-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NPGhJhzt3sREk3HTINhIpq5m8FAl+HDhUqGm8xttGSffcO3V6ythMzCKVC80/atU GndRoU744doLfInc0++2lA== 0001193125-03-081584.txt : 20031114 0001193125-03-081584.hdr.sgml : 20031114 20031114131245 ACCESSION NUMBER: 0001193125-03-081584 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 31 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIVER HOLDING CORP CENTRAL INDEX KEY: 0001061892 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 954674065 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-56135 FILM NUMBER: 031002465 BUSINESS ADDRESS: STREET 1: 599 LEXINGTON AVE STREET 2: 18TH FL CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2129582555 MAIL ADDRESS: STREET 1: 599 LEXINGTON AVE STREET 2: 18TH FL CITY: NEW YORK STATE: NY ZIP: 10022 10-Q 1 d10q.htm QUARTERLY REPORT ON FORM 10-Q Quarterly Report on Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 


 

Form 10-Q

 


 

(Mark One)

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2003

 

OR

 

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             .

 

Commission file number - 333-56135

 


 

RIVER HOLDING CORP.

(Exact name of registrant as specified in its charter)

 


 

Delaware   95-4674065

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

599 Lexington Drive, 18th Floor

New York, New York

  10022
(Address of Principal Executive Offices)   (Zip Code)

(212) 758-2555

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report).

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    Not Applicable  x

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

The number of shares of Common Stock, $0.01 par value, outstanding (the only class of common stock of the Company outstanding) was 9,144,293 on November 14, 2003.

 



Table of Contents

RIVER HOLDING CORP. AND SUBSIDIARIES

 

QUARTER ENDED SEPTEMBER 30, 2003

 

TABLE OF CONTENTS

 

     Page

PART I

   FINANCIAL INFORMATION     
     Item 1.    River Holding Corp. Unaudited Condensed Consolidated Financial Statements:     
          Unaudited Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002    1
          Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and September 30, 2002    3
          Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and September 30, 2002    4
          Notes to Unaudited Condensed Consolidated Financial Statements    5
          Hudson Respiratory Care Inc. Unaudited Condensed Consolidated Financial Statements:     
          Unaudited Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002    15
          Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2003 and September 30, 2002
   17
          Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and September 30, 2002    18
          Notes to Unaudited Condensed Consolidated Financial Statements    19
     Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    29
     Item 3.    Quantitative and Qualitative Disclosures About Market Risks    34
     Item 4.    Controls and Procedures    34

PART II

   OTHER INFORMATION     
     Item 1.    Legal Proceedings    35
     Item 2.    Changes in Securities    35
     Item 3.    Defaults Upon Senior Securities    35
     Item 4.    Submission of Matters to a Vote of Security Holders    35
     Item 5.    Other Information    35
     Item 6.    Exhibits and Reports on Form 8-K    35

SIGNATURE

   37

 

 

 

 

i


Table of Contents

RIVER HOLDING CORP. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

(amounts in thousands)

 

    

September 30,

2003


  

December 31,

2002


CURRENT ASSETS:

             

Cash

   $ 3,021    $ 6,425

Accounts receivable, less allowance for doubtful accounts of $1,145 and $1,331 at September 30, 2003 and December 31, 2002, respectively

     22,250      24,214

Inventories, net

     25,846      22,624

Other current assets

     915      1,459
    

  

Total current assets

     52,032      54,722

PROPERTY, PLANT AND EQUIPMENT, net

     42,126      45,769

OTHER ASSETS:

             

Goodwill

     39,313      34,137

Deferred financing and other costs, net

     6,665      7,888

Other assets

     1,077      987
    

  

Total other assets

     47,055      43,012
    

  

Total assets

   $ 141,213    $ 143,503
    

  

 

See notes to unaudited condensed financial statements

 

1


Table of Contents

RIVER HOLDING CORP. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

(amounts in thousands, except per share amounts)

 

    

September 30,

2003


   

December 31,

2002


 

CURRENT LIABILITIES:

                

Notes payable to bank

   $ 8,593     $ 13,783  

Accounts payable

     8,881       10,379  

Accrued liabilities

     27,931       22,302  
    


 


Total current liabilities

     45,405       46,464  

NOTES PAYABLE TO BANK, net of current portion

     50,842       55,792  

SENIOR SUBORDINATED NOTES PAYABLE

     115,000       115,000  

NOTES PAYABLE TO AFFILIATES

     39,317       39,317  

MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value; 2,990 shares authorized; 526 and 497 shares issued and outstanding at September 30, 2003 and December 31, 2002; liquidation preference — $52,594 and $49,735 respectively

     52,104       49,189  

Accrued preferred stock dividend, payable in kind

     2,772       1,192  
    


 


       54,876       50,381  

OTHER NON-CURRENT LIABILITIES

     2,083       1,961  
    


 


Total liabilities

     307,523       308,915  

COMMITMENTS AND CONTINGENCIES (Note 4)

                

STOCKHOLDERS’ EQUITY (DEFICIT):

                

Junior preferred stock, $0.01 par value; 10 shares authorized; 3 shares outstanding at September 30, 2003 and December 31, 2002

     3,845       3,524  

Common stock, $0.01 par value; 37,000 shares authorized; 9,144 issued and 9,069 and 9,144 outstanding at September 30, 2003 and December 31, 2002 respectively

     97,848       97,848  

Additional paid in capital

     881       881  

Treasury stock, 75 and 0 shares, at cost

     (75 )     —    

Cumulative translation adjustment

     6,234       2,740  

Accumulated deficit

     (275,043 )     (270,405 )
    


 


Total stockholders’ deficit

     (166,310 )     (165,412 )
    


 


Total liabilities and stockholders’ deficit

   $ 141,213     $ 143,503  
    


 


 

See notes to unaudited condensed financial statements

 

2


Table of Contents

RIVER HOLDING CORP. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(amounts in thousands)

 

     Three Months Ended

    Nine Months Ended

 
    

September 30,

2003


   

September 30,

2002


   

September 30,

2003


   

September 30,

2002


 

NET SALES

   $ 44,566     $ 42,144     $ 135,713     $ 127,164  

COST OF SALES

     25,463       26,693       77,828       76,790  
    


 


 


 


Gross Profit

     19,103       15,451       57,885       50,374  

OPERATING EXPENSES:

                                

Selling, distribution, general & administrative

     12,629       11,579       37,675       35,042  

Research and development

     918       587       2,278       1,999  
    


 


 


 


       13,547       12,166       39,953       37,041  
    


 


 


 


Income from operations

     5,556       3,285       17,932       13,333  

INTEREST EXPENSE AND OTHER, net

     6,802       5,736       17,355       15,782  
    


 


 


 


Net income (loss) before provision for income taxes

     (1,246 )     (2,451 )     577       (2,449 )

PROVISION FOR INCOME TAXES

     581       660       1,909       2,066  
    


 


 


 


Net loss

   $ (1,827 )   $ (3,111 )   $ (1,332 )   $ (4,515 )
    


 


 


 


OTHER COMPREHENSIVE INCOME:

                                

Foreign currency translation gain (loss)

     1,538       (177 )     3,494       2,014  
    


 


 


 


Comprehensive income (loss)

   $ (289 )   $ (3,288 )   $ 2,162     $ (2,501 )
    


 


 


 


 

See notes to unaudited condensed financial statements

 

3


Table of Contents

RIVER HOLDING CORP. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(amounts in thousands)

 

     Nine Months Ended

 
    

September 30,

2003


   

September 30,

2002


 

CASH FLOWS FROM OPERATING ACTIVITIES:

                

Net loss

   $ (1,332 )   $ (4,515 )

Adjustments to reconcile net loss to net cash provided by operating activities–

                

Depreciation and amortization

     9,058       8,663  

Amortization of deferred financing costs

     1,395       1,336  

Accrued Preferred Stock Dividends

     1,512       —    

Provision for bad debts

     187       351  

Loss (gain) on disposal of equipment

     93       (37 )

Change in operating assets and liabilities:

                

Accounts receivable

     2,774       (2,078 )

Inventories

     (2,513 )     2,101  

Other current assets

     301       (654 )

Other assets

     (87 )     (12 )

Accounts payable

     (1,706 )     (5,139 )

Accrued liabilities

     5,426       5,567  

Other non-current liabilities

     (87 )     304  
    


 


Net cash provided by operating activities

     15,021       5,887  

CASH FLOWS FROM INVESTING ACTIVITIES:

                

Purchases of property, plant and equipment

     (5,293 )     (5,277 )

Proceeds from sales of property, plant and equipment

     18       156  
    


 


Net cash used in investing activities

     (5,275 )     (5,121 )

CASH FLOWS FROM FINANCING ACTIVITIES:

                

Repayment of notes payable to bank

     (19,663 )     (24,004 )

Proceeds from bank borrowings

     7,591       2,450  

Proceeds from notes payable to affiliates

     —         20,000  

Purchase of treasury stock

     (75 )     —    

Additions of deferred financing costs

     (172 )     (477 )

Payment of capital lease obligations

     (39 )     (29 )
    


 


Net cash used in financing activities

     (12,358 )     (2,060 )

Effect of exchange rate changes on cash

     (792 )     (768 )
    


 


NET DECREASE IN CASH

     (3,404 )     (2,062 )

CASH, beginning of period

     6,425       7,085  
    


 


CASH, end of period

   $ 3,021     $ 5,023  
    


 


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

                

Cash paid during the period for:

                

Interest

   $ 8,659     $ 10,045  
    


 


Income taxes (primarily foreign)

   $ 1,714     $ 2,259  
    


 


NON-CASH FINANCING ACTIVITIES:

                

Preferred dividends accrued or paid-in-kind

   $ 3,287     $ 4,183  
    


 


Issuance of warrants

   $ —       $ 750  
    


 


 

See notes to unaudited condensed financial statements

 

4


Table of Contents

RIVER HOLDING CORP. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Financial Statements. River Holding Corp. (“Holding”) is a holding company with no other operations than those of its majority owned subsidiary, Hudson Respiratory Care Inc. (“Hudson” or the “Company”). The condensed consolidated financial statements included herein have been prepared by Holding and Hudson, without audit, and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position at September 30, 2003, the results of operations for the three and nine month periods ended September 30, 2003 and September 30, 2002 and statements of cash flows for the nine month period ended September 30, 2003 and September 30, 2002 pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although Holding believes that the disclosures in such financial statements are adequate to make the information presented not misleading, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with Holding’s 2002 audited financial statements and the notes thereto included in its Form 10-K filed with the SEC. The results of operations for the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results to be achieved for a full year.

 

Financial Condition and Results of Operations

 

Management believes that Holding’s ability to achieve operating results in line with current forecasts and to comply with the terms and covenants of its financing agreements will enable Holding to meet its ongoing obligations on a timely basis and continue operations for at least the next twelve months. If Holding does not generate sufficient cash flow from operations in line with its current forecasts, Holding would have to initiate measures to raise cash through additional debt or equity issuances, additional asset sales and/or curtail operations. Holding currently has no commitments for additional debt or equity financing and no assurance can be given as to whether or, on what terms, additional debt or equity investments could be obtained, if required. Failure to achieve expected cash flows or, if necessary, to obtain additional debt or equity investment would have a material adverse effect on Holding.

 

Significant Accounting Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

The significant estimates made in the preparation of the Company’s consolidated financial statements relate to allowance for bad debts, rebate reserve, and inventory reserve.

 

Reclassifications

 

Certain amounts from prior periods have been reclassified to conform to the current period presentation.

 

Recent Accounting Pronouncements

 

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires classification of a financial instrument that is within its scope as a liability, or an asset in some circumstances. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and shall otherwise be effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a nonpublic entity. Holding has adopted this standard as of September 30, 2003, and has classified its mandatorily redeemable preferred stock as a liability. For the three months ended September 30, 2003, Holding recorded $1,512,000 in interest expense for the increase in the present value of the mandatorily redeemable preferred stock.

 

5


Table of Contents

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. More specifically, SFAS 149, among other things, clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component, and amends the definition of an “underlying” to conform to recently issued standards. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except for certain aspects of the standard that relate to previously issued guidance, which should continue to be applied in accordance with the previously set effective dates. Also, this standard is effective for existing and new contracts entered into after June 30, 2003 as they relate to forward purchases or sales of when-issued securities or other securities that do not yet exist. The adoption of this standard did not have a material effect on Holding’s financials.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure” (“SFAS 148”), an amendment of SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 148 amends SFAS 123 to provide alternative methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS 123 to require prominent disclosures for both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the methods used on reported results. The interim transition was effective December 31, 2002 and annual disclosure requirements of SFAS 148 are effective for the Company’s fiscal year 2003. Holding does not expect SFAS 148 to have a material impact on its consolidated results of operations or financial position.

 

2. Inventories. Inventories consisted of the following (amounts in thousands):

 

    

September 30,

2003


    December 31,
2002


 

Raw materials

   $ 5,939     $ 5,266  

Work-in-process

     5,074       4,983  

Finished goods

     16,623       13,926  
    


 


       27,636       24,175  

Provision for obsolescence

     (1,790 )     (1,551 )
    


 


     $ 25,846     $ 22,624  
    


 


 

3. Segment Data and Subsidiaries Guaranteeing Debt. Holding presents segment information externally based on how management uses financial data internally to make operating decisions and assess performance. Holding has two operating segments: United States, or guarantor, and international or non-guarantor. The non-guarantor subsidiaries consist principally of Hudson RCI AB and subsidiaries (whose operations are principally international). Under SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” Holding’s operating segments are the same as its reporting segments.

 

The Company is the 100% owner of certain subsidiaries that do not guarantee the Company’s senior subordinated notes and certain bank debt. The following tables disclose required consolidating financial information for guarantor subsidiaries, including the Company, and non-guarantor subsidiaries (amounts in thousands):

 

6


Table of Contents

RIVER HOLDING CORP. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

 

     As of September 30, 2003

 
     River

    Guarantor

   

Non-

Guarantor


   Eliminations

    Total

 
ASSETS                                        

CURRENT ASSETS:

                                       

Cash

   $ —       $ 649     $ 2,372    $ —       $ 3,021  

Accounts receivable

     —         15,108       7,142      —         22,250  

Intercompany receivables, net

     —         —         1,268      (1,268 )     —    

Inventories

     —         21,463       6,032      (1,649 )     25,846  

Other current assets

     (583 )     865       633      —         915  
    


 


 

  


 


Total current assets

     (583 )     38,085       17,447      (2,917 )     52,032  

PROPERTY, PLANT AND EQUIPMENT, net

     4,233       35,933       1,960      —         42,126  

INTANGIBLE ASSETS, net

     —         —         39,313      —         39,313  

DEFERRED FINANCING COSTS, net

     —         6,665       —        —         6,665  

INVESTMENT IN NON-GUARANTOR SUBSIDIARIES, at cost

     —         28,636       4,000      (32,636 )     —    

OTHER ASSETS

     (77 )     1,135       19      —         1,077  
    


 


 

  


 


Total other assets

     (77 )     36,436       43,332      (32,636 )     47,055  
    


 


 

  


 


     $ 3,573     $ 110,454     $ 62,739    $ (35,553 )   $ 141,213  
    


 


 

  


 


LIABILITIES AND

STOCKHOLDERS’ EQUITY (DEFICIT)

                                       

CURRENT LIABILITIES:

                                       

Notes payable to bank

   $ —       $ 3,373     $ 5,220    $ —       $ 8,593  

Accounts payable

     —         7,752       1,129      —         8,881  

Intercompany payables, net

     —         1,268       —        (1,268 )     —    

Accrued liabilities

     (49 )     20,973       7,007      —         27,931  
    


 


 

  


 


Total current liabilities

     (49 )     33,366       13,356      (1,268 )     45,405  

NOTES PAYABLE TO BANKS, net of current portion

     —         42,627       8,215      —         50,842  

SENIOR SUBORDINATED NOTES PAYABLE

     —         115,000       —        —         115,000  

NOTES PAYABLE TO AFFILIATE

     —         26,951       12,366      —         39,317  

MANDATORILY-REDEEMBABLE PREFERRED STOCK

     —         54,876       —        —         54,876  

OTHER NON-CURRENT LIABILITIES

     —         242       1,841      —         2,083  
    


 


 

  


 


Total liabilities

     (49 )     273,062       35,778      (1,268 )     307,523  

STOCKHOLDERS’ DEFICIT

     3,622       (162,608 )     26,961      (34,285 )     (166,310 )
    


 


 

  


 


     $ 3,573     $ 110,454     $ 62,739    $ (35,553 )   $ 141,213  
    


 


 

  


 


 

 

7


Table of Contents

RIVER HOLDING CORP. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

 

     As of December 31, 2002

 
     River

    Guarantor

   

Non-

Guarantor


   Eliminations

    Total

 
ASSETS                                        

CURRENT ASSETS:

                                       

Cash

   $ —       $ 3,568     $ 2,857    $ —       $ 6,425  

Accounts receivable

     —         17,207       7,007      —         24,214  

Intercompany receivables, net

     —         —         1,227      (1,227 )     —    

Inventories

     —         19,303       4,204      (883 )     22,624  

Other current assets

     (258 )     1,162       555      —         1,459  
    


 


 

  


 


Total current assets

     (258 )     41,240       15,850      (2,110 )     54,722  

PROPERTY, PLANT AND EQUIPMENT, net

     5,901       38,548       1,320      —         45,769  

INTANGIBLE ASSETS, net

     —         —         34,137      —         34,137  

DEFERRED FINANCING COSTS, net

     —         7,888       —        —         7,888  

INVESTMENT IN NON-GUARANTOR SUBSIDIARIES, at cost

     —         28,636       4,000      (32,636 )     —    

OTHER ASSETS

     (77 )     1,064       —        —         987  
    


 


 

  


 


Total other assets

     (77 )     37,588       38,137      (32,636 )     43,012  
    


 


 

  


 


     $ 5,566     $ 117,376     $ 55,307    $ (34,746 )   $ 143,503  
    


 


 

  


 


LIABILITIES AND

STOCKHOLDERS’ EQUITY (DEFICIT)

                                       

CURRENT LIABILITIES:

                                       

Notes payable to banks – current portion

     —         9,250       4,533      —         13,783  

Accounts payable

   $ —       $ 8,540     $ 1,839    $ —       $ 10,379  

Intercompany payables, net

     —         1,227       —        (1,227 )     —    

Accrued liabilities

     (90 )     18,026       4,366      —         22,302  
    


 


 

  


 


Total current liabilities

     (90 )     37,043       10,738      (1,227 )     46,464  

NOTES PAYABLE TO BANKS, net of current portion

     —         46,300       9,492      —         55,792  

SENIOR SUBORDINATED NOTES PAYABLE

     —         115,000       —        —         115,000  

NOTES PAYABLE TO AFFILIATE

     —         26,951       12,366      —         39,317  

MANDATORILY-REDEEMBABLE PREFERRED STOCK

     —         50,381       —        —         50,381  

OTHER NON-CURRENT LIABILITIES

     —         281       1,680      —         1,961  
    


 


 

  


 


Total liabilities

     (90 )     275,956       34,276      (1,227 )     308,915  
    


 


 

  


 


STOCKHOLDERS’ DEFICIT

     5,656       (158,580 )     21,031      (33,519 )     (165,412 )
    


 


 

  


 


     $ 5,566     $ 117,376     $ 55,307    $ (34,746 )   $ 143,503  
    


 


 

  


 


 

8


Table of Contents

RIVER HOLDING CORP. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

 

     Three Months Ended September 30, 2003

 
     River

    Guarantor

   

Non-

Guarantor


   Eliminations

    Total

 

NET SALES

   $ —       $ 38,316     $ 10,619    $ (4,369 )   $ 44,566  

COST OF SALES

     556       24,145       4,855      (4,093 )     25,463  
    


 


 

  


 


Gross profit

     (556 )     14,171       5,764      (276 )     19,103  

OPERATING EXPENSES:

                                       

Selling, distribution, general and administrative

     250       8,932       3,447      —         12,629  

Research and development

     —         537       381      —         918  
    


 


 

  


 


       250       9,469       3,828      —         13,547  
    


 


 

  


 


Income (loss) from operations

     (806 )     4,702       1,936      (276 )     5,556  

INTEREST EXPENSE AND OTHER, net

     —         6,197       605      —         6,802  
    


 


 

  


 


Income (loss) before provision for income taxes

     (806 )     (1,495 )     1,331      (276 )     (1,246 )

PROVISION FOR INCOME TAXES

     —         68       513      —         581  
    


 


 

  


 


Net (loss) income

   $ (806 )   $ (1,563 )   $ 818    $ (276 )   $ (1,827 )
    


 


 

  


 


 

     Three Months Ended September 30, 2002

 
     River

    Guarantor

   

Non-

Guarantor


   Eliminations

    Total

 

NET SALES

   $ —       $ 37,126     $ 8,849    $ (3,831 )   $ 42,144  

COST OF SALES

     565       25,058       4,508      (3,438 )     26,693  
    


 


 

  


 


Gross profit

     (565 )     12,068       4,341      (393 )     15,451  

OPERATING EXPENSES:

                                       

Selling, distribution, general and administrative

     —         8,984       2,595      —         11,579  

Research and development

     —         444       143      —         587  
    


 


 

  


 


       —         9,428       2,738      —         12,166  
    


 


 

  


 


Income (loss) from operations

     (565 )     2,640       1,603      (393 )     3,285  

INTEREST EXPENSE AND OTHER, net

     —         5,079       657      —         5,736  
    


 


 

  


 


Income (loss) before provision for income taxes

     (565 )     (2,439 )     946      (393 )     (2,451 )

PROVISION FOR INCOME TAXES

     —         44       616      —         660  
    


 


 

  


 


Net (loss) income

   $ (565 )   $ (2,483 )   $ 330    $ (393 )   $ (3,111 )
    


 


 

  


 


 

9


Table of Contents

RIVER HOLDING CORP. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

 

     Nine Months Ended September 30, 2003

 
     River

    Guarantor

   

Non-

Guarantor


   Eliminations

    Total

 

NET SALES

   $ —       $ 118,387     $ 32,039    $ (14,713 )   $ 135,713  

COST OF SALES

     1,668       74,876       15,231      (13,947 )     77,828  
    


 


 

  


 


Gross profit

     (1,668 )     43,511       16,808      (766 )     57,885  

OPERATING EXPENSES:

                                       

Selling, distribution, general and administrative

     291       27,419       9,965      —         37,675  

Research and development

     —         1,284       994      —         2,278  
    


 


 

  


 


       291       28,703       10,959      —         39,953  
    


 


 

  


 


Income (loss) from operations

     (1,959 )     14,808       5,849      (766 )     17,932  

INTEREST EXPENSE AND OTHER, net

     —         15,487       1,868      —         17,355  
    


 


 

  


 


Income (loss) before provision for income taxes

     (1,959 )     (679 )     3,981      (766 )     577  

PROVISION FOR INCOME TAXES

     —         295       1,614      —         1,909  
    


 


 

  


 


Net (loss) income

   $ (1,959 )   $ (974 )   $ 2,367    $ (766 )   $ (1,332 )
    


 


 

  


 


 

     Nine Months Ended September 30, 2002

 
     River

    Guarantor

   

Non-

Guarantor


   Eliminations

    Total

 

NET SALES

   $ —       $ 111,632     $ 26,437    $ (10,905 )   $ 127,164  

COST OF SALES

     1,695       72,708       13,461      (11,074 )     76,790  
    


 


 

  


 


Gross profit

     (1,695 )     38,924       12,976      169       50,374  

OPERATING EXPENSES:

                                       

Selling, distribution, general and administrative

     40       27,549       7,453      —         35,042  

Research and development

     —         1,309       690      —         1,999  
    


 


 

  


 


       40       28,858       8,143      —         37,041  
    


 


 

  


 


(Loss) income from operations

     (1,735 )     10,066       4,833      169       13,333  

INTEREST EXPENSE AND OTHER, net

     —         14,433       1,349      —         15,782  
    


 


 

  


 


Income (loss) before provision for income taxes

     (1,735 )     (4,367 )     3,484      169       (2,449 )

PROVISION FOR INCOME TAXES

     —         124       1,942      —         2,066  
    


 


 

  


 


Net (loss) income

   $ (1,735 )   $ (4,491 )   $ 1,542    $ 169     $ (4,515 )
    


 


 

  


 


 

10


Table of Contents

RIVER HOLDING CORP. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

 

    

For the Nine Months Ended

September 30, 2003


 
     River

    Guarantor

   

Non-

Guarantor


    Total

 

Net cash provided by operating activities

   $ 75     $ 11,206     $ 3,740     $ 15,021  

Net cash used in provided by investing activities

     —         (4,293 )     (982 )     (5,275 )

Net cash used in financing activities

     (75 )     (9,761 )     (2,522 )     (12,358 )

Effect of exchange rate changes on cash

     —         (71 )     (721 )     (792 )
    


 


 


 


NET DECREASE IN CASH

     —         (2,919 )     (485 )     (3,404 )

CASH, beginning of year

     —         3,568       2,857       6,425  
    


 


 


 


CASH, end of year

   $ —       $ 649     $ 2,372     $ 3,021  
    


 


 


 


 

    

For the Nine Months Ended

September 30, 2002


 
     River

   Guarantor

   

Non-

Guarantor


    Total

 

Net cash provided by (used in) operating activities

   $ —      $ 7,346     $ (1,459 )   $ 5,887  

Net cash used in investing activities

     —        (4,614 )     (507 )     (5,121 )

Net cash (used in) provided by financing activities

     —        (5,556 )     3,496       (2,060 )

Effect of exchange rate changes on cash

     —        102       (870 )     (768 )
    

  


 


 


NET DECREASE IN CASH

     —        (2,722 )     660       (2,062 )

CASH, beginning of year

     —        4,713       2,372       7,085  
    

  


 


 


CASH, end of year

   $ —      $ 1,991     $ 3,032     $ 5,023  
    

  


 


 


 

Holding’s percentage of sales by geographic region for the three and nine month period ended September 30, 2003 and September 30, 2002 is as follows:

 

     Three Months Ended

 
    

September 30,

2003


   

September 30,

2002


 

United States

   70.7 %   73.8 %

Europe

   16.2     13.9  

Pacific Rim (Japan, Southeast Asia, Australia/New Zealand)

   7.7     7.2  

Canada

   1.2     1.1  

Other international

   4.2     4.0  
    

 

     100.0 %   100.0 %
    

 

 

     Nine Months Ended

 
    

September 30,

2003


   

September 30,

2002


 

United States

   71.7 %   74.1 %

Europe

   16.4     14.3  

Pacific Rim (Japan, Southeast Asia, Australia/New Zealand)

   7.3     6.3  

Canada

   1.4     1.4  

Other international

   3.2     3.9  
    

 

     100.0 %   100.0 %
    

 

 

11


Table of Contents

4. Commitments and Contingencies. Holding is not a party to any material lawsuits or other proceedings. While the result of Holding’s other existing lawsuits and proceedings cannot be predicted with certainty, management does not expect that the ultimate resolution of these matters will have a material adverse effect on the financial position or results of operations of Holding.

 

Self Insurance. Holding self-insures the majority of its medical benefit programs. Reserves for medical claim losses (including retiree benefits) totaling approximately $1,242,000 and $1,160,000 at September 30, 2003 and December 31, 2002, respectively, were established based upon estimated obligations and are included in accrued liabilities in the accompanying unaudited condensed consolidated balance sheets. Holding maintains excess coverage on an aggregate claim basis. Additionally, Holding is self-insured for workers’ compensation. Reserves for workers’ compensation claim losses totaling approximately $784,000 and $353,000 at September 30, 2003 and December 31, 2002, respectively, were established based upon estimated obligations and are included in accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.

 

Accrued Severance Costs. In 2001, the decision was made to close the Argyle manufacturing facility and relocate that facility’s operations to Tecate, Mexico in April 2003. As of December 31, 2002, 147 employees had been notified that their positions would be eliminated with an estimated severance cost of $2,160,360. The following summarizes the activity of accrued severance costs (amounts in thousands, except for employees):

 

    

Employees

Affected


   

Accrued

Severance


 

As of December 31, 2000

   —       $ —    

Position eliminations announced

   83       694  

Positions eliminated and severance paid

   —         —    
    

 


Balance remaining at December 31, 2001

   83       694  

Position eliminations announced

   64       1,466  

Positions eliminated and severance paid

   (46 )     (331 )
    

 


Balance remaining at December 31, 2002

   101       1,829  

Position eliminations announced

   —         —    

Positions eliminated and severance paid

   (99 )     (1,542 )
    

 


Balance remaining at September 30, 2003

   2     $ 287  
    

 


 

Guarantees. During its normal course of business, Holding has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include, (i) intellectual property indemnities to Holding’s customers and licensees in connection with the use, sales and/or license of Holding products, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of Holding and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, Holding has made contractual commitments to several employees providing for payments upon the occurrence of certain prescribed events. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments Holding could be obligated to make. Holding has not recorded any liability for these indemnities, commitments and other guarantees in the accompanying unaudited condensed consolidated balance sheets.

 

5. Credit Facility. Total borrowings as of September 30, 2003 were $7.0 million and $39.0 million under the Revolving Loan Facility and Acquisition Facility. As of September 30, 2003 $6.7 million was available for borrowing under the Revolving Loan Facility and none is available for borrowing under the Acquisition Facility. As of September 30, 2003 the fair value of the Term Loan facility and Revolving Loan Facility approximated the face value.

 

12


Table of Contents

On October 7, 2003, Holding refinanced its existing Credit Facility with a new $60.0 million Senior Secured Revolving Facility (the “Revolving Facility”) consisting of a $30.0 million Revolving A Facility and a $30.0 million Revolving B Facility. Maturity for both facilities is October 1, 2007. As a result of this refinancing approximately $42.6 million in notes to bank shown as current at June 30, 2003 is now shown as long term at September 30, 2003. See footnote 7 for additional information.

 

At September 30, 2003, Holding was in compliance with all provisions of its debt securities.

 

6. Mandatorily-Redeemable Preferred Stock. As of September 30, 2003, Holding has issued 525,938 shares (including shares issued as payment in kind dividends) of its 11 ½% Senior PIK Preferred Stock due 2010 (the “Holding Preferred Stock”). Dividends on the Holding Preferred Stock accrue from the date of issuance and are payable semi-annually in arrears on April 15 and October 15 of each year (each a “Dividend Payment Date”) at a rate per annum of 11 ½% of the liquidation preference per share. The liquidation preference of each share of Holding Preferred Stock is $100 (the “Liquidation Preference”). Dividends are payable in cash, except that on each Dividend Payment Date occurring on or prior to April 15, 2005, dividends may be paid, at Holding’s option, by the issuance of additional shares of Holding Preferred Stock having an aggregate Liquidation Preference equal to the amount of such dividends. Holding’s credit facility currently prohibits Holding from paying any cash dividends on the Holding Preferred Stock. After April 15, 2003, the Holding Preferred Stock is redeemable at Holding’s option in whole or in part, at a premium of the Liquidation Preference plus accumulated and unpaid dividends, if any, to the date of redemption. Holding is required to redeem the Holding Preferred Stock on April 15, 2010, at a redemption price equal to 100% of the Liquidation Preference thereof plus accumulated and unpaid dividends.

 

At September 30, 2003 the redemption amount was $55.4 million. The maximum amount Holding will pay at the mandatory redemption date will be $115.0 million.

 

7. Treasury Stock. On September 30, 2003 Holding repurchased 75,000 shares of common stock from a former employee.

 

8. Subsequent Events. On October 7, 2003, Holding refinanced its existing Credit Facility with a new $60.0 million Senior Secured Revolving Facility (the “Revolving Facility”) consisting of a $30.0 million Revolving A Facility and a $30.0 million Revolving B Facility. Both credit facilities mature on October 1, 2007. Holding expects to record a loss on the extinguishment of its existing credit facility of $0.6 million in the quarter ending December 31, 2003.

 

The Revolving A Facility consists of a working capital revolver of up to $30.0 million under which advances are subject to availability under a borrowing base consisting of advances against eligible accounts receivable and inventory less advances under the sub facilities and letters of credit. Sub-facilities under the Revolving Facility A consist of a $5.6 million five year reducing real estate loan, a $2.4 million three year reducing equipment loan, a $6.0 million reducing 2.5 year general facility and a $5.0 million letter of credit sub-facility. On October 7, 2003, total borrowings under Revolving Facility A equaled $18.2 million with available borrowing capacity of $10.5 million.

 

The Revolving A Facility is secured by a first priority lien on substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of Holding and all of the shares held by Holding’s guarantor subsidiaries. The Revolving A Facility is guaranteed jointly and severally by Holding and of the guarantor’s subsidiaries.

 

The Revolving B Facility consists of a $30.0 million non-reducing loan due in full upon maturity on October 1, 2007. This facility is secured by a perfected second position in substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of the Company owned by Holding and all of the shares held by the Company’s guarantor subsidiaries. The Revolving B facility is guaranteed jointly and severally by Holding, by the guarantors subsidiaries and by a pledge of the stock of HRC Holdings.

 

13


Table of Contents

Required reductions in the Senior Secured Revolving Facility are equal to (amounts in thousands):

 

Year ending December 31


   2003

   2004

   2005

   2006

   2007

     $ 613    $ 3,680    $ 3,680    $ 2,080    $ 38,100

 

Interest rates under the Revolving Facility A are based, at the option of Holding, upon either a Eurodollar rate or a base rate (as defined) plus a margin during the period and for the applicable type of loan. The interest rate margin is adjustable based on whether or not Holding obtains a certain level of trailing EBITDA. The range in margin for each facility is as follows:

 

     Margin

Period and Loan Type


   Base Rate

   Eurodollar

Revolving Facility A

         

Working Capital

   (0.5)%-.5%    2.0%-3.0%

Real Estate Revolver

   0.5%-1.5%    3.25%-4.0%

Equipment Revolver

   0.0%-1.0%    2.5%-3.5%

General Revolver

   1.5%    NA

Revolving Facility B

   11% Fixed     

 

The Revolving Facility contains covenants restricting the ability of Holding, the Company and the Company’s guarantor subsidiaries to, among others, (i) incur additional debt, (ii) declare dividends or redeem or repurchase capital stock, (iii) prepay, redeem or purchase debt, (iv) incur liens, (v) make loans and investments, (vi) make capital expenditures, (vii) engage in mergers, acquisitions and asset sales, and (viii) engage in transactions with affiliates. The Company is also required to comply with financial covenants with respect to (a) limits on annual aggregate capital expenditures (as defined) and (b) a minimum EBITDA test.

 

As a condition to the extension of credit under the Revolving A Facility and the Revolving B Facility, on September 30, 2003 the holders of a majority of the outstanding Senior Subordinated Convertible Promissory Notes and Unsecured Senior Promissory Notes, shown as “Notes Payable to Affiliates” on the balance sheet, agreed to amend the notes to extend the maturity to March 31, 2008.

 

As a condition to the extension of credit under the Revolving A Facility and the Revolving B Facility, on October 2, 2003, the holders of a majority of the outstanding Senior Preferred Stock, Junior Preferred Stock and Common Stock, each class voting separately, by written consent of the shareholders approved an amendment to the Certificate of Designation for the Holding Preferred Stock to extend the time period in which the Registrant may pay dividends in kind on the Holding Preferred Stock by one year, to April 15, 2005. In addition, the holders of a majority of the outstanding 11 ½% Senior PIK Preferred Stock due 2010 of Holding (the “Holding Preferred Stock”), 12% Junior Convertible Preferred Stock of Holding and the Common Stock of Holding, voting separately as a class, by written consent, approved an amendment to the Certificate of Designation of the Holding Preferred Stock to extend the time period in which Holding may pay dividends in kind on the Holding Preferred Stock by one year, to April 15, 2005.

 

9. Subsidiary Financials. Because Holding is a holding company with no operations other than those of the Company, the unaudited condensed financial statements of the Company have been included.

 

14


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

(amounts in thousands)

 

    

September 30,

2003


   December 31,
2002


CURRENT ASSETS:

             

Cash

   $ 3,021    $ 6,425

Accounts receivable, less allowance for doubtful accounts of $1,145 and $1,331 at September 30, 2003 and December 31, 2002, respectively

     22,250      24,214

Inventories, net

     25,846      22,624

Other current assets

     1,498      1,717
    

  

Total current assets

     52,615      54,980

PROPERTY, PLANT AND EQUIPMENT, net

     37,893      39,868

OTHER ASSETS:

             

Goodwill

     39,313      34,137

Deferred financing and other costs, net

     6,665      7,888

Other assets

     1,154      1,064
    

  

Total other assets

     47,132      43,089
    

  

Total assets

   $ 137,640    $ 137,937
    

  

 

See notes to condensed consolidated statements

 

15


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

LIABILITIES

AND STOCKHOLDERS’ DEFICIT

 

(amounts in thousands, except per share amounts)

 

    

September 30,

2003


    December 31,
2002


 

CURRENT LIABILITIES:

                

Notes payable to bank

   $ 8,593     $ 13,783  

Accounts payable

     8,881       10,379  

Accrued liabilities

     27,980       22,392  
    


 


Total current liabilities

     45,454       46,554  

NOTES PAYABLE TO BANK, net of current portion

     50,842       55,792  

SENIOR SUBORDINATED NOTES PAYABLE

     115,000       115,000  

NOTES PAYABLE TO AFFILIATES

     39,317       39,317  

MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value; 2,990 shares authorized; 526 and 497 shares issued and outstanding at September 30, 2003 and December 31, 2002; liquidation preference — $52,594 and $49,735 respectively

     52,104       49,189  

Accrued preferred stock dividend, payable in kind

     2,772       1,192  
    


 


       54,876       50,381  

OTHER NON-CURRENT LIABILITIES

     2,083       1,961  
    


 


Total liabilities

     307,572       309,005  

COMMITMENTS AND CONTINGENCIES (Note 4)

                

STOCKHOLDERS’ EQUITY (DEFICIT):

                

Junior preferred stock, $0.01 par value; 10 shares authorized; 3 shares outstanding at September 30, 2003 and December 31, 2002

     3,845       3,524  

Common stock, $0.01 par value; 37,000 shares authorized; 10,654 issued and outstanding at September 30, 2003 and December 31, 2002

     98,258       98,258  

Additional paid in capital

     881       881  

Cumulative translation adjustment

     5,770       2,276  

Accumulated deficit

     (278,686 )     (276,007 )
    


 


Total stockholders’ deficit

     (169,932 )     (171,068 )
    


 


Total liabilities and stockholders’ deficit

   $ 137,640     $ 137,937  
    


 


 

See notes to condensed consolidated statements

 

16


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(amounts in thousands)

 

     Three Months Ended

    Nine Months Ended

 
    

September 30,

2003


   

September 30,

2002


   

September 30,

2003


  

September 30,

2002


 

NET SALES

   $ 44,566     $ 42,144     $ 135,713    $ 127,164  

COST OF SALES

     24,907       26,128       76,160      75,095  
    


 


 

  


Gross Profit

     19,659       16,016       59,553      52,069  

OPERATING EXPENSES:

                               

Selling, distribution, general & administrative

     12,379       11,579       37,384      35,002  

Research and development

     918       587       2,278      1,999  
    


 


 

  


       13,297       12,166       39,662      37,001  
    


 


 

  


Income from operations

     6,362       3,850       19,891      15,068  

INTEREST EXPENSE AND OTHER, net

     6,802       5,736       17,355      15,782  
    


 


 

  


Net income (loss) before provision for income taxes

     (440 )     (1,886 )     2,536      (714 )

PROVISION FOR INCOME TAXES

     581       660       1,909      2,066  
    


 


 

  


Net Income (loss)

   $ (1,021 )   $ (2,546 )   $ 627    $ (2,780 )
    


 


 

  


OTHER COMPREHENSIVE INCOME:

                               

Foreign currency translation gain (loss)

     1,538       (177 )     3,494      2,014  
    


 


 

  


Comprehensive income (loss)

   $ 517     $ (2,723 )   $ 4,121    $ (766 )
    


 


 

  


 

See notes to condensed consolidated statements

 

17


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(amounts in thousands)

 

     Nine Months Ended

 
    

September 30,

2003


   

September 30,

2002


 

CASH FLOWS FROM OPERATING ACTIVITIES:

                

Net income (loss)

   $ 627     $ (2,780 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities–

                

Depreciation and amortization

     7,390       6,968  

Amortization of deferred financing costs

     1,395       1,336  

Accrued Preferred Stock Dividends

     1,512       —    

Provision for bad debts

     187       351  

Loss (gain) on disposal of equipment

     93       (37 )

Change in operating assets and liabilities:

                

Accounts receivable

     2,774       (2,078 )

Inventories

     (2,513 )     2,101  

Other current assets

     301       (654 )

Other assets

     (87 )     (12 )

Accounts payable

     (1,706 )     (5,139 )

Accrued liabilities

     5,060       5,527  

Other non-current liabilities

     (87 )     304  
    


 


Net cash provided by operating activities

     14,946       5,887  

CASH FLOWS FROM INVESTING ACTIVITIES:

                

Purchases of property, plant and equipment

     (5,293 )     (5,277 )

Proceeds from sales of property, plant and equipment

     18       156  
    


 


Net cash used in investing activities

     (5,275 )     (5,121 )

CASH FLOWS FROM FINANCING ACTIVITIES:

                

Repayment of notes payable to bank

     (19,663 )     (24,004 )

Proceeds from bank borrowings

     7,591       2,450  

Proceeds from notes payable to affiliates

     —         20,000  

Additions of deferred financing costs

     (172 )     (477 )

Payment of capital lease obligations

     (39 )     (29 )
    


 


Net cash used in financing activities

     (12,283 )     (2,060 )

Effect of exchange rate changes on cash

     (792 )     (768 )
    


 


NET DECREASE IN CASH

     (3,404 )     (2,062 )

CASH, beginning of period

     6,425       7,085  
    


 


CASH, end of period

   $ 3,021     $ 5,023  
    


 


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

                

Cash paid during the period for:

                

Interest

   $ 8,659     $ 10,045  
    


 


Income taxes (primarily foreign)

   $ 1,714     $ 2,259  
    


 


NON-CASH FINANCING ACTIVITIES:

                

Preferred dividends accrued or paid-in-kind

   $ 3,287     $ 4,183  
    


 


Issuance of warrants

   $ —       $ 750  
    


 


 

See notes to condensed consolidated statement

 

18


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

(A majority-owned subsidiary of River Holding Corp.)

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Financial Statements. The condensed consolidated financial statements included herein have been prepared by the Company, without audit, and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position at September 30, 2003, the results of operations for the three and nine month periods ended September 30, 2003 and September 30, 2002 and statements of cash flows for the nine month periods ended September 30, 2003 and September 30, 2002 pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures in such financial statements are adequate to make the information presented not misleading, the accompanying unaudited condensed, consolidated financial statements should be read in conjunction with the Company’s 2002 audited financial statements and the notes thereto included in its Form 10-K filed with the SEC. The results of operations for the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results to be achieved for a full year.

 

Financial Condition and Results of Operations

 

Management believes that the Company’s ability to achieve operating results in line with current forecasts and to comply with the terms and covenants of its financing agreements will enable the Company to meet its ongoing obligations on a timely basis and continue operations for at least the next twelve months. If the Company does not generate sufficient cash flow from operations in line with its current forecasts, the Company would have to initiate measures to raise cash through additional debt or equity issuances, additional asset sales and/or curtail operations. The Company currently has no commitments for additional debt or equity financing and no assurance can be given as to whether or, on what terms, additional debt or equity investments could be obtained, if required. Failure to achieve expected cash flows or, if necessary, to obtain additional debt or equity investment would have a material adverse effect on the Company.

 

Significant Accounting Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

The significant estimates made in the preparation of the Company’s consolidated financial statements relate to allowance for bad debts, rebate reserve, and inventory reserve.

 

Reclassifications

 

Certain amounts from prior periods have been reclassified to conform to the current period presentation.

 

Recent Accounting Pronouncements

 

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and

 

19


Table of Contents

Equity” (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires classification of a financial instrument that is within its scope as a liability, or an asset in some circumstances. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and shall otherwise be effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a nonpublic entity. The Company has adopted this standard as of September 30, 2003, and has classified its mandatorily redeemable preferred stock as a liability. For the three months ended September 30, 2003, the Company recorded $1,512,000 in interest expense for the increase in the present value of the mandatorily redeemable preferred stock.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. More specifically, SFAS 149, among other things, clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component, and amends the definition of an “underlying” to conform to recently issued standards. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except for certain aspects of the standard that relate to previously issued guidance, which should continue to be applied in accordance with the previously set effective dates. Also, this standard is effective for existing and new contracts entered into after June 30, 2003 as they relate to forward purchases or sales of when-issued securities or other securities that do not yet exist. The adoption of this standard did not have a material effect on the Company’s financials.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure” (“SFAS 148”), an amendment of SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 148 amends SFAS 123 to provide alternative methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS 123 to require prominent disclosures for both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the methods used on reported results. The interim transition was effective December 31, 2002 and annual disclosure requirements of SFAS 148 are effective for the Company’s fiscal year 2003. The Company does not expect SFAS 148 to have a material impact on its consolidated results of operations or financial position.

 

2. Inventories. Inventories consisted of the following (amounts in thousands):

 

    

September 30,

2003


    December 31,
2002


 

Raw materials

   $ 5,939     $ 5,266  

Work-in-process

     5,074       4,983  

Finished goods

     16,623       13,926  
    


 


       27,636       24,175  

Provision for obsolescence

     (1,790 )     (1,551 )
    


 


     $ 25,846     $ 22,624  
    


 


 

3. Segment Data and Subsidiaries Guaranteeing Debt. The Company presents segment information externally based on how management uses financial data internally to make operating decisions and assess performance. The Company has two operating segments: United States, or guarantor, and international or non-guarantor. The non-guarantor subsidiaries consist principally of Hudson RCI AB and subsidiaries (whose operations are principally international). Under SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company’s operating segments are the same as its reporting segments.

 

The Company is the 100% owner of certain subsidiaries that do not guarantee the Company’s senior subordinated notes and certain bank debt. The following tables disclose required consolidating financial information for guarantor subsidiaries, including the Company, and non-guarantor subsidiaries (amounts in thousands):

 

20


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

 

     September 30, 2003

 
     Guarantor

    Non-
Guarantor


   Eliminations

    Total

 
ASSETS                                

CURRENT ASSETS:

                               

Cash

   $ 649     $ 2,372    $ —       $ 3,021  

Accounts receivable

     15,108       7,142      —         22,250  

Intercompany receivables, net

     —         1,268      (1,268 )     —    

Inventories

     21,463       6,032      (1,649 )     25,846  

Other current assets

     865       633      —         1,498  
    


 

  


 


Total current assets

     38,085       17,447      (2,917 )     52,615  

PROPERTY, PLANT AND EQUIPMENT, NET

     35,933       1,960      —         37,893  

INTANGIBLE ASSETS, net

     —         39,313      —         39,313  

DEFERRED FINANCING COSTS, net

     6,665       —        —         6,665  

INVESTMENT IN NON-GUARANTOR SUBSIDIARIES, at cost

     28,636       4,000      (32,636 )     —    

OTHER ASSETS

     1,135       19      —         1,154  
    


 

  


 


Total other assets

     36,436       43,332      (32,636 )     47,132  
    


 

  


 


     $ 110,454     $ 62,739    $ (35,553 )   $ 137,640  
    


 

  


 


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                                

CURRENT LIABILITIES:

                               

Notes payable to bank

   $ 3,373     $ 5,220    $ —       $ 8,593  

Accounts payable

     7,752       1,129      —         8,881  

Intercompany payables, net

     1,268       —        (1,268 )     —    

Accrued liabilities

     20,973       7,007      —         27,980  
    


 

  


 


Total current liabilities

     33,366       13,356      (1,268 )     45,454  

NOTES PAYABLE TO BANK, net of current portion

     42,627       8,215      —         50,842  

SENIOR SUBORDINATED NOTES PAYABLE

     115,000       —        —         115,000  

NOTES PAYABLE TO AFFILIATES

     26,951       12,366      —         39,317  

MANDATORILY-REDEEMABLE PREFERRED STOCK

     54,876       —        —         54,876  

OTHER NON-CURRENT LIABILITIES

     242       1,841      —         2,083  
    


 

  


 


Total liabilities

     273,062       35,778      (1,268 )     307,572  

STOCKHOLDERS’ EQUITY (DEFICIT)

     (162,608 )     26,961      (34,285 )     (169,932 )
    


 

  


 


     $ 110,454     $ 62,739    $ (35,553 )   $ 137,640  
    


 

  


 


 

21


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET

 

     December 31, 2002

 
     Guarantor

    Non-
Guarantor


   Eliminations

    Total

 
ASSETS                                

CURRENT ASSETS:

                               

Cash

   $ 3,568     $ 2,857    $ —       $ 6,425  

Accounts receivable

     17,207       7,007      —         24,214  

Intercompany receivables, net

     —         1,227      (1,227 )     —    

Inventories

     19,303       4,204      (883 )     22,624  

Other current assets

     1,162       555      —         1,717  
    


 

  


 


Total current assets

     41,240       15,850      (2,110 )     54,980  

PROPERTY, PLANT AND EQUIPMENT, NET

     38,548       1,320      —         39,868  

INTANGIBLE ASSETS, net

     —         34,137      —         34,137  

DEFERRED FINANCING COSTS, net

     7,888       —        —         7,888  

INVESTMENT IN NON-GUARANTOR SUBSIDIARIES, at cost

     28,636       4,000      (32,636 )     —    

OTHER ASSETS

     1,064       —        —         1,064  
    


 

  


 


Total other assets

     37,588       38,137      (32,636 )     43,089  
    


 

  


 


     $ 117,376     $ 55,307    $ (34,746 )   $ 137,937  
    


 

  


 


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                                

CURRENT LIABILITIES:

                               

Notes payable to bank

   $ 9,250     $ 4,533    $ —       $ 13,783  

Accounts payable

     8,540       1,839      —         10,379  

Intercompany payables, net

     1,227       —        (1,227 )     —    

Accrued liabilities

     18,026       4,366      —         22,392  
    


 

  


 


Total current liabilities

     37,043       10,738      (1,227 )     46,554  

NOTES PAYABLE TO BANK, net of current portion

     46,300       9,492      —         55,792  

SENIOR SUBORDINATED NOTES PAYABLE

     115,000       —        —         115,000  

NOTES PAYABLE TO AFFILIATES

     26,951       12,366      —         39,317  

MANDATORILY-REDEEMABLE PREFERRED STOCK

     50,381       —        —         50,381  

OTHER NON-CURRENT LIABILITIES

     281       1,680      —         1,961  
    


 

  


 


Total liabilities

     275,956       34,276      (1,227 )     309,005  

STOCKHOLDERS’ EQUITY (DEFICIT)

     (158,580 )     21,031      (33,519 )     (171,068 )
    


 

  


 


     $ 117,376     $ 55,307    $ (34,746 )   $ 137,937  
    


 

  


 


 

22


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

 

     Three Months Ended September 30, 2003

 
     Guarantor

    Non-
Guarantor


   Eliminations

    Total

 

NET SALES

   $ 38,316     $ 10,619    $ (4,369 )   $ 44,566  

COST OF SALES

     24,145       4,855      (4,093 )     24,907  
    


 

  


 


Gross Profit

     14,171       5,764      (276 )     19,659  

OPERATING EXPENSES:

                               

Selling, distribution, general and administrative

     8,932       3,447      —         12,379  

Research and development

     537       381      —         918  
    


 

  


 


       9,469       3,828      —         13,297  
    


 

  


 


Income from operations

     4,702       1,936      (276 )     6,362  

INTEREST EXPENSE AND OTHER, net:

     6,197       605      —         6,802  
    


 

  


 


Income (loss) before provision for income taxes

     (1,495 )     1,331      (276 )     (440 )

PROVISION FOR INCOME TAXES

     68       513      —         581  
    


 

  


 


Net income (loss)

   $ (1,563 )   $ 818    $ (276 )   $ (1,021 )
    


 

  


 


 

     Three Months Ended September 30, 2002

 
     Guarantor

    Non-
Guarantor


   Eliminations

    Total

 

NET SALES

   $ 37,126     $ 8,849    $ (3,831 )   $ 42,144  

COST OF SALES

     25,058       4,508      (3,438 )     26,128  
    


 

  


 


Gross Profit

     12,068       4,341      (393 )     16,016  

OPERATING EXPENSES:

                               

Selling, distribution, general and administrative

     8,984       2,595      —         11,579  

Research and development

     444       143      —         587  
    


 

  


 


       9,428       2,738      —         12,166  
    


 

  


 


Income from operations

     2,640       1,603      (393 )     3,850  

INTEREST EXPENSE AND OTHER, net:

     5,079       657              5,736  
    


 

  


 


(Loss) income before provision for income taxes

     (2,439 )     946      (393 )     (1,886 )

PROVISION FOR INCOME TAXES

     44       616      —         660  
    


 

  


 


Net (loss) income

   $ (2,483 )   $ 330    $ (393 )   $ (2,546 )
    


 

  


 


 

23


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

 

     Nine Months Ended September 30, 2003

     Guarantor

    Non-
Guarantor


   Eliminations

    Total

NET SALES

   $ 118,387     $ 32,039    $ (14,713 )   $ 135,713

COST OF SALES

     74,876       15,231      (13,947 )     76,160
    


 

  


 

Gross Profit

     43,511       16,808      (766 )     59,553

OPERATING EXPENSES:

                             

Selling, distribution, general and administrative

     27,419       9,965      —         37,384

Research and development

     1,284       994      —         2,278
    


 

  


 

       28,703       10,959      —         39,662
    


 

  


 

Income from operations

     14,808       5,849      (766 )     19,891

INTEREST EXPENSE AND OTHER, net:

     15,487       1,868      —         17,355
    


 

  


 

Income (loss) before provision for income taxes

     (679 )     3,981      (766 )     2,536

PROVISION FOR INCOME TAXES

     295       1,614      —         1,909
    


 

  


 

Net income (loss)

   $ (974 )   $ 2,367    $ (766 )   $ 627
    


 

  


 

 

     Nine Months Ended September 30, 2002

 
     Guarantor

    Non-
Guarantor


   Eliminations

    Total

 

NET SALES

   $ 111,632     $ 26,437    $ (10,905 )   $ 127,164  

COST OF SALES

     72,708       13,461      (11,074 )     75,095  
    


 

  


 


Gross Profit

     38,924       12,976      169       52,069  

OPERATING EXPENSES:

                               

Selling, distribution, general and administrative

     27,549       7,453      —         35,002  

Research and development

     1,309       690      —         1,999  
    


 

  


 


       28,858       8,143      —         37,001  
    


 

  


 


Income from operations

     10,066       4,833      169       15,068  

INTEREST EXPENSE AND OTHER, net:

     14,433       1,349      —         15,782  
    


 

  


 


(Loss) income before provision for income taxes

     (4,367 )     3,484      169       (714 )

PROVISION FOR INCOME TAXES

     124       1,942      —         2,066  
    


 

  


 


Net (loss) income

   $ (4,491 )   $ 1,542    $ 169     $ (2,780 )
    


 

  


 


 

24


Table of Contents

HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES

GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

 

    

Nine Months Ended

September 30, 2003


 
     Guarantor

    Non-
Guarantor


    Total

 

Net cash provided by operating activities

   $ 11,206     $ 3,740     $ 14,946  

Net cash used in investing activities

     (4,293 )     (982 )     (5,275 )

Net cash used in financing activities

     (9,761 )     (2,522 )     (12,283 )

Effect of exchange rate changes on cash

     (71 )     (721 )     (792 )
    


 


 


NET DECREASE IN CASH

     (2,919 )     (485 )     (3,404 )

CASH, beginning of period

     3,568       2,857       6,425  
    


 


 


CASH, end of period

   $ 649     $ 2,372     $ 3,021  
    


 


 


 

    

Nine Months Ended

September 30, 2002


 
     Guarantor

    Non-
Guarantor


    Total

 

Net cash provided by (used in) operating activities

   $ 7,346     $ (1,459 )   $ 5,887  

Net cash used in investing activities

     (4,614 )     (507 )     (5,121 )

Net cash (used in) provided by financing activities

     (5,556 )     3,496       (2,060 )

Effect of exchange rate changes on cash

     102       (870 )     (768 )
    


 


 


NET DECREASE IN CASH

     (2,722 )     660       (2,062 )

CASH, beginning of period

     4,713       2,372       7,085  
    


 


 


CASH, end of period

   $ 1,991     $ 3,032     $ 5,023  
    


 


 


 

The Company’s percentage of sales by geographic region for the three and nine month period ended September 30, 2003 and September 30, 2002 is as follows:

 

     Three Months Ended

 
    

September 30,

2003


   

September 30,

2002


 

United States

   70.7 %   73.8 %

Europe

   16.2     13.9  

Pacific Rim (Japan, Southeast Asia, Australia/New Zealand)

   7.7     7.2  

Canada

   1.2     1.1  

Other international

   4.2     4.0  
    

 

     100.0 %   100.0 %
    

 

 

     Nine Months Ended

 
    

September 30,

2003


   

September 30,

2002


 

United States

   71.7 %   74.1 %

Europe

   16.4     14.3  

Pacific Rim (Japan, Southeast Asia, Australia/New Zealand)

   7.3     6.3  

Canada

   1.4     1.4  

Other international

   3.2     3.9  
    

 

     100.0 %   100.0 %
    

 

 

5. Commitments and Contingencies. The Company is not a party to any material lawsuits or other proceedings. While the result of the Company’s other existing lawsuits and proceedings cannot be predicted with certainty, management does not expect that the ultimate resolution of these matters will have a material adverse effect on the financial position or results of operations of the Company.

 

25


Table of Contents

Self Insurance. The Company self-insures the majority of its medical benefit programs. Reserves for medical claim losses (including retiree benefits) totaling approximately $1,242,000 and $1,160,000 at September 30, 2003 and December 31, 2002, respectively, were established based upon estimated obligations and are included in accrued liabilities in the accompanying unaudited condensed consolidated balance sheets. The Company maintains excess coverage on an aggregate claim basis. Additionally, the Company is self-insured for workers’ compensation. Reserves for workers’ compensation claim losses totaling approximately $784,000 and $353,000 at September 30, 2003 and December 31, 2002, respectively, were established based upon estimated obligations and are included in accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.

 

Accrued Severance Costs. In 2001, the decision was made to close the Argyle manufacturing facility and relocate that facility’s operations to Tecate, Mexico in April 2003. As of December 31, 2002, 147 employees had been notified that their positions would be eliminated with an estimated severance cost of $2,160,360. The following summarizes the activity of accrued severance costs (amounts in thousands, except for employees):

 

    

Employees

Affected


   

Accrued

Severance


 

As of December 31, 2000

   —       $ —    

Position eliminations announced

   83       694  

Positions eliminated and severance paid

   —         —    
    

 


Balance remaining at December 31, 2001

   83       694  

Position eliminations announced

   64       1,466  

Positions eliminated and severance paid

   (46 )     (331 )
    

 


Balance remaining at December 31, 2002

   101       1,829  

Position eliminations announced

   —         —    

Positions eliminated and severance paid

   (99 )     (1,542 )
    

 


Balance remaining at September 30, 2003

   2     $ 287  
    

 


 

Guarantees. During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include, (i) intellectual property indemnities to the Company’s customers and licensees in connection with the use, sales and/or license of Company products, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, the Company has made contractual commitments to several employees providing for payments upon the occurrence of certain prescribed events. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and other guarantees in the accompanying unaudited condensed consolidated balance sheets.

 

5. Credit Facility. Total borrowings as of September 30, 2003, were $7.0 million and $39.0 million under the Revolving Loan Facility and Acquisition Facility. As of September 30, 2003 $6.7 million was available for borrowing under the Revolving Loan Facility and none is available for borrowing under the Acquisition Facility. As of September 30, 2003 the fair value of the Term Loan facility and Revolving Loan Facility approximated the face value.

 

On October 7, 2003, the Company refinanced its existing Credit Facility with a new $60.0 million Senior Secured Revolving Facility (the “Revolving Facility”) consisting of a $30.0 million Revolving A Facility and a $30.0 million Revolving B Facility. Maturity for both facilities is October 1, 2007. As a result of this refinancing approximately $42.6 million in notes to bank shown as current at June 30, 2003 is now shown as long term at September 30, 2003. See footnote 7 for additional information.

 

26


Table of Contents

At September 30, 2003, the Company was in compliance with all provisions of its debt securities.

 

6. Mandatorily-Redeemable Preferred Stock. As of September 30, 2003, the Company has issued to its parent River Holding Corp (“Holding”), 525,938 shares (including shares issued as payment in kind dividends) of its 11 ½% Senior PIK Preferred Stock due 2010 (the “Company Preferred Stock”). Dividends on the Company Preferred Stock accrue from the date of issuance and are payable semi-annually in arrears on April 15 and October 15 of each year (each a “Dividend Payment Date”), at a rate per annum of 11 ½% of the liquidation preference per share. The liquidation preference of each share of Company Preferred Stock is $100 (the “Liquidation Preference”). Dividends are payable in cash, except that on each Dividend Payment Date occurring on or prior to April 15, 2005, dividends may be paid, at the Company’s option, by the issuance of additional shares of Company Preferred Stock having an aggregate Liquidation Preference equal to the amount of such dividends. The Company’s credit facility currently prohibits the Company from paying any cash dividends on the Company Preferred Stock. After April 15, 2003, the Company Preferred Stock is redeemable at the Company’s option in whole or in part, at a premium of the Liquidation Preference plus accumulated and unpaid dividends, if any, to the date of redemption. The Company is required to redeem the Company Preferred Stock on April 15, 2010, at a redemption price equal to 100% of the Liquidation Preference thereof plus accumulated and unpaid dividends.

 

At September 30, 2003 the redemption amount was $55.4 million. The maximum amount the Company will pay at the mandatory redemption date will be $115.0 million.

 

7. Subsequent Events. On October 7, 2003, the Company refinanced its existing Credit Facility with a new $60.0 million Senior Secured Revolving Facility (the “Revolving Facility”) consisting of a $30.0 million Revolving A Facility and a $30.0 million Revolving B Facility. Both credit facilities mature on October 1, 2007. The Company expects to record a loss on the extinguishment of its existing credit facility of $0.6 million in the quarter ending December 31, 2003.

 

The Revolving A Facility consists of a working capital revolver of up to $30.0 million under which advances are subject to availability under a borrowing base consisting of advances against eligible accounts receivable and inventory less advances under the sub facilities and letters of credit. Sub-facilities under the Revolving Facility A consist of a $5.6 million five year reducing real estate loan, a $2.4 million three year reducing equipment loan, a $6.0 million reducing 2.5 year general facility and a $5.0 million letter of credit sub-facility. On October 7, 2003, total borrowings under Revolving Facility A equaled $18.2 million with available borrowing capacity of $10.5 million.

 

The Revolving A Facility is secured by a first priority lien on substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of the Company owned by Holding and all of the shares held by the Company’s guarantor subsidiaries. The Revolving A Facility is guaranteed jointly and severally by Holding and of the guarantor’s subsidiaries.

 

The Revolving B Facility consists of a $30.0 million non-reducing loan due in full upon maturity on October 1, 2007. This facility is secured by a perfected second position in substantially all of the properties and assets of the guarantor including a pledge of all of the capital stock of the Company owned by Holding and all of the shares held by the Company’s guarantor subsidiaries. The Revolving B facility is guaranteed jointly and severally by Holding, by the guarantors subsidiaries and by a pledge of the stock of HRC Holdings.

 

Required reductions in the Senior Secured Revolving Facility are equal to (amounts in thousands):

 

Year ending December 31


   2003

   2004

   2005

   2006

   2007

     $ 613    $ 3,680    $ 3,680    $ 2,080    $ 38,100

 

27


Table of Contents

Interest rates under the Revolving Facility A are based, at the option of the Company, upon either a Eurodollar rate or a base rate (as defined) plus a margin during the period and for the applicable type of loan. The interest rate margin is adjustable based on whether or not the Company obtains a certain level of trailing EBITDA. The range in margin for each facility is as follows:

 

     Margin

Period and Loan Type


   Base Rate

   Eurodollar

Revolving Facility A

         

Working Capital

   (0.5)%-.5%    2.0%-3.0%

Real Estate Revolver

   0.5%-1.5%    3.25%-4.0%

Equipment Revolver

   0.0%-1.0%    2.5%-3.5%

General Revolver

   1.5%    NA

Revolving Facility B

   11% Fixed     

 

The Revolving Facility contains covenants restricting the ability of Holding, the Company and the Company’s guarantor subsidiaries to, among others, (i) incur additional debt, (ii) declare dividends or redeem or repurchase capital stock, (iii) prepay, redeem or purchase debt, (iv) incur liens, (v) make loans and investments, (vi) make capital expenditures, (vii) engage in mergers, acquisitions and asset sales, and (viii) engage in transactions with affiliates. The Company is also required to comply with financial covenants with respect to (a) limits on annual aggregate capital expenditures (as defined) and (b) a minimum EBITDA test.

 

As a condition to the extension of credit under the Revolving A Facility and the Revolving B Facility, on September 30, 2003 the holders of a majority of the outstanding Senior Subordinated Convertible Promissory Notes and Unsecured Senior Promissory Notes, shown as “Notes Payable to Affiliates” on the balance sheet, agreed to amend the notes to extend the maturity to March 31, 2008.

 

As a condition to the extension of credit under the Revolving A Facility and the Revolving B Facility, on October 2, 2003, the holders of a majority of the outstanding Senior Preferred Stock, Junior Preferred Stock and Common Stock, each class voting separately, by written consent of the shareholders approved an amendment to the Certificate of Designation for the Holding Preferred Stock to extend the time period in which the Registrant may pay dividends in kind on the Holding Preferred Stock by one year, to April 15, 2005. In addition, the holders of a majority of the outstanding 11 ½% Senior PIK Preferred Stock due 2010 of Holding (the “Holding Preferred Stock”), 12% Junior Convertible Preferred Stock of Holding and the Common Stock of Holding, voting separately as a class, by written consent, approved an amendment to the Certificate of Designation of the Holding Preferred Stock to extend the time period in which Holding may pay dividends in kind on the Holding Preferred Stock by one year, to April 15, 2005.

 

28


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Because River Holding Corp. (“Holding”) is a holding company with no operations other than those of Hudson Respiratory Care Inc. (the “Company” or “Hudson”), the following discussion throughout this section relates primarily to the Company. The following discussion of Holding and the Company’s consolidated historical results of operations and financial condition should be read in conjunction with the consolidated financial statements of Holding and the Company and the notes thereto included elsewhere in this Form 10-Q and the 2002 Form 10-K.

 

Holding’s acquisition of a majority of the Company’s stock was accounted for as a purchase. As a result of Holding’s acquisition of the Company, Holding recorded property, plant and equipment at fair value. Additional depreciation expense related to the allocation of purchase price at fair value to depreciable assets of $1.7 million was recorded in the first nine months of 2003 and 2002 respectively. The remaining value of the step-up in basis to fair value was approximately $4.2 million at September 30, 2003.

 

On September 30, 2003 Holding repurchased 75,000 shares of common stock from a former employee.

 

There are no other material differences between Holding consolidated and the Company.

 

Forward-Looking Statements

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Such statements relating to future events and financial performance are forward-looking statements involving risks and uncertainties that are detailed from time to time in the Company’s Securities and Exchange Commission filings.

 

General

 

The Company manufactures and markets products for use in respiratory care and anesthesia. The products for each market are similar and often overlap, as do the distribution channels. The Company groups its products into four clinical categories: (i) oxygen therapy; (ii) aerosol therapy; (iii) humidification; and (iv) airway management. The following table provides examples of the products sold in each category:

 

Category


  

Examples of Products


Oxygen Therapy

   Oxygen masks, cannula, oxygen catheters, oxygen tubing, prefilled and refillable humidifiers, oxygen regulators, cylinder carts and bases, oxygen analyzers/monitors, oxygen sensors, and adaptors and connectors

Aerosol Therapy

   Aerosol masks, prefilled and refillable large volume nebulizers, aerosol tubing, unit dose solutions, small volume nebulizers, peak flow meters and spacers/changes

Humidification

   ConchaTherm heated humidifiers and accessories, Humid-Heat and accessories, AquaTherm and ThermaGard nebulizer heaters, Concha water, Concha Pak, Aqua+ and Humid-Vent HME’s and filters for critical care, anesthesia and pulmonary function

Airway Management

   Oral airways, SHERIDAN® endotracheal tubes, incentive breathing exercisers, disposable and reuseable resuscitation bags, hyperinflation bags, breathing bags, air cushion masks, anesthesia circuits, heated-wire and conventional ventilator circuits, gas sampling lines and filters, catheter mounts and infant Continuous Positive Airway Pressure (“CPAP”) sets

 

29


Table of Contents

Although the Company’s sales efforts differ depending on the clinical use of its products, management focuses on geographical segments for strategic decision making.

 

The Company’s results of operations may fluctuate significantly from quarter to quarter as a result of a number of factors, including, among others, the buying patterns of the Company’s distributors, group purchasing organizations (“GPOs”) and other purchasers of the Company’s products, forecasts regarding the severity of the annual cold and flu season, announcements of new product introductions by the Company or its competitors, changes in the Company’s pricing of its products and the prices offered by the Company’s competitors, rate of overhead absorption due to variability in production levels, variability in the number of shipping days in a given quarter and changes in the relative values of the principal currencies in which the Company conducts its business compared to the U.S. Dollar.

 

Results of Operations

 

The following tables set forth, for the periods indicated, certain income and expense items expressed in dollars and as a percentage of the Company’s net sales.

 

     Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
     2003

    2002

    2003

    2002

 
     (amounts in
thousands)
    (amounts in
thousands)
 

Net sales

   $ 44,566     $ 42,144     $ 135,713     $ 127,164  

Cost of sales

     24,907       26,128       76,160       75,095  
    


 


 


 


Gross profit

     19,659       16,016       59,553       52,069  
    


 


 


 


Selling expenses

     5,568       4,970       15,971       15,368  

Distribution expenses

     2,623       2,482       7,628       6,890  

General and administrative expenses

     4,188       4,127       13,785       12,744  

Research and development expenses

     918       587       2,278       1,999  
    


 


 


 


Total operating expenses

     13,297       12,166       39,662       37,001  
    


 


 


 


Income from operations

     6,362       3,850       19,891       15,068  

Interest expense and other, net

     6,802       5,736       17,355       15,782  
    


 


 


 


Net income (loss) before provision for income taxes

     (440 )     (1,886 )     2,536       (714 )

Provision for income taxes

     581       660       1,909       2,066  
    


 


 


 


Net income (loss)

   $ (1,021 )   $ (2,546 )   $ 627     $ (2,780 )
    


 


 


 


     Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
     2003

    2002

    2003

    2002

 

Net sales

     100.0 %     100.0 %     100.0 %     100.0 %

Cost of sales

     55.9       62.0       56.1       59.1  
    


 


 


 


Gross profit

     44.1       38.0       43.9       40.9  
    


 


 


 


Selling expenses

     12.5       11.8       11.8       12.1  

Distribution expenses

     5.9       5.9       5.6       5.4  

General and administrative expenses

     9.4       9.8       10.2       10.0  

Research and development expenses

     2.1       1.4       1.7       1.6  
    


 


 


 


Total operating expenses

     29.8       28.9       29.2       29.1  
    


 


 


 


Income from operations

     14.3       9.1       14.7       11.8  

Interest expense and other, net

     15.3       13.6       12.8       12.4  
    


 


 


 


Net income (loss) before provision for income taxes

     (1.0 )     (4.5 )     1.9       (0.6 )

Provision for income taxes

     1.3       1.6       1.4       1.6  
    


 


 


 


Net income (loss)

     (2.3 )%     (6.0 )%     0.5 %     (2.2 )%
    


 


 


 


 

30


Table of Contents

Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002

 

Net sales, on a consolidated basis, were $44.6 million in the third quarter of 2003 as compared to $42.1 million in the third quarter of 2002, representing an increase of $2.5 million or 5.9%. Sales into Europe increased by $1.3 million reflecting the impact of favorable changes in exchange rates resulting from a weakened U.S. dollar as compared to other countries’ currencies in which the Company distributes its products (an increase to reported sales of $0.9 million) and an increase in units shipped (an increase of $0.4 million). Sales into the Pacific Rim increased by $0.4 million or 13.4%, primarily attributable to an increase in sales volume in Humidification products. Sales into the domestic hospital market increased by $0.4 million or 1.8%, primarily attributable to sales volume increases in Oxygen Therapy and Humidification product groups. Sales into other markets represented an increase of $0.4 million from the third quarter of 2002.

 

The Company’s gross profit for the third quarter of 2003 was $19.7 million, an increase of $3.7 million or 23.1% from the third quarter of 2002. As a percentage of sales, the gross profit was 44.1% and 38.0% for the third quarter of 2003 and 2002, respectively. The following contributed to the improvement in 2003 margin; (i) improved margin in Europe (1.4 margin points) due to sales mix; (ii) greater volume of higher margin products (1.5 margin points) in the domestic hospital market primarily in Oxygen Therapy and Airway Management product groups; (iii) favorable mix on products sold to the Company’s OEM customers (0.5 margin points); (iv) the favorable impact of the weakening value of the U.S. Dollar as compared to other countries’ currencies in which the Company distributes its products (1.3 margin points); (v) reduction in transition expenses associated with the move of the Argyle, New York facility to Tecate, Mexico substantially completed during the second quarter of 2003 (0.9 margin points); and improved absorption of manufacturing costs in 2003 due to higher levels of production (0.7 margin points). Offset by other factors (negative 0.2 margin points).

 

Selling expenses were $5.6 million for the third quarter of 2003 as compared to $5.0 million in the third quarter of 2002, representing an increase of $0.6 million or 12.0%. The increase was primarily attributable to unfavorable changes in exchange rates of $0.3 million and increases in European selling expenses of $0.3 million. As a percentage of net sales, selling expenses were 12.5% in the third quarter of 2003 as compared to 11.8% in the third quarter of 2002.

 

Distribution expenses were $2.6 million for the third quarter of 2003 as compared to $2.5 million in the third quarter of 2002, representing an increase of $0.1 million or 4.0%. The increase was attributable to unfavorable changes in exchange rates of $0.1 million. As a percentage of sales, distribution expense was 5.9% in the third quarter of 2003 and 2002.

 

General and administrative expenses were $4.2 million in the third quarter of 2003 as compared to $4.1 million in the third quarter of 2002, representing an increase of $0.1 million or 2.4%. This increase was primarily the result of unfavorable changes in exchange rates of $0.1 million. As a percentage of net sales, general and administrative expenses were 9.4% in the third quarter of 2003 as compared to 9.8% in the third quarter of 2002.

 

Interest and other expense was $6.8 million for the third quarter of 2003 as compared to $5.7 million in the third quarter of 2002, representing an increase of $1.1 million or 19.3%. The increase was due to the treatment of preferred stock dividends as interest expense of $1.5 million during 2003 (See footnote 1 on the Company’s adoption of SFAS 150), partially offset by $0.4 million decrease in interest expense from decreased borrowings under the Company’s bank facilities. During the last quarter of 2003, the company expects to write-off the remainder of deferred financing charges of approximately $0.6 million as other expense associated with the refinancing of the Company’s Credit Facility completed in October 2003.

 

Income tax provision was $0.6 million for the third quarter of 2003 as compared to $0.7 million in the third quarter of 2002 and related primarily to foreign income taxes.

 

31


Table of Contents

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002

 

Net sales, on a consolidated basis, were $135.7 million in the first nine months of 2003 as compared to $127.2 million in the first nine months of 2002, representing an increase of $8.5 million or 6.7%. Sales into Europe increased by $4.1 million reflecting the impact of favorable changes in exchange rates resulting from a weakened U.S. dollar as compared to other countries’ currencies in which the Company distributes its products (an increase to reported sales of $3.8 million) and higher volume of units shipped (an increase of $0.3 million). Sales into the domestic hospital market increased by $2.7 million or 4.0%, attributable to sales volume increases in Oxygen Therapy, Humidification and Airway Management product groups. Sales into the Pacific Rim increased by $1.8 million or 22.4%, attributable to increased sales volume in Humidification and Oxygen Therapy products. Sales to the alternate site market increased by $0.3M or 1.4%, primarily attributable to sales volume in Aerosol Therapy, Humidification and Airway Management product groups. Sales to the Company’s OEM customers increased by $0.3 million or 4.8%, attributable to changes in sales mix. These gains were partially offset by a decline in sales into Latin America of $0.6 million or 18.4%. Sales into other markets were relatively unchanged representing a decrease of $0.1 million from the prior year.

 

The Company’s gross profit for the first nine months of 2003 was $59.6 million, an increase of $7.5 million or 14.4% from the first nine months of 2002. As a percentage of sales, the gross profit was 43.9% and 40.9% for the first nine months of 2003 and 2002, respectively. The following contributed to the improvement in 2003 margin; (i) greater volume of higher margin products (1.5 margin points) in the domestic hospital market primarily in Oxygen Therapy and Airway Management product groups; (ii) greater volume (0.4 margin points) in the Pacific Rim market primarily in the Humidification product group; (iii) improved absorption of manufacturing costs due to higher production during 2003 (1.0 margin points); and (iv) the favorable impact of the weakening value of the U.S. Dollar as compared to other countries’ currencies in which the Company distributes its products (1.1 margin points). These increases in margin were partially offset by: (i) incremental costs associated with the move of the Argyle, New York facility to Tecate, Mexico in 2003 (0.4 margin points); and (ii) other factors (.6 margin points).

 

Selling expenses were $16.0 million for the first nine months of 2003 as compared to $15.4 million in the first nine months of 2002, representing an increase of $0.6 million or 3.9%. The increase was due to unfavorable changes in exchange rates of $0.8 million and compensation expense of $0.4 million due to increases in staffing, offset by spending declines of $0.6 million primarily due to lower fees associated with Group Purchasing Organizations in the domestic hospital market. As a percentage of net sales, selling expenses were 11.8% in the first nine months of 2003 as compared to 12.1% in the first nine months of 2002.

 

Distribution expenses were $7.6 million for the first nine months of 2003 as compared to $6.9 million in the first nine months of 2002, representing an increase of $0.7 million or 10.1%. The increase was primarily attributable to unfavorable changes in exchange rates of $0.4 million, increased intracompany freight charges of $0.6 million and increased European distribution expenses of $0.3 million. The increases were partially offset by decreased labor and overtime of $0.6 million in the Domestic operations. As a percentage of sales, distribution expense was 5.6% in the first nine months of 2003 and 5.4% in the first nine months of 2002.

 

General and administrative expenses were $13.8 million in the first nine months of 2003 as compared to $12.7 million in the first nine months of 2002, representing an increase of $1.1 million or 8.7%. This increase was primarily the result of unfavorable changes in exchange rates of $0.5 million and increased expenses due to higher compensation and fringe benefit expenses offset in part by the elimination of consulting and third party expenses associated with the debt restructuring in May 2002, together resulting in a net increase of $0.6 million. As a percentage of net sales, general and administrative expenses were 10.2% in the first nine months of 2003 as compared to 10.0% in the first nine months of 2002.

 

Interest and other expense was $17.4 million for the first nine months of 2003 as compared to $15.8 million in the first nine months of 2002, representing an increase of $1.6 million or 10.1%. The increase was primarily due to the treatment of preferred stock dividends as interest expense of $1.5 million during 2003 (See footnote 1 on the Company’s adoption of SFAS 150) and the increase in interest expense associated with increased debt to affiliates of $1.3 million offset by lower interest expense (down $1.2 million) associated with decreased bank borrowings. During the last quarter of 2003, the company expects to write-off the remainder of deferred financing charges of approximately $0.6 million as other expense associated with the refinancing of the Company’s Credit Facility completed in October 2003.

 

32


Table of Contents

Income tax provision was $1.9 million for the first nine months of 2003 as compared to $2.1 million in the first nine months of 2002 and related primarily to foreign income taxes.

 

Liquidity and Capital Resources

 

The Company’s primary sources of liquidity are cash flow from operations and borrowings under its working capital bank facility. Cash provided by operations totaled $15.0 million and $5.9 million for the first nine months of 2003 and 2002, respectively. The increase for the first nine months of 2003 as compared to the first nine months of 2002 is primarily attributable to increased operating income, a decrease in accounts receivable, an increase in accrued liabilities, offset in part by an increase in inventory. The Company had working capital of $7.1 million and $8.4 million as of the end of September 30, 2003 and December 31, 2002, respectively. Inventories were $25.8 million and $22.6 million as of the end of September 30, 2003 and December 31, 2002, respectively. Accounts receivable, net of allowances, were $22.3 million and $24.2 million at September 30, 2003 and December 31, 2002, respectively.

 

During the nine months ended September 30, 2003 and 2002, net cash used in investing activities was $5.3 million and $5.1 million, respectively. Cash was used primarily for the purchase of manufacturing equipment and new heater production.

 

During the nine months ended September 30, 2003 and September 30, 2002, net cash used by financing was $12.3 million and $2.1 million, respectively, reflecting repayment on the Company’s borrowings in the first nine months of 2003 and 2002.

 

As of September 30, 2003, the Company had outstanding $213.7 million of indebtedness, consisting of $115.0 million of Senior Subordinated Notes, borrowings of $46.0 million under the Company’s Credit Facility, $39.3 million in notes payable to affiliates and $13.4 million in outstanding borrowings under the bank facility of Hudson RCI AB, the Company’s European subsidiary. On October 7, 2003 the Company completed a new $60 million Senior Secured Facility. The new Senior Secured Revolving Facility replaces the Credit Facility that would have expired in 2004.

 

The Company has issued to Holding 525,938 shares (including shares issued as payment in kind dividends) of Company Preferred Stock with an aggregate liquidation preference of $52.6 million. At the election of the Company, dividends may be paid in kind until April 15, 2005 and thereafter must be paid in cash. The Senior Secured Credit Facility currently prohibits the Company from paying cash dividends on this Preferred Stock.

 

The Company has issued 3,000 shares of 12% Junior Convertible Cumulative Preferred Stock (the “Junior Preferred Stock”) to Holding, for total cash consideration to the Company of $3.0 million. Each share of the Junior Preferred Stock may be redeemed, from time to time, in whole or in part, at the option of the Company at a redemption price of 100% of the Liquidation Preference of the Junior Preferred Stock or $1,000 per share plus accumulated and unpaid dividends that would be payable on such shares of Junior Preferred Stock.

 

At September 30, 2003, the Company was in compliance with all provisions of its debt securities and preferred stock.

 

33


Table of Contents

The following is a summary of the Company’s consolidated contractual obligations as of September 30, 2003. The long term debt is based on the new contractual terms of the Senior Secured Revolving Facility and the affiliate notes are based on the amended maturity date:

 

(amounts in thousands)    Payments Due by Period

     Total

  

Less Than

1 Year


  

1-3

Years


  

4-5

Years


  

After 5

Years


Long-term debt

   $ 213,752    $ 8,593    $ 11,900    $ 35,947    $ 157,312

Mandatorily redeemable preferred securities

     54,876      —        —        —        54,876

Leases and other commitments

     10,637      2,724      4,402      1,119      2,392
    

  

  

  

  

Total contractual obligations

   $ 279,265    $ 11,317    $ 16,302    $ 37,066    $ 214,580
    

  

  

  

  

 

The Company believes that cash generated from anticipated improved operating performance, together with the refinancing of its Credit Facility will provide sufficient liquidity to fund its operations and meet its obligations for the next twelve months. If the Company does not generate sufficient cash flow from operations in line with its current forecasts, the Company would have to initiate measures to raise cash through additional debt or equity issuances, additional asset sales and/or curtail operations. The Company has no commitments for additional debt or equity and no assurance can be given as to whether or, on what terms, additional debt or equity investments could be obtained, if required. Failure to achieve expected cash flows or, if necessary, to obtain additional debt or equity investment would have a material adverse effect on the Company.

 

For additional information regarding the Company’s debt securities and preferred stock, reference is made to Item 7 of the Company’s Annual Report on Form 10-K, for the year ended December 31, 2002.

 

As Holding is a holding company, its primary source of liquidity is dividends or other distributions from the Company. Holding’s only asset is its investment in Hudson Respiratory Care, Inc. The ability of the Company to pay cash dividends or make distributions to Holding when required, is restricted or prohibited under the terms of the debt instruments, including the Credit Facility. Since the Credit Agreement currently prohibits the Company from paying cash dividends to Holding, Holding may not be able to pay cash dividends to the holders of Holding Preferred Stock commencing in April 2004. In the event Holding is unable to pay cash dividends to the holders of Holding Preferred Stock for two consecutive periods, the sole remedy of the holders is the ability to elect two members to Holding’s Board of Directors.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

There have been no material changes in Holding’s market risk exposure from that reported in Holding’s 10-K for the fiscal year ended December 31, 2002.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Holding’s Chief Executive Officer and Chief Financial Officer have concluded, based on an evaluation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(c)), during the period covered by this report, that such disclosure controls and procedures were effective as of the end of the period covered by this report. No changes in the Company’s internal control over financial reporting occurred during the period covered by this report that have materially affected, or is reasonably likely to material affect, the Company’s internal control over financial reporting.

 

34


Table of Contents

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 2. CHANGES IN SECURITIES

 

The Certificate of Determination for Holding Preferred Stock was amended on October 2, 2003, to extend the time period in which Holding may pay dividends in kind on the Holding Preferred Stock by one year. The amendment allows Holding to pay dividends in kind on the Holding Preferred Stock to and including April 15, 2005.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM   6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a) Exhibits

 

3.1

   Amended and Restated Articles of Incorporation of Hudson RCI, as amended to date.

10.1

   Loan and Security Agreement, dated as of October 7, 2003, among Hudson RCI, the Lenders that are signatory thereto and Wells Fargo Foothill, Inc. (“Wells Fargo”), as the Arranger and Administrative Agent.

10.2

   Stock Pledge Agreement, dated as of October 7, 2003, between Holding and Wells Fargo, as the arranger and administrative agent.

10.3

   Stock Pledge Agreement, dated as of October 7, 2003, among Hudson RCI, IH Holding LLC and Wells Fargo, as the arranger and administrative agent.

10.4

   Security Agreement, dated as of October 7, 2003, among affiliates of Hudson RCI signatory thereto and Wells Fargo, as the arranger and administrative agent.

10.5

   Patent Security Agreement, dated as of October 7, 2003, between Hudson RCI and Wells Fargo, as arranger and administrative agent.

10.6

   Trademark Security Agreement, dated as of October 7, 2003, between Hudson RCI and Wells Fargo, as arranger and administrative agent.

10.13

   General Continuing Guaranty, dated as of October 7, 2003, between Hudson RCI and Wells Fargo, as arranger and administrative agent.

10.16

   Intercompany Subordination Agreement, dated as of October 7, 2003, between Hudson RCI, Holding, IH Holding LLC, Tecate, Industrias Hudson, HRC Holding Inc. and Wells Fargo, as arranger and administrative agent.

10.17

   Subordination Agreement, dated as of October 7, 2003, between Hudson RCI, FS Equity Partners IV, L.P. and Wells Fargo, as arranger and administrative agent.

10.22

   Deed of Trust, Financing Statement, Fixture Filing, Assignment of Rents and Security Agreement, dated as of October 7, 2003, by and from Hudson RCI to Chicago Title Company as Trustee for the benefit of Wells Fargo.

 

35


Table of Contents

10.23

   Loan and Security Agreement, dated as of October 7, 2003, among Hudson RCI, the Lenders that are signatory thereto and MW Post Advisory Group, LLC (“MW Post”), as Administrative Agent.

10.24

   Stock Pledge Agreement, dated as of October 7, 2003, between Holding and MW Post, as the administrative agent.

10.25

   Stock Pledge Agreement, dated as of October 7, 2003, among Hudson RCI, IH Holding LLC and MW Post, as the administrative agent.

10.26

   Security Agreement, dated as of October 7, 2003, among affiliates of Hudson RCI signatory thereto and MW Post, as the administrative agent.

10.33

   Patent Security Agreement, dated as of October 7, 2003, between Hudson RCI and MW Post, as administrative agent.

10.34

   Trademark Security Agreement, dated as of October 7, 2003, between Hudson RCI and MW Post, as administrative agent.

10.35

   General Continuing Guaranty, dated as of October 7, 2003, between Hudson RCI and MW Post, as administrative agent.

10.36

   Intercompany Subordination Agreement, dated as of October 7, 2003, between Hudson RCI, Holding, IH Holding LLC, Tecate, Industrias Hudson, HRC Holding Inc. and MW Post, as administrative agent.

10.37

   Subordination Agreement, dated as of October 7, 2003, between Hudson RCI, FS Equity Partners IV, L.P. and MW Post, as administrative agent.

10.38

   Deed of Trust, Financing Statement, Fixture Filing, Assignment of Rents and Security Agreement, dated as of October 7, 2003, by and from Hudson RCI to Chicago Title Company as Trustee for the benefit of MW Post.

10.39

   Form of Unsecured Senior Promissory Note.

10.40

   Form of Agreement to Amend a series of Unsecured Senior Promissory Notes issued by Hudson RCI in an aggregate principal amount of $12,000,000.

10.41

   Form of Agreement to Amend a series of Unsecured Senior Promissory Notes issued by HRC Holding Inc. in an aggregate principal amount of $10,100,000.

10.42

   Form of Agreement to Amend as series of Senior Subordinated Convertible Promissory Notes in an aggregate principal amount of $9,951,250.

10.43

   Form of Agreement to Amend certain promissory notes held by FSEP IV.

31.1

   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley of 2002

32.1

   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b)   Reports on Form 8-K

 

None.

 

36


Table of Contents

SIGNATURE

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

RIVER HOLDING CORP.,

   

a Delaware corporation

November 14, 2003

 

        by:

 

/s/ Patrick G. Yount


   

        Patrick G. Yount

   

        Chief Financial Officer

   

        (Duly Authorized Officer and Principal Financial Officer)

EX-3.1 3 dex31.txt AMENDED AND RESTATED ARTICLES OF INCORPORATION Exhibit 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF HUDSON RESPIRATORY CARE INC. Richard W. Johansen and Jay R. Ogram certify that: 1. They are the President and Secretary, respectively, of Hudson Respiratory Care Inc., a California corporation (the "CORPORATION"). 2. The Amended and Restated Articles of Incorporation of the Corporation are amended and restated to read as follows: I NAME OF CORPORATION The name of the Corporation shall be: Hudson Respiratory Care Inc. II PURPOSE The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III AUTHORIZED CAPITAL STOCK The Corporation is authorized to issue two classes of shares of stock to be designated, respectively, "COMMON STOCK" and "PREFERRED STOCK;" the total number of such shares shall be seventeen million (17,000,000); the total number of Common Stock shall be fifteen million (15,000,000), each having a par value of one-cent ($.01); and the total number of Preferred Stock shall be two million (2,000,000), each having a par value of one-cent ($.01). Upon amendment and restatement of the Amended and Restated Articles of Incorporation as herein set forth, each outstanding share of Common Stock is split up and converted into two hundred and forty-five (245) shares of Common Stock. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby vested with authority to fix by resolution or resolutions the designations and the powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference, of any series of Preferred Stock, and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series (but not below the number of shares thereof then outstanding). In case the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status which they had before the adoption of the resolution or resolutions originally fixing the number of such shares. IV LIMITATION ON DIRECTOR LIABILITY The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. V INDEMNIFICATION OF AGENTS The Corporation is authorized to provide indemnification of its agents (as such term is defined in Section 317 of the California General Corporation Law) to the fullest extent permissible under California law. 3. The foregoing amendment and restatement of the Amended and Restated Articles of Incorporation has been duly approved by the Board of Directors of the Corporation. 4. The foregoing amendment and restatement of the Amended and Restated Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of the Corporation is fifty-nine thousand and fifty-six (59,056). The number of shares voting in favor of the amendment and restatement was fifty-nine thousand and fifty-six (59,056) and this number equaled or exceeded the vote required. The percentage vote required was more than 50%. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: March 23, 1998 /s/ Richard W. Johansen - ---------------------------------- Richard W. Johansen President /s/ Jay R. Ogram - ---------------------------------- Jay R. Ogram Secretary [SEAL APPEARS HERE] CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED ARTICLES OF INCORPORATION OF HUDSON RESPIRATORY CARE INC. Charles A. French and Patrick Yount certify that: 1. They are the duly elected and acting president and secretary, respectively, of Hudson Respiratory Care Inc., a California corporation. 2. The Amended and Restated Articles of Incorporation of the Corporation shall be amended by amending the first paragraph of Article III to read as follows: "The Corporation is authorized to issue two classes of shares of stock to be designated respectively, "Common Stock" and "Preferred Stock;" the total number of such shares shall be forty million (40,000,000); the total number of Common Stock shall be thirty-seven million (37,000,000) and the total number of Preferred Stock shall be three million (3,000,000)." 3. The foregoing amendment to the Amended and Restated Articles of Incorporation has been duly approved by the board of directors of the Corporation. 4. The foregoing amendment of the Amended and Restated Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 903 of the California Corporations Code. The total number of outstanding shares of the corporation is 10,654,293 shares of Common Stock, and 529,028 shares of Preferred Stock consisting of 526,028 shares of Senior PIK Preferred Stock and 3,000 shares of Junior Preferred Stock. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding shares of Common Stock and more than 50% of the outstanding shares of Preferred Stock, voting separately as a class. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: May 16, 2003 /s/ Charles A. French ---------------------------------------- Charles A. French, President /s/ Patrick Yount ---------------------------------------- Patrick Yount, Secretary CERTIFICATE OF DETERMINATION OF HUDSON RESPIRATORY CARE INC. Richard W. Johansen and Jay R. Ogram hereby certify as follows: 1. They are the President and Chief Financial Officer, respectively, of Hudson Respiratory Care Inc., a California corporation (the "Company"). 2. The number of shares of 11 1/2% Senior Redeemable PIK Preferred Stock Due 2010, $.01 par value, of the Company is 600,000 shares, none of which has been issued. 3. The number of shares of 11 1/2% Series B Senior Redeemable PIK Preferred Stock Due 2010, $.01 par value, of the Company is 600,000 shares, none of which has been issued. 4. The Board of Directors of the Company has duly adopted the following resolution: "WHEREAS, the Articles of Incorporation of the Company authorize the Board of Directors to determine the designations and powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference, of any series of Preferred Stock, and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series. NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby establish two series of Preferred Stock as follows: (a) The designation of such series of Preferred Stock are (i) the 11 1/2% Senior Redeemable PIK Preferred Stock Due 2010, $.01 par value, of the Company (the "Initial Company Preferred Stock"), and the number of shares of such Initial Company Preferred Stock is 600,000, and (ii) the 11 1/2% Series B Senior Redeemable PIK Preferred Stock Due 2010, $.01 par value, of the Company (the "Series B Stock"), and the number of shares of such Series B Stock is 600,000. The Initial Company Preferred Stock and the Series B Stock are referred to as the "Company Preferred Stock." The liquidation preference of the Company Preferred Stock shall be $100 per share (the "Liquidation Preference"). The designations and powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference, granted to and imposed upon the Company Preferred Stock and the holders thereof (the "Holders") shall be as set forth below. (b) Ranking. The Initial Company Preferred Stock and the Series B - -------- Stock will each rank on a parity with the other in all respects. The Company Preferred Stock will, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank (i) senior to all classes of common stock of the Company and to each other class of Capital Stock and to each other series of Preferred Stock established hereafter by the Board of Directors the terms of which do not expressly provide that it ranks senior to, or on a parity with, the Company Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution of the Company (collectively referred to, together with common stock of the Company, as "Junior Stock") and (ii) on a parity with each other class of Capital Stock or series of Preferred Stock established hereafter by the Board of Directors, the terms of which expressly provide that such series will rank on a parity with the Company Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution(collectively referred to as "Parity Stock"). The Company Preferred Stock and the Company's 11 1/2% Senior PIK Preferred Stock due 2010, $.01 par value (the "Senior PIK Preferred Stock"), will each rank on a parity with the other in all respects. (c) Dividends. (i) Holders of the outstanding shares of Company __________ Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors of the Company, out of funds legally available therefor, cumulative preferential dividends on each share of the Company Preferred Stock at a rate per annum equal to 11 1/2% of the Liquidation Preference of such share, payable semi-annually in arrears (each such semi-annual period being herein called a "Dividend Period") in the manner set forth below. In addition to the dividends described in the preceding sentence, holders of outstanding shares of Company Preferred Stock will be entitled to additional dividends (the "Additional Dividends"), when, as and if declared by the Board of Directors of the Company, out of funds legally available therefor, with respect to the shares of Company Preferred Stock, which Additional Dividends shall accrue as follows if any of the following events occur (each such event in clauses (A), (B), (C),and (D) below being herein called a "Registration Default"): (A) if on or prior to June 6, 1998, neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been filed with the Securities and Exchange Commission (the "SEC"); (B) if on or prior to September 5, 1998, neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been declared effective by the SEC; (C) if on or prior to October 5, 1998, neither the Registered Exchange Offer has been consummated nor the Shelf Registration Statement has been declared effective; or (D) after either the Exchange Offer Registration Statement or the Shelf Registration Statement has been declared effective, such Registration Statement thereafter ceases to be effective or usable (in each case except as permitted below) in connection with resales of the Company Preferred Stock in accordance with and during the periods specified herein. Additional Dividends shall accrue on the shares of Company Preferred Stock from and including the date on which any such Registration Default shall occur, to but excluding the date on which all such Registration Defaults have been cured. Such Additional Dividends will accrue at a rate of 0.25% per annum during the 90-day period immediately following the occurrence of such Registration Default and shall increase by 0.25% per annum at the end of each subsequent 90-day period, but in no event shall the amount of such Additional Dividends exceed 1.00% per annum. A Registration Default referred to in clause (C) of this paragraph (c)(i) shall be deemed not to have occurred and be continuing in relation to a Registration Statement or the related prospectus if (i) such Registration Default has occurred solely as a result of (x) the filing of a post-effective amendment to the Registration Statement to incorporate annual audited financial information with respect to the Company where such post-effective amendment is not yet effective and needs to be declared effective to permit Holders to use the related prospectus or (y) other material events with respect to the Company that would need to be described in the Registration Statement or the related prospectus and (ii) in the case of clause (y), the Company proceeds promptly and in good faith to amend or supplement the Registration Statement and related prospectus to describe such events unless the Company has determined in good faith that there are material legal or commercial impediments in doing so; provided, however, that in any case if such Registration Default occurs for a ________ _______ continuous period in excess of 45 days, Additional Dividends shall be payable in accordance with the immediately preceding paragraphs of this paragraph (c)(i) from the day such Registration Default initially occurs to but excluding the date on which such Registration Default is cured and provided, further, that not________ _______ more than one Registration Default shall be deemed to have occurred pursuant to clause (y) of this paragraph during any 365-day period. Additional Dividends will not accrue with respect to a Registration Default referred to in clause (D) of this paragraph (c)(i) occurring solely as a result of the determination by the SEC that an Exchange Offer Registration Statement filed prior to the issuance of the Initial Company Preferred Stock may not register Company Preferred Stock if (x) the Company, within 30 days of the issuance of the Initial Company Preferred Stock, files an additional Exchange Offer Registration Statement (the "Supplemental Exchange Offer Registration Statement") with the SEC, (y) on or prior to the 90th day following the issuance of the Initial Company Preferred Stock the Supplemental Exchange Offer Registration Statement or an additional Shelf Registration Statement (the "Supplemental Shelf Registration Statement") has been declared effective by the SEC and (z) on or prior to the 120th day following the issuance of the Initial Company Preferred Stock the Registered Exchange Offer has been consummated or the Supplemental Shelf Registration Statement has been declared effective. Any amounts of Additional Dividends due pursuant to clauses (A), (B), (C) or (D) of this paragraph (c)(i) or pursuant to the proviso contained in the preceding sentence will be payable on the regular dividend payment dates with respect to the Company Preferred Stock and on the same terms and conditions and subject to the same limitations as pertain at such time for the payment of regular dividends. The amount of Additional Dividends will be determined by multiplying the applicable Additional Dividends rate by the aggregate Liquidation Preference of the outstanding shares of Company Preferred Stock, multiplied by a fraction, the numerator of which is the number of days such Additional Dividend rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months), and the denominator of which is 360. All dividends on the Company Preferred Stock, including Additional Dividends, to the extent accrued, shall be cumulative, whether or not the Company has earnings or profits, whether or not there are funds legally available for the payments of such dividends and whether or not dividends are declared, on a daily basis from the Issue Date or, in the case of additional shares of Company Preferred Stock issued in payment of a dividend, from the date of issuance of such additional shares of Company Preferred Stock, and shall be payable semi-annually in arrears on each April 15 and October 15 (each, a "Dividend Payment Date"), commencing on October 15, 1998, to holders of record on the April 1 and October 1 immediately preceding the relevant Dividend Payment Date. Any dividend on the Company Preferred Stock payable pursuant to this paragraph (c)(i) on or prior to April 15, 2003 shall be, at the option of the Company, payable (1) in cash or (2) through the issuance of a number of additional shares (including fractional shares) of Company Preferred Stock (the "Additional Shares") equal to the dividend amount divided by the Liquidation Preference of such Additional Shares. With respect to dividends payable after April 15, 2003, all dividends shall be payable solely in cash. (ii) All dividends paid with respect to shares of the Company Preferred Stock pursuant to this paragraph (c) shall be paid pro rata to the Holders entitled thereto. (iii) No dividend whatsoever may be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Company Preferred Stock with respect to any Dividend Period unless all dividends for all preceding Dividend Periods have been declared and paid or declared and, if payable in cash, a sufficient sum in cash set apart for the payment of such dividend, upon all outstanding shares of Company Preferred Stock. (iv) No full dividends may be declared or paid or funds set apart for the payment of dividends by the Company on any Parity Stock for any period unless full cumulative dividends in respect of each Dividend Period ending on or before such period shall have been or contemporaneously are declared and paid in full or declared and, if payable in cash, a sufficient sum in cash set apart for such payment on the Company Preferred Stock. If full dividends are not so paid, the Company Preferred Stock will share dividends pro rata with the Parity Stock. (v) The Company will not (A) declare, pay or set apart funds for the payment of any dividend or other distribution with respect to any Junior Stock or (B) repurchase, redeem or otherwise retire any Junior Stock or Parity Stock, nor may funds be set apart for payment with respect thereto, unless all accrued and unpaid dividends with respect to the Company Preferred Stock at the time such dividends are payable have been paid or funds have been set apart for payment of such dividends, if payable in cash. As used herein, the term "dividend" does not include dividends payable solely in shares of Junior Stock on Junior Stock. (vi) Dividends on account of arrears for any past Dividend Period and dividends in connection with any optional redemption or any mandatory repurchase may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record on such date, not more than 45 days prior to the payment thereof, as may be fixed by the Board of Directors of the Company. (vii) Dividends payable on the Company Preferred Stock for any period other than a Dividend Period shall be computed on the basis of a 360-day year comprised of twelve 30-day months and the actual number of days elapsed in the period for which payable and will be deemed to accrue on a daily basis. Dividends payable on the Company Preferred Stock for a full Dividend Period will be computed by dividing the per annum dividend rate by two. (d) Liquidation Preference. (i) Upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, each Holder of the Company Preferred Stock will be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, an amount equal to the Liquidation Preference per share of Company Preferred Stock held by such Holder, plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends (whether or not declared and including Additional Dividends, if any) thereon to the date fixed for liquidation, dissolution or winding-up (including, without duplication, an amount equal to a prorated dividend for the period from the last Dividend Payment Date to the date fixed for liquidation, dissolution or winding up that would have been payable had the Company Preferred Stock been the subject of an Optional Redemption on such date) before any distribution is made on any Junior Stock, including, without limitation, common stock of the Company. If, upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the amounts payable with respect to the holders of the Company Preferred Stock and all Parity Stock are not paid in full, the holders of the Company Preferred Stock and the Parity Stock will share equally and ratably (in proportion to the full liquidation preference and accumulated and unpaid dividends that would be payable on such shares of the Company Preferred Stock and the Parity Stock, respectively, if all amounts payable thereon had been paid in full) in any distribution of assets of the Company to which each is entitled. After payment of the full amount of the Liquidation Preference of the outstanding shares of Company Preferred Stock (plus all accumulated and unpaid dividends), the holders of shares of Company Preferred Stock will not be entitled to any further participation in any distribution of assets of the Company. (ii) For the purposes of this paragraph (d), neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more other entities shall be deemed to be a liquidation, dissolution or winding-up of the Company. (e) Redemption. (i) Optional Redemption. (A) Except as set forth in clause (B) below, the Company Preferred Stock shall not be redeemable at the option of the Company prior to April 15, 2003. On or after April 15, 2003, each share of the Company Preferred Stock may be redeemed at any time or from time to time, in whole or in part, at the option of the Company, at the redemption prices (expressed as a percentage of the Liquidation Preference of such share) set forth below, plus, without duplication, an amount in cash equal to all accrued and unpaid dividends to the date fixed for redemption (an "Optional Redemption Date") (including, without duplication, an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Optional Redemption Date) (the "Optional Redemption Price"), if redeemed during the 12-month period beginning April 15 of each of the years set forth below: YEAR IN WHICH REDEMPTION OCCURS PERCENTAGE - ------------------------------- ---------- 2003......................................... 105.750% 2004......................................... 104.600 2005......................................... 103.450 2006......................................... 102.300 2007......................................... 101.150 2008 and thereafter.......................... 100.000 (B) At any time prior to April 15, 2001, the Company may redeem at its option (i) up to 50% or (ii) all but not less than all of the outstanding shares of Company Preferred Stock with the net proceeds of any Public Equity Offering by the Company at a redemption price (expressed as a percentage of the Liquidation Preference per share thereof) of 111.5% plus accumulated and unpaid dividends (including, without duplication, an amount in cash equal to a prorated dividend for any partial dividend period). Any such redemption shall be made upon consummation of such Public Equity Offering upon not less than 30 nor more than 60 days' notice. (C) In the event of a redemption of only a portion of the then outstanding shares of Company Preferred Stock, the Company shall effect such redemption on a pro rata basis, except that the Company may redeem all of the shares held by Holders of fewer than 100 shares (or all of the shares held by Holders who would hold less than 100 shares as a result of such redemption), as may be determined by the Company. (ii) Mandatory Redemption. Each share of the Company Preferred Stock (if not earlier redeemed) shall be subject to mandatory redemption in whole (to the extent of lawfully available funds therefor) on April 15, 2010 (the "Mandatory Redemption Date") at a price equal to 100% of the Liquidation Preference of such share, plus an amount equal to all accrued and unpaid dividends thereon (including, without duplication, an amount equal to a prorated dividend thereon from the immediately preceding Dividend Payment Date to the Mandatory Redemption Date), if any, to the Mandatory Redemption Date (the "Mandatory Redemption Price"). (iii) Procedure for Redemption. (A) On and after an Optional Redemption Date or the Mandatory Redemption Date, as the case may be (the "Redemption Date"), unless the Company defaults in the payment of the applicable redemption price, dividends will cease to accumulate on shares of Company Preferred Stock called for redemption and all rights of Holders of such shares will terminate except for the right to receive the Optional Redemption Price or the Mandatory Redemption Price, as the case may be, without interest; provided, however, that if a notice of redemption shall have been given as provided in subparagraph (iii)(B) and the funds necessary for redemption (including an amount in respect of all dividends that will accrue to the Redemption Date) shall have been segregated and irrevocably set apart by the Company, in trust for the benefit of the Holders of the shares called for redemption, then dividends shall cease to accumulate on the Redemption Date on the shares to be redeemed and, at the close of business on the day on which such funds are segregated and set apart, the Holders of the shares to be redeemed shall, with respect to the shares to be redeemed, cease to be shareholders of the Company and shall be entitled only to receive the Optional Redemption Price or the Mandatory Redemption Price, as the case may be, for such shares without interest from the Redemption Date. (B) With respect to a redemption pursuant to paragraph (e)(i) or (e)(ii), the Company will send a written notice of redemption by first class mail to each holder of record of shares of Company Preferred Stock at its registered address, not fewer than 30 days nor more than 60 days prior to the Redemption Date (the "Redemption Notice") and notice, if mailed in the manner herein provided, shall conclusively be presumed to have been given, whether or not the Holder receives such notice; provided, however, that no failure to give such notice nor any deficiency therein shall affect the validity of the procedure for the redemption of any shares of Company Preferred Stock to be redeemed except as to the Holder or Holders to whom the Company has failed to give said notice or except as to the Holder or Holders whose notice was defective. The Redemption Notice shall state: (1) whether the redemption is pursuant to paragraph (e)(i) or (e)(ii) hereof; (2) the Optional Redemption Price or the Mandatory Redemption Price, as the case may be; (3) whether all or less than all the outstanding shares of Company Preferred Stock are to be redeemed and the total number of shares of Company Preferred Stock being redeemed; (4) the Redemption Date; (5) that the Holder is to surrender to the Company, in the manner, at the place or places and at the price designated, his certificate or certificates representing the shares of Company Preferred Stock to be redeemed; and (6) that dividends on the shares of the Company Preferred Stock to be redeemed shall cease to accumulate on such Redemption Date unless the Company defaults in the payment of the Optional Redemption Price or the Mandatory Redemption Price, as the case may be to the Holders of the Company Preferred Stock who have duly surrendered their certificates for redemption in accordance with clause (C) below on or before the Redemption Date. (C) Each Holder of Company Preferred Stock shall surrender the certificate or certificates representing such shares of Company Preferred Stock to the Company, duly endorsed (or otherwise in proper form for transfer, as determined by the Company), in the manner and at the place designated in the Redemption Notice, and on the Redemption Date the full Optional Redemption Price or Mandatory Redemption Price, as the case may be, for such shares shall be payable in cash to the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event that less than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (f) Voting Rights. (i) The Holders of Company Preferred Stock, _________ except as otherwise required under California law or as set forth in paragraphs (ii) and (iii) below, shall not be entitled to vote on any matter required or permitted to be voted upon by the shareholders of the Company. (ii) (A) If (1) dividends on the Company Preferred Stock are in arrears and unpaid and, in the case of dividends payable after April 15, 2003, are not paid in cash for six or more Dividend Periods (whether or not consecutive) (a "Dividend Default"); (2) the Company fails for any reason to redeem the Company Preferred Stock on April 15, 2010, or fails to otherwise discharge any redemption obligation with respect to the Company Preferred Stock; (3) the Company fails to make an offer to redeem all of the outstanding shares of the Company Preferred Stock following a Change of Control (whether or not the Company is permitted to do so by the terms of the Indenture, the New Credit Facility or any other obligation of the Company); (4) a breach or violation of any of the provisions set forth under paragraph (l) (Certain Additional Provisions) occurs and, the breach or violation continues for a period of 30 days or more after the Company receives notice thereof specifying the default from the Holders of at least 25% of the shares of the Company Preferred Stock then outstanding; or (5) the Company fails to pay at final maturity (giving effect to any applicable grace period) the principal amount of any Debt of the Company or any Subsidiary of the Company or the stated maturity of any such Debt of the Company or any Subsidiary of the Company is accelerated because of a default and the total amount of such Debt unpaid or accelerated exceeds $7.5 million, then, subject to paragraph (f)(ii)(E), the Holders of the then outstanding shares of Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable), voting together as a class, shall have the right and power to elect two directors to the Board of Directors of the Company and the common stock of the Company ("Common Stock") shall have the right to elect the remaining directors. Each such event described in clauses (1), (2), (3), (4) or (5) above is a "Voting Rights Triggering Event". (B) The voting rights set forth in paragraph (f)(ii)(A) above will continue until such time as (x) in the case of a Dividend Default, all dividends in arrears on the Company Preferred Stock are paid in full in cash and (y) in all other cases, any failure, breach or default giving rise to such Voting Rights Triggering Event is remedied or waived by the Holders of at least a majority of the shares of Company Preferred Stock then outstanding, at which time the exclusive right to elect directors shall revert to the Common Stock, subject to renewal of the voting right of the Company Preferred Stock under paragraph (f)(ii)(A) from time to time. At any time after the right to elect two directors is vested in the Company Preferred Stock, and at any time after the exclusive right to elect directors shall revert to the Common Stock, the holders of 25% or more of the outstanding shares of Company Preferred Stock (or the holders of 25% of the shares of any other series of Preferred Stock then outstanding upon which like rights have been conferred and are exercisable) or 25% or more of the outstanding Common Stock, as the case may be, have a right to call a special meeting of shareholders for the purpose of electing all of the members of the Board of Directors, such right to be exercisable by delivering a request in writing for the calling of the special meeting to the president or secretary, or to the chairman of the board or a vice-president if there be such; provided, however, that no such special meeting shall be called if the next annual meeting of shareholders of the Company is to be held within 60 days after the voting power to elect directors shall have become vested, in which case such meeting shall be deemed to have been called for such next annual meeting. The officer receiving the request shall forthwith cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than 35 nor more than 60 days after the receipt of the request. If the notice is not given within 20 days after receipt of the request, the shareholders calling the meeting shall have the rights accorded to them pursuant to subdivision (c) of Section 601 of the California Corporations Code. In lieu of electing directors at a meeting of the shareholders in accordance with the foregoing, the holders of Common Stock and Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any), voting as separate classes, may, pursuant to Section 603 of the Corporations Code of the State of California elect such directors by unanimous written consent. Upon the election of directors by the Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any) at a meeting of shareholders (or by written consent), the terms of all persons who were directors immediately prior thereto shall terminate and the directors elected by the Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any) together with those elected at such meeting (or by written consent) by the Common Stock shall constitute the directors of the Company until the next annual meeting, unless the terms of such directors shall terminate earlier in accordance with the immediately following sentence. Upon the election of directors by the Common Stock at a meeting of shareholders (or by written consent) after the exclusive right to elect directors has reverted to the Common Stock, the terms of all persons who were directors immediately prior thereto shall terminate and the directors elected by the Common Stock at such meeting (or by written consent) shall constitute the directors of the Company until the next annual meeting, unless earlier removed in accordance with this paragraph (f)(ii)(B). (C) At any meeting held for the purposes of electing directors at which the Holders of Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable) shall have the right, voting together as a single class, to elect directors as aforesaid, the presence in person or by proxy of the holders of at least a majority in voting power of the outstanding shares of Company Preferred Stock (and such Preferred Stock) shall be required to constitute a quorum thereof. (D) Any vacancy occurring in the office of a director elected by the Holders of Company Preferred Stock (and such Preferred Stock) may be filled by the remaining director elected by the Holders of Company Preferred Stock (and such Preferred Stock) unless and until such vacancy shall be filled by the Holders of Company Preferred Stock (and such Preferred Stock) at a meeting of shareholders held in accordance with paragraph (f)(ii)(B). In lieu of electing a director at a meeting of the shareholders in accordance with the foregoing, a majority of the outstanding shares of Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any), voting together as a single class, may, pursuant to Sections 305(b) and 603 of the Corporations Code of the State of California, elect such director by written consent. (E) In the event that an event occurs at any time which results in the holders of any Parity Stock having voting rights to elect directors to the Board of Directors, Holders of Company Preferred Stock shall, whether or not such event otherwise constitutes a Voting Rights Triggering Event pursuant to paragraph (f)(ii)(A), have the voting rights set forth in paragraphs (f)(ii)(A) and (f)(ii)(B), and such event shall be deemed (for purposes of this paragraph (f) only) to constitute a Voting Rights Triggering Event. In addition, in the event that during a time in which directors elected by the Holders of Company Preferred Stock pursuant to this paragraph (f)(ii) are serving on the Board of Directors ("Previously-Elected Directors") an event occurs which results in holders of Preferred Stock having voting rights to elect (voting together with the Holders of Company Preferred Stock) at least two directors to the Board of Directors, the Holders of Company Preferred Stock shall vote together, as a single class, with the holders of such Preferred Stock to elect such new directors, and upon the election of the new directors the term of office of the Previously-Elected Directors shall (unless such Previously-Elected Directors are elected as new directors) automatically terminate. (iii) (A) So long as any shares of Company Preferred Stock are outstanding, the Company will not authorize, create or increase the authorized amount of any class or series of Capital Stock or Preferred Stock, the terms of which expressly provide that such class or series will rank senior to the Company Preferred Stock as to dividend rights and rights upon liquidation, winding-up and dissolution of the Company (collectively referred to as "Senior Stock") or Parity Stock without the affirmative vote or consent of Holders of at least two-thirds of the shares of Company Preferred Stock then outstanding, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting. (B) So long as any shares of the Company Preferred Stock are outstanding, the Company will not amend this Certificate of Determination so as to affect adversely the specified rights, preferences, privileges or voting rights of Holders of shares of Company Preferred Stock or to authorize the issuance of any additional shares of the Company Preferred Stock (except to authorize the issuance of additional shares of Company Preferred Stock to be paid as dividends on the Company Preferred Stock, for which no consent shall be necessary) without the affirmative vote or consent of Holders of at least a majority of the issued and then outstanding shares of Company Preferred Stock, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting; provided that this paragraph shall not prohibit the merger of the ________ Company and a Wholly Owned Subsidiary of Holding or the Company incorporated in another state of the United States solely for the purpose of reincorporating the Company to the extent that the surviving corporation issues to Holding shares of a series of Preferred Stock having an aggregate liquidation preference equal to the Liquidation Preference of the Company Preferred Stock outstanding immediately prior to such merger and terms and provisions substantially similar to those of the Company Preferred Stock. (C) Except as required under California law or as set forth in paragraph (f)(iii)(A) or (B) above, (x) the creation, authorization or issuance of any shares of any Junior Stock, Parity Stock or Senior Stock, including the designation of a series thereof within the existing class of Company Preferred Stock, or (y) the increase or decrease in the amount of authorized Capital Stock of any class, including any Company Preferred Stock, shall not require the consent of Holders of Company Preferred Stock and shall not be deemed to affect adversely the rights, preferences, privileges or voting rights of shares of the Company Preferred Stock. (iv) In any case in which the Holders of Company Preferred Stock shall be entitled to vote pursuant to this paragraph (f) or pursuant to law, each Holder of the Company Preferred Stock entitled to vote with respect to such matters shall be entitled to one vote for each share of Company Preferred Stock held. (g) Redemption. (A) The Company may, at its option, redeem the _________ Company Preferred Stock, in whole but not in part (including in conjunction with, and after giving effect to, a redemption of up to 50% of the outstanding shares of the Company Preferred Stock with the proceeds of a Public Equity Offering by the Company pursuant to clause (B) of paragraph (e)(i) above), at any time, for Company Exchange Debentures; provided, ________ however, that (i) on the date of such redemption there are no accumulated and ____________ unpaid dividends on the Company Preferred Stock (including the dividend payable on such date) that are not paid contemporaneously with such redemption or other contractual impediments to such redemption; (ii) such redemption is permitted under applicable law; (iii) immediately after giving effect to such redemption, no Default (as defined in the Company Exchange Indenture) or Voting Rights Triggering Event, as applicable, shall have occurred and be continuing; and (iv) the Company shall have delivered to the Trustee under the Company Exchange Indenture an opinion of counsel with respect to the due authorization and issuance of the Company Exchange Debentures. (B) Upon any redemption of Company Preferred Stock for Company Exchange Debentures pursuant to this paragraph (g), each Holder of Company Preferred Stock will be entitled to receive, subject to the second succeeding sentence, $1.00 principal amount of Company Exchange Debentures for each $1.00 Liquidation Preference of Company Preferred Stock so redeemed, and an amount in cash equal to a prorated dividend for any partial dividend period. The Company Exchange Debentures will be issued in registered form without coupons. Company Exchange Debentures issued upon redemption of the Company Preferred Stock will be issued in principal amounts of $1,000 and integral multiples thereof to the extent possible, and will also be issued in principal amounts less than $1,000 so that each Holder of Company Preferred Stock will receive certificates representing the entire amount of Company Exchange Debentures to which such Holder's shares of Company Preferred Stock entitle such Holder; provided, ________ however, that the Company may pay cash in lieu of issuing a Company Exchange _ _______ (ii) Procedures. (A) The Company will send a written notice of ___________ redemption (the "Redemption Notice") by first-class mail to each Holder of record of shares of Company Preferred Stock not fewer than 30 days nor more than 60 days before the date fixed for any redemption (the "Redemption Date") at its registered address and notice, if mailed in the manner herein provided, shall conclusively be presumed to have been given, whether or not the Holder receives such notice; provided, however, that no failure to give such notice nor any ________ ________ deficiency therein shall affect the validity of the procedure for the redemption of any shares of Company Preferred Stock to be redeemed except as to the Holder or Holders to whom the Company has failed to give said notice or except as to the Holder or Holders whose notice was defective; provided further that, in the event of any redemption which is intended to occur _______________ ________________ in conjunction with a Public Equity Offering by the Company, (i) the Company may provide for a Redemption Date which relates to the consummation of such Public Equity Offering and (ii) the Company shall have the right to revoke such written notice in the event that such related Public Equity Offering is terminated by sending by first-class mail a subsequent written notice to such Holders within two Business Days following such termination. The Redemption Notice shall state: (1) the Redemption Date; (2) that the Holder is to surrender to the Company, in the manner and at the place or places designated, his certificate or certificates representing the shares of Company Preferred Stock to be redeemed; (3) that dividends on the shares of Company Preferred Stock to be redeemed shall cease to accrue on such Redemption Date whether or not certificates representing shares of Company Preferred Stock are surrendered for redemption on such Redemption Date unless the Company shall default in the delivery of the Company Exchange Debentures to Holders of the Company Preferred Stock who have duly surrendered their certificates for redemption in accordance with clause (g)(ii)(C) on or before the Redemption Date; and (4) that interest on the Company Exchange Debentures shall accrue from the Redemption Date whether or not certificates for shares of Company Preferred Stock are surrendered for redemption on such Redemption Date. (B) On and after the Redemption Date, dividends will cease to accrue on the outstanding shares of Company Preferred Stock, and all rights of the Holders of Company Preferred Stock (except the right to receive the Company Exchange Debentures, an amount in cash, to the extent applicable, equal to the accumulated and unpaid dividends to the Redemption Date and, if the Company so elects, cash in lieu of any Company Exchange Debenture that is in a principal amount that is not an integral multiple of $1,000 or in lieu of any fractional share of Company Preferred Stock) will terminate. Subject to clause (g)(ii)(D) below, from and after the Redemption Date, the person entitled to receive the Company Exchange Debentures issuable upon such redemption will be treated for all purposes as the registered holder of such Company Exchange Debentures. (C) On or before the Redemption Date, each Holder of the Company Preferred Stock shall surrender the certificate or certificates representing such shares of Company Preferred Stock, in the manner and at the place designated in the Redemption Notice. Upon surrender in accordance with the Redemption Notice of the certificates representing any shares of Company Preferred Stock so redeemed, duly endorsed (or otherwise in proper form for transfer, as determined by the Company), such shares shall be redeemed by the Company for Company Exchange Debentures received by the Company in accordance with clause g(i)(B). Subject to clause (g)(ii)(D) below, the Company shall pay interest, as applicable, on the Company Exchange Debentures at the rate and on the dates specified therein from the Redemption Date. (D) Anything contained herein to the contrary notwithstanding, no Holder of Company Preferred Stock will be entitled to receive any payment of interest on Company Exchange Debentures or exercise any other right or privilege in respect thereof, until such Holder has surrendered the certificate or certificates evidencing such Holder's Company Preferred Stock in accordance with clause (g)(ii)(C). The Company shall pay all interest which would have accrued on a Holder's Company Exchange Debentures without additional interest, had such Holder surrendered the certificate or certificates evidencing such Holder's Company Preferred Stock on the Redemption Date at the time such certificate or certificates are duly surrendered. (iii) No Redemption in Certain Cases. Notwithstanding the foregoing provisions of this paragraph (g), the Company shall not be entitled to redeem the Company Preferred Stock for Company Exchange Debentures if such redemption, or any term or provision of the Company Exchange Indenture or the Company Exchange Debentures, or the performance of the Company's obligations under the Company Exchange Indenture or the Company Exchange Debentures, shall violate or conflict with any applicable law or agreement or instrument then binding on the Company or if, at the time of such redemption, the Company is insolvent or would be rendered insolvent by such redemption. (iv) Redemption of Initial Company Preferred Stock for Series B Stock. The Series B Stock will be issued by the Company only in connection with a redemption offer, on a share for share basis, for the Initial Company Preferred Stock as required pursuant to the Registration Agreement. Each share of Series B Stock issued upon redemption of a share of Initial Company Preferred Stock will be deemed to have the same Liquidation Preference and accrued and unpaid dividends as the share of Initial Company Preferred Stock so redeemed. (h) Redemption at the Option of Holders Upon a Change of Control. (i) Upon the occurrence of a Change of Control (the date of such occurrence being the "Change of Control Date"), each Holder of Company Preferred Stock shall have the right to require the Company to redeem all or any part of such Holder's Company Preferred Stock pursuant to the offer described in paragraph (h)(ii) below (the "Change of Control Offer") at a cash redemption price (the "Change of Control Redemption Price") equal to 101% of the Liquidation Preference thereof, plus payment in cash of accrued and unpaid dividends thereon, if any, to the redemption date (including an amount in cash equal to a prorated dividend for any partial dividend period). (ii) Within 30 days following the date on which the Company knows or reasonably should have known a Change of Control has occurred, the Company shall (a) cause a notice of the Change of Control Offer to be sent at least once to the Dow Jones News Service or similar business news service in the United States and (b) send, by first-class mail, with a copy to the transfer agent, to each Holder of Company Preferred Stock, at such Holder's address appearing in the security register, a notice stating: (A) that a Change of Control has occurred and a Change of Control Offer is being made pursuant to this paragraph (h) and that all Company Preferred Stock timely tendered will be accepted for payment; (B) the Change of Control Redemption Price and the redemption date (the "Change of Control Redemption Date"), which shall be, subject to any contrary requirements of applicable law, a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed; (C) the circumstances and relevant facts regarding the Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to the Change of Control); (D) that any shares of Company Preferred Stock not tendered will continue to accrue dividends; (E) that, unless the Company defaults in making payment therefor, any share of Company Preferred Stock accepted for payment pursuant to the Change of Control Offer shall cease to accrue dividends after the Change of Control Redemption Date; (F) that Holders electing to have any shares of Company Preferred Stock redeemed pursuant to a Change of Control Offer will be required to surrender stock certificates representing such shares of Company Preferred Stock, properly endorsed for transfer, together with such other customary documents as the Company and the Transfer Agent may reasonably request to the Transfer Agent and registrar for the Company Preferred Stock at the address specified in the notice prior to the close of business on the Business Day prior to the Change of Control Redemption Date; (G) that Holders will be entitled to withdraw their election if the Company receives, not later than five Business Days prior to the Change of Control Redemption Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the number of shares of Company Preferred Stock the Holder delivered for redemption and a statement that such Holder is withdrawing his election to have such shares of Company Preferred Stock redemption; and (H) that Holders whose shares of Company Preferred Stock are redeemed only in part will be issued a new certificate representing the unredeemed shares of Company Preferred Stock. (iii) The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the redemption of Company Preferred Stock pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Certificate of Determination, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this Certificate of Determination by virtue of such compliance. (iv) On the Change of Control Redemption Date the Company shall (A) accept for payment the shares of Company Preferred Stock validly duly tendered pursuant to the Change of Control Offer, (B) pay to the Holders of shares so accepted the redemption price therefor in cash and (C) cancel each surrendered certificate and retire the shares represented thereby. Unless the Company defaults in the payment for the shares of Company Preferred Stock duly tendered pursuant to the Change of Control Offer, dividends will cease to accrue with respect to the shares of Company Preferred Stock tendered and all rights of Holders of such tendered shares will terminate, except for the right to receive payment therefor, on the Change of Control Redemption Date. (v) To accept the Change of Control Offer, the Holder of a share of Company Preferred Stock shall deliver, on or before the 10th day prior to the Change of Control Redemption Date, written notice to the Company (or an agent designated by the Company for such purpose) of such Holder's acceptance, together with certificates evidencing the shares of Company Preferred Stock with respect to which the Change of Control Offer is being accepted, duly endorsed for transfer. (i) Conversion or Exchange. The Holders of shares of Company Preferred Stock shall not have any rights hereunder to convert such shares into or exchange such shares for shares of any other class or classes or of any other series of any class or classes of Capital Stock of the Company. (j) Reissuance of the Company Preferred Stock. Shares of Company Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed, shall not be reissued as shares of Company Preferred Stock and shall (upon compliance with any applicable provisions of the laws of California) have the status of authorized and unissued shares of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of Preferred Stock; provided, however, that so long as any shares of Company Preferred Stock are outstanding, any issuance of such shares must be in compliance with the terms hereof. (k) Business Day. If any payment or redemption shall be required by the terms hereof to be made on a day that is not a Business Day, such payment or redemption shall be made on the immediately succeeding Business Day. (l) Certain Additional Provisions. The sole remedy to Holders of Company Preferred Stock in the event that any of the following conditions shall occur, and the sole consequence of any such occurrence, shall be the voting rights described in paragraph (f)(ii). (i) SEC Reports. Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the SEC and provide the Holders and, upon request, security analysts of prospective holders of the Company Preferred Stock with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and other reports to be so filed and provided at the times specified for the filing of such information, documents and reports under such Sections; provided, however, that the Company shall not be so obligated to file such information, documents and reports with the SEC if the SEC does not permit such filings. The Company shall file with the SEC and provide Holders and, upon request, security analysts of prospective holders of the Company Preferred Stock with the information, documents and reports described herein whether or not the Exchange Offer Registration Statement has been filed or declared effective. (ii) Limitation on Debt. The Company shall not, and shall not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Debt unless, after giving pro forma effect to the application of the proceeds thereof, no Voting Rights Triggering Event would occur as a consequence of such Incurrence or be continuing following such Incurrence and either (a) after giving effect to the Incurrence of such Debt and the application of the proceeds thereof, the Consolidated Interest Coverage Ratio would be greater than 1.75 to 1.00 if such Debt is Incurred from the Issue Date through April 15, 2000, and 2.00 to 1.00 if such Debt is Incurred thereafter or (b) such Debt is Permitted Debt. (iii) Limitation on Restricted Payments. The Company shall not make, and shall not permit any Restricted Subsidiary to make, directly or indirectly, any Restricted Payment if at the time of, and after giving pro forma effect to, such proposed Restricted Payment, (a) a Voting Rights Triggering Event shall have occurred and be continuing, (b) the Company could not Incur at least $1.00 of additional Debt pursuant to clause (a) of paragraph (l)(ii) above or (c) the aggregate amount of such Restricted Payment and all other Restricted Payments declared or made since the Issue Date (the amount of any Restricted Payment, if made other than in cash, to be based upon Fair Market Value) would exceed an amount equal to the sum of: (i) 50% of the aggregate amount of Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter during which the Issue Date occurs to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or if the aggregate amount of Consolidated Net Income for such period shall be a deficit, minus 100% of such deficit), (ii) Capital Stock Sale Proceeds, (iii) the amount by which Debt of the Company Incurred after the Issue Date is reduced on the Company's balance sheet upon the conversion or exchange (other than by the Company or a Subsidiary of the Company) subsequent to the Issue Date of any Debt for Parity Stock or Junior Stock (other than Disqualified Stock) of the Company (less the amount of any cash or other Property distributed by the Company or any Restricted Subsidiary upon such conversion or exchange), and (iv) an amount equal to the sum of (A) the net reduction in Investments in any Person other than the Company or a Restricted Subsidiary resulting from dividends, repayments of loans or advances or other transfers of Property, in each case to the Company or any Restricted Subsidiary from such Person, to the extent such dividends, repayments or transfers do not increase the amount of Permitted Investments permitted to be made pursuant to clause (i) of the definition thereof and (B) the portion (proportionate to the Company's equity interest in such Unrestricted Subsidiary) of the Fair Market Value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided, however, that the foregoing sum shall not exceed, in the case of any Person, the amount of Investments previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in such Person, and (v) $7.5 million. Notwithstanding the foregoing limitation, the Company may: (a) pay dividends on its Capital Stock within 60 days of the declaration thereof if, on said declaration date, such dividends could have been paid in compliance with this covenant; provided, however, that at the time of such payment of such dividend, no other Voting Rights Triggering Event shall have occurred and be continuing (or result therefrom); provided further, however, that such dividend shall be included in the calculation of the amount of Restricted Payments; (b) purchase, repurchase, redeem, legally defease, acquire or retire for value Capital Stock of the Company in exchange for, or in an amount not in excess of the proceeds of the substantially concurrent sale of, Parity Stock or Junior Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any of its Subsidiaries for the benefit of their employees); provided, however, that (i) such purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments and (ii) the Capital Stock Sale Proceeds from such exchange or sale shall be excluded from the calculation pursuant to clause (c)(ii) above; (c) purchase, repurchase, redeem, legally defease, acquire or retire for value shares of, or options to purchase shares of, common stock of the Company or Holding from employees or former employees of the Company, Holding or any of their Subsidiaries (or their estates or beneficiaries thereof) upon death, disability, retirement or termination pursuant to the terms of the agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals purchase or sell, or are granted the option to purchase or sell, shares of such common stock (or pay dividends or make loans to Holding for such purpose); provided, however, that (i) the aggregate amount of such purchases, repurchases, redemptions, defeasances, acquisitions or retirements shall not exceed $1.0 million in any year or $5.0 million during the term of the Company Preferred Stock, except that (x) such amounts shall be increased by the aggregate net amount of cash received by the Company after the Issue Date from the sale of such shares to, or the exercise of options to purchase such shares by, employees of Holding, the Company or any of their Subsidiaries and (y) the Company may forgive or return Employee Notes without regard to the limitation set forth in clause (c)(i) above and such forgiveness or return shall not be treated as a Restricted Payment for purpose of determining compliance with such clause (c)(i) and (ii) such purchases, repurchases, defeasances, acquisitions or retirements (but not forgiveness or return of Employee Notes) shall be included in the calculation of the amount of Restricted Payments; and (d) make payments to Helen Hudson Lovaas pursuant to the Merger Agreement in an aggregate amount not to exceed $1.1 million in any fiscal year or $3.3 million during the term of the Company Preferred Stock (plus, in each case, interest due on the unpaid portion of such required payments in accordance with the Merger Agreement); provided, however, that such payments shall be excluded in the calculation of the amount of Restricted Payments. (iv) Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries. The Company shall not (a) sell, pledge, hypothecate or otherwise dispose of any shares of Capital Stock of a Restricted Subsidiary or (b) permit any Restricted Subsidiary to, directly or indirectly, issue or sell or otherwise dispose of any shares of its Capital Stock, other than (i) directors' qualifying shares, (ii) to the Company or a Wholly Owned Subsidiary or (iii) the disposition of 100% of the Capital Stock of a Restricted Subsidiary; provided that (x) the Company receives consideration at the time of such disposition at least equal to the Fair Market Value of such Restricted Subsidiary, (y) at least 75% of the consideration paid to the Company in connection with such disposition is in the form of cash or cash equivalents or the assumption by the purchaser of liabilities of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Company Preferred Stock) as a result of which the Company and the Restricted Subsidiaries are no longer obligated with respect to such liabilities, and (z) the Net Available Cash received by the Company from such disposition is applied within twelve months from the date of the receipt of such Net Available Cash to prepay, repay, legally defease or purchase Debt of the Company or any Restricted Subsidiary (excluding, in any such case, Disqualified Stock and Debt owed to the Company or an Affiliate of the Company) or to reinvest in Additional Assets (including by means of an Investment in Additional Assets by the Company or a Restricted Subsidiary with Net Available Cash received by the Company). (v) Limitation on Restrictions on Distributions from Restricted Subsidiaries. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist any consensual restriction on the right of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, or pay any Debt or other obligation owed, to the Company or any other Restricted Subsidiary (except, with respect to restrictions on dividends of non-cash Property, as permitted pursuant to clause (ii) of the next sentence), (b) make any loans or advances to the Company or any other Restricted Subsidiary or (c) transfer any of its Property to the Company or any other Restricted Subsidiary. The foregoing limitations will not apply (i) with respect to clauses (a), (b) and (c), to restrictions (A) in effect on the Issue Date, (B) pursuant to the Credit Facility, (C) relating to Debt of a Restricted Subsidiary and existing at the time it became a Restricted Subsidiary if such restriction was not created in connection with or in anticipation of the transaction or series of transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company or (D) which result from the Refinancing of Debt Incurred pursuant to an agreement referred to in clause (i)(A) or (B) above or in clause (ii)(A) or (B) below, provided such restriction is no less favorable to the holders of the Company Preferred Stock than those under the agreement evidencing the Debt so Refinanced, and (ii) with respect to clause (c) only, to restrictions (A) encumbering Property at the time such Property was acquired by the Company or any Restricted Subsidiary, so long as such restriction relates solely to the Property so acquired and was not created in connection with or in anticipation of such acquisition, (B) resulting from customary provisions restricting subletting or assignment of leases or customary provisions in other agreements that restrict assignment of such agreements or rights thereunder or (C) customary restrictions contained in asset sale agreements limiting the transfer of such Property pending the closing of such sale. (vi) Limitation on Transactions with Affiliates. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, conduct any business or enter into or suffer to exist any transaction or series of transactions (including the purchase, sale, transfer, assignment, lease, conveyance or exchange of any Property or the rendering of any service) with, or for the benefit of, any Affiliate of the Company (an "Affiliate Transaction"), unless (a) the terms of such Affiliate Transaction are (i) set forth in writing, (ii) in the interest of the Company or such Restricted Subsidiary, as the case may be, and (iii) no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could be obtained in a comparable arm's-length transaction with a Person that is not an Affiliate of the Company, (b) if such Affiliate Transaction involves aggregate payments or value in excess of $2.5 million, the Board of Directors (including a majority of the disinterested members of the Board of Directors, if any) approves such Affiliate Transaction and, in its good faith judgment, believes that such Affiliate Transaction complies with clauses (a) (ii) and (iii) of this paragraph as evidenced by a Board Resolution promptly delivered to the Transfer Agent and (c) if such Affiliate Transaction involves aggregate payments or value in excess of $5.0 million, the Company obtains a written opinion from an Independent Appraiser to the effect that the consideration to be paid or received in connection with such Affiliate Transaction is fair, from a financial point of view, to the Company or such Restricted Subsidiary, as the case may be. Notwithstanding the foregoing limitation, the Company or any Restricted Subsidiary may enter into or suffer to exist the following: (i) any transaction or series of transactions between the Company and one or more Restricted Subsidiaries or between two or more Restricted Subsidiaries in the ordinary course of business; provided that no more than 5% of the total voting power of the Voting Stock (on a fully diluted basis) of any such Restricted Subsidiary is owned by an Affiliate of the Company (other than a Restricted Subsidiary); (ii) any Restricted Payment permitted to be made pursuant to paragraph (l)(iii) above;. (iii) the payment of compensation (including amounts paid pursuant to employee benefit plans) for the personal services of officers, directors and employees of the Company or any of the Restricted Subsidiaries, so long as the Board of Directors in good faith shall have approved the terms thereof and deemed the services theretofore or thereafter to be performed for such compensation to be fair consideration therefor; (iv) loans and advances to employees made in the ordinary course of business and consistent with the past practices of the Company or such Restricted Subsidiary, as the case may be; provided that such loans and advances do not exceed $1.0 million in the aggregate at any one time outstanding; (v) the payment of fees and expenses in connection with the Recapitalization pursuant to written agreements in effect on the Issue Date; (vi) the sale of common stock of the Company for cash; provided, that the Company may receive Employee Notes in an aggregate principal amount not in excess of $1.0 million at any one time outstanding; (vii) the payment of dividends in kind in respect of (i) the Mirror Preferred Stock or (ii) any other Preferred Stock issued in compliance with this covenant; and (viii) a proportionate split of, or a common stock dividend payable on, the common stock of the Company. (vii) Designation of Restricted and Unrestricted Subsidiaries. The Board of Directors may designate any Subsidiary of the Company (other than any Subsidiary of the Company designated as a Restricted Subsidiary under the Indenture governing the Notes) to be an Unrestricted Subsidiary if (a) the Subsidiary to be so designated does not own any Capital Stock or Debt of, or own or hold any Lien on any Property of, the Company or any other Restricted Subsidiary, (b) the Subsidiary to be so designated is not obligated under any Debt, Lien or other obligation that, if in default, would result (with the passage of time or notice or otherwise) in a default on any Debt of the Company or of any Restricted Subsidiary and (c) either (i) the Subsidiary to be so designated has total assets of $1,000 or less or (ii) such designation is effective immediately upon such entity becoming a Subsidiary of the Company. Unless so designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company will be classified as a Restricted Subsidiary; provided, however, that such Subsidiary shall not be designated a Restricted Subsidiary and shall be automatically classified as an Unrestricted Subsidiary if either of the requirements set forth in clauses (x) and (y) of the immediately following paragraph will not be satisfied after giving pro forma effect to such classification. Except as provided in the first sentence of this paragraph, no Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary if, immediately after giving pro forma effect to such designation, (x) the Company could Incur at least $1.00 of additional Debt pursuant to clause (a) of paragraph (l)(ii) above and (y) no Voting Rights Triffering Event shall have occurred and be continuing or would result therefrom. Any such designation or redesignation by the Board of Directors will be evidenced to the Transfer Agent by filing with the Transfer Agent a Board Resolution giving effect to such designation or redesignation and an Officers' Certificate (a) certifying that such designation or redesignation complies with the foregoing provisions and (b) giving the effective date of such designation or redesignation, such filing with the Transfer Agent to occur within 45 days after the end of the fiscal quarter of the Company in which such designation or redesignation is made (or, in the case of a designation or redesignation made during the last fiscal quarter of the Company's fiscal year, within 90 days after the end of such fiscal year). (viii) Merger, Consolidation and Sale of Property. The Company shall not merge, consolidate or amalgamate with or into any other Person (other than a merger of a Wholly Owned Subsidiary into the Company) or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all its Property in any one transaction or series of transactions unless: (a) the Company shall be the surviving Person (the "Surviving Person") or the Surviving Person (if other than the Company) formed by such merger, consolidation or amalgamation or to which such sale, transfer, assignment, lease, conveyance or disposition is made shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia; (b) the Surviving Person (if other than the Company) expressly assumes all obligations of the Company under the Company Preferred Stock and this Certificate of Determination; (c) in the case of a sale, transfer, assignment, lease, conveyance or other disposition of all or substantially all the Property of the Company, such Property shall have been transferred as an entirety or virtually as an entirety to one Person; (d) immediately before and after giving effect to such transaction or series of transactions on a pro forma basis (and treating, for purposes of this clause (d) and clauses (e) and (f) below, any Debt which becomes, or is anticipated to become, an obligation of the Surviving Person or any Restricted Subsidiary as a result of such transaction or series of transactions as having been Incurred by the Surviving Person or such Restricted Subsidiary at the time of such transaction or series of transactions), no Voting Rights Triggering Event shall have occurred and be continuing; (e) immediately after giving effect to such transaction or series of transactions on a pro forma basis, the Company or the Surviving Person, as the case may be, would be able to Incur at least $1.00 of additional Debt under clause (a) of the first paragraph of covenant (l)(iv) above, determining compliance thereunder for this purpose based upon the Consolidated Interest Expense, Consolidated Net Income and EBITDA of the Company or the Surviving Person, as the case may be, and its Restricted Subsidiaries; provided, however, that this clause (e) shall not apply to a merger between the Company and a Wholly Owned Subsidiary of the Company solely for the purpose of reincorporating the Company in another state of the United States so long as the total amount of Debt of the Company and its Restricted Subsidiaries is not increased as a result thereof; and (f) the Company shall deliver, or cause to be delivered, to the Transfer Agent, in form and substance reasonably satisfactory to the Transfer Agent, an Officers' Certificate and an Opinion of Counsel, each stating that such transaction complies with this covenant and that all conditions precedent herein provided for relating to such transaction have been satisfied. (m) Certificates. (i) Form and Dating. The Company Preferred Stock and the Transfer Agent's Countersignature shall be substantially in the form of Exhibit A, which is hereby incorporated in and expressly made a part of this Certificate of Determination. The Company Stock certificate may have notations, legends or endorsements required by law, stock exchange rules, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). Each Company Preferred Stock certificate shall be dated the date of its countersignature. The terms of the Company Preferred Stock certificate set forth in Exhibit A are part of the terms of this Certificate of Determination. Notwithstanding any of the provisions of this paragraph (m) to the contrary, the rights, preferences, privileges and restrictions of each share of Company Preferred Stock shall be equal in all respects to each other share of Company Preferred Stock, except with respect to restrictions and other matters that may be imposed by applicable federal securities laws. (A) Global Company Preferred Stock. Rule 144A Company Preferred Stock shall be issued initially in the form of one or more permanent global securities in definitive, fully registered form (collectively, the "Rule 144A Global Company Preferred Stock") and Regulation S Company Preferred Stock shall, to the extent required pursuant to paragraph (C)(3)(ii)(B) of Rule 903 under Regulation S under the Securities Act, be issued initially in the form of one or more temporary global securities (collectively, the "Temporary Regulation S Global Company Preferred Stock"), and, to the extent permitted pursuant to paragraph (C)(3)(ii)(B) of such Rule 903, shall be issued initially in the form of one or more permanent global securities in definitive, fully registered form (collectively, the "Permanent Regulation S Global Company Preferred Stock"), in each case without coupons with the global securities legend and restricted securities legend set forth in Exhibit A hereto, which shall be deposited on behalf of the purchasers of the Initial Company Preferred Stock represented thereby with the Transfer Agent, at its New York office, as custodian for DTC (or with such other custodian as DTC may direct), and registered in the name of DTC or a nominee of DTC, duly executed by the Company and countersigned by the Transfer Agent as hereinafter provided. Beneficial ownership interests in Temporary Regulation S Global Company Preferred Stock will not be exchangeable for interests in the Rule 144A Global Company Preferred Stock, the Permanent Regulation S Global Company Preferred Stock, or any other security without a legend containing restrictions on transfer until the expiration of the Restricted Period and then only upon certification in form reasonably satisfactory to the Transfer Agent that beneficial ownership interests in such Temporary Regulation S Global Company Preferred Stock are owned either by non- U.S. persons or U.S. persons who purchased such interests in a transaction that did not require registration under the Securities Act. The Rule 144A Global Company Preferred Stock, Temporary Regulation S Global Company Preferred Stock and Permanent Regulation S Global Company Preferred Stock are collectively referred to herein as "Global Company Preferred Stock." Subject to the terms hereof and to the requirements of applicable law, thenumber of shares of Company Preferred Stock represented by Global Company Preferred Stock may from time to time be increased or decreased by adjustments made on the records of the Transfer Agent and DTC or its nominee as hereinafter provided. The Transfer Agent shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Certificate of Determination or under applicable law with respect to any transfer of any interest in the Company Preferred Stock (including any transfers between or among DTC participants, members or beneficial owners in any Global Company Preferred Stock) other than to require delivery of such certificates and other documentation or evidence as are expressly required by the terms of this Certificate of Determination, and to examine the same to determine substantial compliance as to form with the express requirements hereof. (B) Book-Entry Provisions. In the event Global Company Preferred Stock is deposited with or on behalf of DTC, the Company shall execute and the Transfer Agent shall countersign and deliver initially one or more Global Company Preferred Stock certificates that (a) shall be registered in the name of DTC for such Global Company Preferred Stock or the nominee of DTC and (b) shall be delivered by the Transfer Agent to DTC or pursuant to DTC's instructions or held by the Transfer Agent as custodian for DTC. Members of, or participants in, DTC ("Agent Members") shall have no rights under this Certificate of Determination with respect to any Global Company Preferred Stock held on their behalf by DTC or by the Transfer Agent as the custodian of DTC or under such Global Company Preferred Stock, and DTC may be treated by the Company, the Transfer Agent and any agent of the Company or the Transfer Agent as the absolute owner of such Global Company Preferred Stock for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Transfer Agent or any agent of the Company or the Transfer Agent from giving effect to any written certification, proxy or other authorization furnished by DTC or impair, as between DTC and its Agent Members, the operation of customary practices of DTC governing the exercise of the rights of a holder of a beneficial interest in any Global Company Preferred Stock. (C) Definitive Securities. Except as provided by applicable law or as provided in this paragraph (m)(i) or in paragraph (m)(iii), owners of beneficial interests in Global Company Preferred Stock will not be entitled to receive physical delivery of certificated Company Preferred Stock. (ii) Execution and Countersignature. Two Officers shall sign the certificates representing the Company Preferred Stock for the Company by manual or facsimile signature. The Company's seal shall be impressed, affixed, imprinted or reproduced on the Company Preferred Stock and may be in facsimile form. If an Officer whose signature is on certificates representing the Company Preferred Stock no longer holds that office at the time the Transfer Agent countersigns the Company Preferred Stock evidenced thereby, the shares of Company Preferred Stock evidenced thereby shall be valid nevertheless. A certificate representing the Company Preferred Stock shall not be valid until an authorized signatory of the Transfer Agent manually countersigns the Company Preferred Stock. The signature shall be conclusive evidence that the Company Preferred Stock has been countersigned under this Certificate of Determination. The Transfer Agent shall countersign and deliver a number of shares of Initial Company Preferred Stock and Series B Stock equal to the aggregate number of shares of Holding Preferred Stock for which such Company Preferred Stock is exchanged for issue only in a Registered Exchange Offer pursuant to the Registration Agreement, in each case upon a written order of the Company signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of the Company. In addition, the Transfer Agent shall countersign and deliver, from time to time, Additional Shares for original issue upon order of the Company signed by two Officers or by an Officer or either an Assistant Treasurer or Assistant Secretary of the Company. Such orders shall specify the number of shares of the Company Preferred Stock to be countersigned and the date on which the original issue of Company Preferred Stock is to be countersigned and whether the Company Preferred Stock is to be Initial Company Preferred Stock or Series B Stock. The Transfer Agent may appoint an countersigning agent reasonably acceptable to the Company to countersign the Company Preferred Stock. Unless limited by the terms of such appointment, a countersigning agent may countersign the Company Preferred Stock whenever the Transfer Agent may do so. Each reference in this Certificate of Determination to countersign by the Transfer Agent includes countersign by such agent. An countersigning agent has the same rights as the Transfer Agent or agent for service of notices and demands. (iii) Transfer and Exchange. (A) Transfer and Exchange of ______________________ ________________________ Definitive Company Preferred Stock. When Definitive Company Preferred Stock is presented to the Transfer Agent with a request to register the transfer of such Definitive Company Preferred Stock or to exchange such Definitive Company Preferred Stock for an equal number of shares of Definitive Company Preferred Stock of other authorized denominations, the Transfer Agent shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Definitive Company Preferred Stock surrendered for transfer or exchange: (1) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Transfer Agent, duly executed by the Holder thereof or its attorney duly authorized in writing; and (2) is being transferred or exchanged pursuant to an effective registration statement under the Securities Act or pursuant to clause (I) or (II) below, and are accompanied by the following additional information and documents, as applicable: (I) if such Definitive Company Preferred Stock is being delivered to the Transfer Agent by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect in substantially the form of Exhibit B hereto; or (II) if such Definitive Company Preferred Stock is being transferred to the Company or to a "qualified institutional buyer" ("QIB") in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 or Regulation S under the Securities Act, a certification to that effect (in substantially the form of Exhibit B hereto). (B) Restrictions on Transfer of Definitive Company Preferred Stock for a Beneficial Interest in Global Company Preferred Stock. Definitive Company Preferred Stock may not be exchanged for a beneficial interest in Global Company Preferred Stock except upon satisfaction of the requirements set forth below. Upon receipt by the Transfer Agent of Definitive Company Preferred Stock, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Transfer Agent, together with: (1) certification that such Definitive Company Preferred Stock is being transferred (A) to a QIB in accordance with Rule 144A, (B) to an institution that is an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act that has furnished to the Transfer Agent a signed letter in the form of Exhibit B hereto or (C) outside the United States in an offshore transaction within the meaning of Regulation S and in compliance with Rule 904 under the Securities Act; and (2) written instructions directing the Transfer Agent to make, or to direct DTC to make, an adjustment on its books and records with respect to such Global Company Preferred Stock to reflect an increase in the number of shares of Company Preferred Stock represented by the Global Company Preferred Stock, then the Transfer Agent shall cancel such Definitive Company Preferred Stock and cause, or direct DTC to cause, in accordance with the standing instructions and procedures existing between DTC and the Transfer Agent, the number of shares of Company Preferred Stock represented by the Global Company Preferred Stock to be increased accordingly. If no Global Company Preferred Stock is then outstanding, the Company shall issue and the Transfer Agent shall countersign, upon written order of the Company in the form of an Officers' Certificate, a new Global Company Preferred Stock representing the appropriate number of shares. (C) Transfer and Exchange of Interests in Global Company Preferred Stock. The transfer and exchange of beneficial interests in Global Company Preferred Stock or beneficial interests therein shall be effected through DTC, in accordance with this Certificate of Determination (including applicable restrictions on transfer set forth herein, if any) and the procedures of DTC therefor. (D) Transfer of a Beneficial Interest in Temporary Regulation S Global Company Preferred Stock for interests in other Company Preferred Stock. During the Restricted Period, beneficial ownership interests in Temporary Regulation S Global Company Preferred Stock (if any) may not be exchanged for interests in any other Global Company Preferred Stock or Definitive Company Preferred Stock. Thereafter, such beneficial ownership interests may be so exchanged only upon delivery to the Company and the Transfer Agent of a certificate in form and substance satisfactory to them certifying that the beneficial owner of the Temporary Regulation S Global Company Preferred Stock is either a non-U.S. person or a U.S. person who purchased such beneficial ownership interests in a transaction that did not require registration under the Securities Act, as provided in paragraph (C)(3)(ii)(B) of Rule 903 under Regulation S under the Securities Act. (E) (i) Restrictions on Transfer and Exchange of Global Company Preferred Stock. Notwithstanding any other provisions of this Certificate of Determination, Global Company Preferred Stock may not be transferred as a whole except by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such nominee to a successor depository or a nominee of such successor depository. (ii) Restrictions on Transfer of Temporary Regulation S Global Company Preferred Stock Interests. During the Restricted Period, beneficial ownership interests in Temporary Regulation S Global Company Preferred Stock may only be sold, pledged or transferred through Euroclear or Cedel in accordance with the Applicable Procedures and only (i) to the Company, (ii) so long as such security is eligible for resale pursuant to Rule 144A under the Securities Act ("Rule 144A"), to a person whom the selling Holder reasonably believes is a "qualified institutional buyer" ("QIB") as defined in Rule 144A that purchases for its own account or for the account of a QIB to whom notice is given that the resale, pledge or transfer is being made in reliance on Rule 144A, (iii) in an offshore transaction in accordance with Regulation S, (iv) pursuant to an exemption from registration under the Securities Act provided by Rule 144 (if applicable) under the Securities Act, or (v) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. During the Restricted Period, interests in the Temporary Regulation S Global Company Preferred Stock may not be transferred to institutions that are "Accredited Investors" (but not QIBs) as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. (F) Countersignature of Definitive Company Preferred Stock. If at any time: (1) DTC notifies the Company that DTC is unwilling or unable to continue as depository for the Global Company Preferred Stock and a successor depository for the Global Company Preferred Stock is not appointed by the Company within 90 days after delivery of such notice; (2) DTC ceases to be a clearing agency registered under the Exchange Act; (3) The Company, in its sole discretion, notifies the Transfer Agent in writing that it elects to cause the issuance of Definitive Company Preferred Stock under this Certificate of Determination, then the Company will execute, and the Transfer Agent, upon receipt of a written order of the Company signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of the Company requesting the countersign and delivery of Definitive Company Preferred Stock to the persons designated by the Company, will countersign and deliver Definitive Company Preferred Stock equal to the number of shares of Company Preferred Stock represented by the Global Company Preferred Stock, in exchange for such Global Company Preferred Stock. Definitive Company Preferred Stock issued in exchange for a beneficial interest in a Global Company Preferred Stock shall be registered in such names and in such authorized denominations as DTC, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Transfer Agent. The Transfer Agent shall mail or deliver such Definitive Company Preferred Stock to the persons in whose names such Company Preferred Stock are so registered in accordance with the instructions of DTC. (G) Legend. (1) Except as permitted by the following paragraph (2), each certificate evidencing the Global Company Preferred Stock and the Definitive Company Preferred Stock (and all Company Preferred Stock issued in exchange therefor or substitution thereof) shall bear a legend in substantially the following form: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE SECOND ANNIVERSARY OF THE ISSUANCE HEREOF (OR OF A PREDECESSOR SECURITY HERETO) OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF THE ISSUER AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE ISSUER, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), (3) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY) PROVIDED THAT A CERTIFICATE WHICH MAY BE OBTAINED FROM THE ISSUER IS DELIVERED BY CERTAIN TRANSFEREES TO THE ISSUER, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a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o)(2) OF RULE 902 UNDER) REGULATION S UNDER THE SECURITIES ACT." (2) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by Global Company Preferred Stock) pursuant to Rule 144 under the Securities Act or an effective registration statement under the Securities Act: (I) in the case of any Transfer Restricted Security that is a Definitive Company Preferred Stock, the Transfer Agent shall permit the Holder thereof to exchange such Transfer Restricted Security for a Definitive Company Preferred Stock that does not bear the legend set forth above and rescind any restriction on the transfer of such Transfer Restricted Security; and (II) in the case of any Transfer Restricted Security that is represented by a Global Company Preferred Stock, the Transfer Agent shall permit the Holder thereof to exchange such Transfer Restricted Security for interests in an Unrestricted Global Preferred Stock Security that does not bear the legend set forth above and rescind any restriction on the transfer of such Transfer Restricted Security, if the Holder's request for such exchange was made in reliance on Rule 144 and the Holder certifies to that effect in writing to the Transfer Agent (such certification to be in the form and substance satisfactory to the Transfer Agent). (3) In the case of any Restricted or Unrestricted Global Security that represents the Initial Company Preferred Stock, the Transfer Agent shall permit the Holder thereof to exchange such Restricted or Unrestricted Global Security for a new global security representing Series B Stock that does not bear the legend set forth above. (H) Cancelation or Adjustment of Global Company Preferred Stock. At such time as all beneficial interests in Global Company Preferred Stock have either been exchanged for Definitive Company Preferred Stock, redeemed, repurchased or canceled, such Global Company Preferred Stock shall be returned to DTC for cancelation or retained and canceled by the Transfer Agent. At any time prior to such cancelation, if any beneficial interest in Global Company Preferred Stock is exchanged for Definitive Company Preferred Stock, redeemed, repurchased or canceled, the number of shares of Company Preferred Stock represented by such Global Company Preferred Stock shall be reduced and an adjustment shall be made on the books and records of the Transfer Agent with respect to such Global Company Preferred Stock, by the Transfer Agent or DTC, to reflect such reduction. (I) Obligations with Respect to Transfers and Exchanges of Company Preferred Stock. (1) To permit registrations of transfers and exchanges, the Company shall execute and the Transfer Agent shall countersign Definitive Company Preferred Stock and Global Company Preferred Stock as required pursuant to the provisions of this paragraph (iii). (2) All Definitive Company Preferred Stock and Global Company Preferred Stock issued upon any registration of transfer or exchange of Definitive Company Preferred Stock or Global Company Preferred Stock shall be the valid obligations of the Company, entitled to the same benefits under this Certificate of Determination as the Definitive Company Preferred Stock or Global Company Preferred Stock surrendered upon such registration of transfer or exchange. (3) Prior to due presentment for registration of transfer of any shares of Company Preferred Stock, the Transfer Agent and the Company may deem and treat the person in whose name such shares of Company Preferred Stock are registered as the absolute owner of such Company Preferred Stock and neither the Transfer Agent nor the Company shall be affected by notice to the contrary. (4) No service charge shall be made to a Holder for any registration of transfer or exchange upon surrender of any Company Preferred Stock Certificate at the office of the Transfer Agent maintained for that purpose. However, the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Company Preferred Stock Certificates. (5) Upon any sale or transfer of shares of Company Preferred Stock (including any Company Preferred Stock represented by a Global Company Preferred Stock Certificate) pursuant to an effective registration statement under the Securities Act, pursuant to Rule 144 under the Securities Act or pursuant to an opinion of counsel reasonably satisfactory to the Company that no legend is required: (A) in the case of any Definitive Company Preferred Stock, the Transfer Agent shall permit the Holder thereof to exchange such Company Preferred Stock for Definitive Company Preferred Stock that does not bear the legend set forth in paragraph (iii)(G) above and rescind any restriction on the transfer of such Company Preferred Stock; and (B) in the case of any Global Company Preferred Stock, such Company Preferred Stock shall not be required to bear the legend set forth in paragraph (m)(iii)(G) above but shall continue to be subject to the provisions of paragraph (m)(iii)(D) hereof. (iv) Replacement Certificates. If a mutilated Company Preferred Stock certificate is surrendered to the Transfer Agent or if the Holder of a Company Preferred Stock certificate claims that the Company Preferred Stock certificate has been lost, destroyed or wrongfully taken, the Company shall issue and the Transfer Agent shall countersign a replacement Company Preferred Stock certificate if the reasonable requirements of the Transfer Agent, the Company and of Section 8-405 of the Uniform Commercial Code as in effect in the State of New York are met. If required by the Transfer Agent or the Company, such Holder shall furnish an indemnity bond sufficient in the judgment of the Company and the Transfer Agent to protect the Company and the Transfer Agent from any loss which either of them may suffer if a Company Preferred Stock certificate is replaced. The Company and the Transfer Agent may charge the Holder for their expenses in replacing a Company Preferred Stock certificate. (v) Temporary Certificates. Until definitive Company Preferred Stock certificates are ready for delivery, the Company may prepare and the Transfer Agent shall countersign temporary the Company Preferred Stock certificates. Temporary the Company Preferred Stock certificates shall be substantially in the form of definitive Company Preferred Stock certificates but may have variations that the Company considers appropriate for temporary Company Preferred Stock certificates. Without unreasonable delay, the Company shall prepare and the Transfer Agent shall countersign definitive Company Preferred Stock certificates and deliver them in exchange for temporary Company Preferred Stock certificates. (vi) Cancelation. (A) In the event the Company shall purchase or otherwise acquire Definitive Company Preferred Stock, the same shall thereupon be delivered to the Transfer Agent for cancelation. (B) At such time as all beneficial interests in Global Company Preferred Stock have been exchanged for Definitive Company Preferred Stock, redeemed, repurchased or canceled, such Global Company Preferred Stock shall thereupon be delivered to the Transfer Agent for cancelation. (C) The Transfer Agent and no one else shall cancel and, subject to the record retention requirements under the Exchange Act, destroy all Company Preferred Stock certificates surrendered for transfer, exchange, replacement or cancelation and deliver a certificate of such destruction to the Company unless the Company directs the Transfer Agent to deliver canceled Company Preferred Stock certificates to the Company. The Company may not issue new Company Preferred Stock certificates to replace Company Preferred Stock certificates to the extent they evidence Company Preferred Stock which the Company has purchased or otherwise acquired. (n) Additional Rights of Holders. In addition to the rights provided to Holders under this Certificate of Determination, Holders shall have the rights set forth in the Registration Agreement. (o) Certain Definitions. As used in this Certificate of Determination, the following terms shall have the following meanings (and (1) terms defined in the singular have comparable meanings when used in the plural and vice versa, (2) "including" means including without limitation, (3) "or" is not exclusive and (4) an accounting term not otherwise defined has the meaning assigned to it in accordance with United States generally accepted accounting principles as in effect on the Issue Date and all accounting calculations will be determined in accordance with such principles), unless the content otherwise requires: "Additional Assets" means (a) any Property (other than cash, cash equivalents and securities) to be owned by the Company or any Restricted Subsidiary and used in a Related Business; or (b) Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary from any Person other than an Affiliate of the Company; provided, however, that, in the case of clause (b), such Restricted Subsidiary is primarily engaged in a Related Business. "Affiliate" of any specified Person means (a) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person or (b) any other Person who is a director or officer of (i) such specified Person, (ii) any Subsidiary of such specified Person or (iii) any Person described in clause (a) above. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of the covenant described under paragraph (l)(vi) only, "Affiliate" shall also mean any beneficial owner of shares representing 5% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Voting Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. "Asset Sale" means any sale, lease, transfer, issuance or other disposition (or series of related sales, leases, transfers, issuances or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of (a) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares) or (b) any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary (other than, in the case of clauses (a) and (b) above, (i) any disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (ii) any disposition effected in compliance with the first paragraph of the covenant described under paragraph (l)(viii), (iii) any Sale and Leaseback Transaction completed within 180 days following the original acquisition of the subject assets where such Sale and Leaseback Transaction represents the intended financing of Property acquired after the Issue Date and (iv) any disposition or series of related dispositions of assets having a Fair Market Value and sale price of less than $500,000). "Attributable Debt" in respect of a Sale and Leaseback Transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Average Life" means, as of any date of determination, with respect to any Debt or Preferred Stock, the quotient obtained by dividing (a) the sum of the product of the numbers of years (rounded to the nearest one twelfth of one year) from the date of determination to the dates of each successive scheduled principal payment of such Debt or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (b) the sum of all such payments. "Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "Business Day" means each day which is not a Legal Holiday. "Capital Lease Obligations" means any obligation under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of Debt represented by such obligation shall be the capitalized amount of such obligations determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Capital Stock" means, with respect to any Person, any shares or other equivalents (however designated) of corporate stock, partnership interests or any other participations, rights, warrants, options or other interests in the nature of an equity interest in such Person, including Preferred Stock, but excluding any debt security convertible or exchangeable into such equity interest. "Capital Stock Sale Proceeds" means the aggregate cash proceeds received by the Company from the issuance or sale (other than to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any of its Subsidiaries for the benefit of their employees) by the Company of any class of its Parity Stock and Junior Stock (other than Disqualified Stock) after the Issue Date, net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Change of Control" means the occurrence of any of the following events: (a) prior to the first Public Equity Offering, the Permitted Holders cease to be the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of a majority of the voting power of the Voting Stock of the Company, whether as a result of the issuance of securities of the Company, any merger, consolidation, liquidation or dissolution of the Company, any direct or indirect transfer of securities by the Permitted Holders or otherwise (for purposes of this clause (a), the Permitted Holders will be deemed to beneficially own any Voting Stock of a corporation (the "specified corporation") held by any other corporation (the "parent corporation") so long as the Permitted Holders beneficially own, directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of such parent corporation); or (b) after the first Public Equity Offering, any "Person" or "group" (as such terms are used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provisions to either of the foregoing), including any group acting for the purpose of acquiring, holding, voting or disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act, other than any one or more of the Permitted Holders, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 35% or more of the voting power of the Voting Stock of the Company; provided, however, that the Permitted Holders are the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, in the aggregate of a lesser percentage of the total voting power of all classes of the Voting Stock of the Company than such other Person or group (for purposes of this clause (b), such Person or group shall be deemed to beneficially own any Voting Stock of a specified corporation held by a parent corporation so long as such Person or group beneficially owns, directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of such parent corporation); or (c) the sale, transfer, assignment, lease, conveyance or other disposition, directly or indirectly, of all or substantially all the assets of the Company and the Restricted Subsidiaries, considered as a whole (other than a disposition of such assets as an entirety or virtually as an entirety to a Wholly Owned Subsidiary or one or more Permitted Holders) shall have occurred, or the Company merges, consolidates or amalgamates with or into any other Person (other than one or more Permitted Holders) or any other Person (other than one or more Permitted Holders) merges, consolidates or amalgamates with or into the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is reclassified into or exchanged for cash, securities or other Property, other than any such transaction where (i) the outstanding Voting Stock of the Company is reclassified into or exchanged for Voting Stock of the surviving corporation and (ii) the holders of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the surviving corporation immediately after such transaction and in substantially the same proportion as before the transaction; or (d) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election or appointment by such Board or whose nomination for election by the shareholders of the Company was approved by a vote of 66% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the Board of Directors then in office; or (e) the shareholders of the Company shall have approved any plan of liquidation or dissolution of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Company Exchange Debentures" means the 11 1/2% Subordinated Exchange Debentures due 2010 of the Company, issuable upon redemption of the Company Preferred Stock. "Company Exchange Indenture" means the Exchange Indenture dated as of April 7, 1998 between the Company and the United States Trust Company of New York, as Trustee, governing the Company Exchange Debentures. "Consolidated Interest Coverage Ratio" means, as of any date of determination, the ratio of (a) the aggregate amount of EBITDA for the most recent four consecutive fiscal quarters ending at least 45 days prior to such determination date to (b) Consolidated Interest Expense for such four fiscal quarters; provided, however, that (i) if the Company or any Restricted Subsidiary has Incurred any Debt since the beginning of such period that remains outstanding or if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio is an Incurrence of Debt, or both, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Debt as if such Debt had been Incurred on the first day of such period and the discharge of any other Debt repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Debt as if such discharge had occurred on the first day of such period, (ii) if since the beginning of such period the Company or any Restricted Subsidiary shall have repaid, repurchased, legally defeased or otherwise discharged any Debt with Capital Stock Sale Proceeds, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such discharge as if such discharge had occurred on the first day of such period, (iii) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Sale or if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio is an Asset Sale, or both, EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the Property which is the subject of such Asset Sale for such period, or increased by an amount equal to the EBITDA (if negative) directly attributable thereto for such period, in either case as if such Asset Sale had occurred on the first day of such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Debt of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Asset Sale, as if such Asset Sale had occurred on the first day of such period (or, if the Capital Stock of any Restricted Subsidiary is sold, by an amount equal to the Consolidated Interest Expense for such period directly attributable to the Debt of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Debt after such sale), (iv) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of Property, including any acquisition of Property occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Debt) as if such Investment or acquisition occurred on the first day of such period and (v) 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 Sale, Investment or acquisition of Property that would have required an adjustment pursuant to clause (iii) or (iv) above if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Sale, Investment or acquisition occurred on the first day of such period. For purposes of this definition, pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company and as further contemplated by the definition of the term "pro forma". If any Debt bears a floating rate of interest and is being given pro forma effect, the interest expense on such Debt shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Debt if such Interest Rate Agreement has a remaining term in excess of 12 months). "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent Incurred by the Company or its Restricted Subsidiaries, (a) interest expense attributable to capital leases, (b) amortization of debt discount and debt issuance cost, including commitment fees, other than with respect to Debt Incurred in connection with the Recapitalization, (c) capitalized interest, (d) non-cash interest expenses, (e) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (f) net costs associated with Hedging Obligations (including amortization of fees), (g) Disqualified Dividends other than Disqualified Dividends paid with shares of Parity Stock or Junior Stock of the Company which is not Disqualified Stock, (h) Preferred Stock dividends in respect of all Preferred Stock of Restricted Subsidiaries held by Persons other than the Company or a Wholly Owned Subsidiary, (i) interest Incurred in connection with Investments in discontinued operations, (j) interest accruing on any Debt of any other Person to the extent such Debt is Guaranteed by the Company or any Restricted Subsidiary and (k) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Debt Incurred by such plan or trust. "Consolidated Net Income" means, for any period, the net income (loss) of the Company and its consolidated Subsidiaries; provided, however, that there shall not be included in such Consolidated Net Income (a) any net income (loss) of any Person (other than the Company) if such Person is not a Restricted Subsidiary, except that (i) subject to the exclusion contained in clause (d) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to a Restricted Subsidiary, to the limitations contained in clause (c) below) and (ii) the Company's equity in a net loss of any such Person other than an Unrestricted Subsidiary for such period shall be included in determining such Consolidated Net Income, (b) for the purposes of paragraph (l)(iii) only, any net income (loss) of any Person acquired by the Company or any of its consolidated Subsidiaries in a pooling of interests transaction for any period prior to the date of such acquisition, (c) any net income (but not loss) of any Restricted Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions, directly or indirectly, to the Company, except that subject to the exclusion contained in clause (d) below, the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to another Restricted Subsidiary, to the limitation contained in this clause), (d) any gain (or, for purposes of paragraphs (l)(ii) and (l)(viii) only, loss) realized upon the sale or other disposition of any Property of the Company or any of its consolidated Subsidiaries (including pursuant to any Sale and Leaseback Transaction) which is not sold or otherwise disposed of in the ordinary course of business, provided, that any tax benefit or tax liability resulting therefrom shall be excluded in such Consolidated Net Income, (e) any extraordinary gain or loss, provided, that any tax benefit or tax liability resulting therefrom shall be excluded in such Consolidated Net Income, (f) the cumulative effect of a change in accounting principles and (g) (i) any non-cash compensation expense realized for grants of performance shares, stock options or other stock awards to officers, directors and employees of the Company or any Restricted Subsidiary or (ii) compensation expense realized with respect to periods prior to Issue Date in respect of payments under the Company's 1994 Amended and Restated Equity Participation Plan or compensation expense, to the extent accrued in 1998, related to contingent payments to existing managers of the Company pursuant to the Merger Agreement in an aggregate amount not in excess of $2.4 million. Notwithstanding the foregoing, for the purposes of paragraph (l)(iii) only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clause (c)(iv) thereof. "Credit Facility" means, with respect to the Company or any Restricted Subsidiary, one or more debt or commercial paper facilities with banks or other institutional lenders (including the New Credit Facility) providing for revolving credit loans, term loans, receivables or inventory financing (including through the sale of receivables or inventory to such lenders or to special purpose, bankruptcy remote entities formed to borrow from such lenders against such receivables or inventory) or trade letters of credit, in each case together with any amendments, supplements, modifications (including by any extension of the maturity thereof), refinancings or replacements thereof by a lender or syndicate of lenders in one or more successive transactions (including any such transaction that changes the amount available thereunder, replaces such agreement or document, or provides for other agents or lenders). "Currency Exchange Protection Agreement" means, in respect of a Person, any foreign exchange contract, currency swap agreement, currency option or other similar agreement or arrangement designed to protect such Person against fluctuations in currency exchange rates. "Debt" means, with respect to any Person on any date of determination (without duplication), (a) the principal of and premium (if any) in respect of (i) debt of such Person for money borrowed and (ii) debt evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (b) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale and Leaseback Transactions entered into by such Person; (c) all obligations of such Person issued or assumed as the deferred purchase price of Property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (d) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in (a) through (c) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit); (e) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person, any Preferred Stock (but excluding, in each case, any accrued dividends); (f) all obligations of the type referred to in clauses (a) through (e) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee; (g) all obligations of the type referred to in clauses (a) through (t) of other Persons secured by any Lien on any Property of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such Property or the amount of the obligation so secured; and (h) to the extent not otherwise included in this definition, Hedging Obligations of such Person. The amount of Debt of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided that the amount outstanding at any time of any Debt issued with original issue discount is the face amount of such Debt less the remaining unamortized portion of the original issue discount of such Debt at such time as determined in accordance with GAAP. "Disqualified Dividends" means, for any dividend with respect to Disqualified Stock, the quotient of the dividend divided by the difference between one and the maximum statutory federal income tax rate (expressed as a decimal number between 1 and 0) then applicable to the issuer of such Disqualified Stock. "Disqualified Stock" means, with respect to any Person, Redeemable Stock of such Person as to which (i) the maturity, (ii) mandatory redemption or (iii) redemption, repurchase, conversion or exchange at the option of the holder thereof occurs, or may occur, on or prior to the first anniversary of the Stated Maturity of the Company Preferred Stock; provided, however, that Redeemable Stock of such Person that would not otherwise be characterized as Disqualified Stock under this definition shall not constitute Disqualified Stock (a) if such Redeemable Stock is convertible or exchangeable into Debt or Disqualified Stock solely at the option of the issuer thereof or (b) solely as a result of provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Redeemable Stock upon the occurrence of a "change of control" occurring prior to the first anniversary of the Stated Maturity of the Company Preferred Stock, if (x) such repurchase obligation may not be triggered in respect of such Redeemable Stock unless a corresponding obligation also arises with respect to the Company Preferred Stock and (y) no such repurchase or redemption is permitted to be consummated unless and until such Person shall have satisfied all repurchase or redemption obligations with respect to any required purchase offer made with respect to the Company Preferred Stock. "EBITDA" means, for any period, an amount equal to, for the Company and its consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income for such period, plus the following to the extent reducing Consolidated Net Income for such period: (i) the provision for taxes based on income or profits or utilized in computing net loss, (ii) Consolidated Interest Expense, (iii) depreciation, (iv) amortization expense and (v) any other non-cash items (other than any such non-cash item to the extent that it represents an accrual of or reserve for cash expenditures in any future period), minus (b) all non- cash items increasing Consolidated Net Income for such period (other than any such non-cash item to the extent that it will result in the receipt of cash payments in any future period). Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its shareholders. "Employee Notes" means promissory notes of employees of Holding, the Company or any of their Subsidiaries payable to the Company or Holding and received in connection with the substantially concurrent purchase of common stock of the Company or Holding by such employees. "Exchange Act" means the Securities Exchange Act of 1934. "Exchange Offer Registration Statement" means a registration statement of the Company on an appropriate form under the Securities Act with respect to the Registered Exchange Offer, all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Fair Market Value" means, with respect to any Property, the price which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair Market Value will be determined, except as otherwise provided, (a) if such Property has a Fair Market Value equal to or less than $2.5 million, by any Officer of the Company or (b) if such Property has a Fair Market Value in excess of $2.5 million, by a majority of the Board of Directors and evidenced by a Board Resolution, dated within 30 days of the relevant transaction, delivered to the Transfer Agent. "GAAP" means United States generally accepted accounting principles as in effect on the Issue Date, including those set forth (a) in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (b) in the statements and pronouncements of the Financial Accounting Standards Board, (c) in such other statements by such other entity as approved by a significant segment of the accounting profession and (d) the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Debt of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing any obligation. "Hedging Obligation" of any Person means any obligation of such Person pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement or any other similar agreement or arrangement. "Holder" means the person in whose name a share of Company Preferred Stock is registered on the Transfer Agent's books. "Holding" means River Holding Corp., the corporate parent of the Company, and any successor thereto. "IAI" means an institution that is an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "Incur" means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by merger, conversion, exchange or otherwise), extend, assume, Guarantee or become liable in respect of such Debt or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Debt or obligation on the balance sheet of such Person (and "Incurrence" and "Incurred" shall have meanings correlative to the foregoing); provided, however, that a change in GAAP that results in an obligation of such Person that exists at such time, and is not theretofore classified as Debt, becoming Debt shall not be deemed an Incurrence of such Debt; provided further, however, that solely for purposes of determining compliance with paragraph (l)(ii), amortization of debt discount shall not be deemed to be the Incurrence of Debt, provided that in the case of Debt sold at a discount, the amount of such Debt Incurred shall at all times be the aggregate principal amount at Stated Maturity. "Indenture" means the Indenture dated as of the Issue Date among Holding, the Company and the United States Trust Company of New York, as Trustee, governing the Notes. "Independent Appraiser" means an investment banking firm of national standing or any third party appraiser of national standing, provided that such -------- firm or appraiser is not an Affiliate of the Company. "Industrias Hudson" means Industrias Hudson S.A. de C.V. "Interest Rate Agreement" means, for any Person, any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement designed to protect against fluctuations in interest rates. "Investment" by any Person means any direct or indirect loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of such Person), advance or other extension of credit or capital contribution (by means of transfers of cash or other Property to others or payments for Property or services for the account or use of others, or otherwise) to, or Incurrence of a Guarantee of any obligation of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person. For purposes of paragraphs (l)(iii) and (l)(vii) and the definition of "Restricted Payment", "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary equal to an amount (if positive) equal to (a) the Company's "Investment" in such Subsidiary at the time of such redesignation less (b) the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the time of such redesignation. In determining the amount of any Investment made by transfer of any Property other than cash, such Property shall be valued at its Fair Market Value at the time of such Investment. "Issue Date" means April 7, 1998. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions are not required to be open in the City of New York and Los Angeles. "Lien" means, with respect to any Property of any Person, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property (including any Capital Lease Obligation, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing or any Sale and Leaseback Transaction). "Merger Agreement" means the Amended and Restated Merger Agreement between Holding, River Acquisition Corp., the Company and shareholders of the Company dated as of March 15, 1998, as in effect on the Issue Date. "Mirror Preferred Stock" means the 11 1/2% Senior PIK Preferred Stock due 2010 of the Company. "Moody's" means Moody's Investors Service, Inc. or any successor to the rating agency business thereof. "Net Available Cash" from any Asset Sale or other transaction subject to paragraph (l)(iv) means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Debt or other obligations relating to the Property that is the subject of such transaction or received in any other noncash form), in each case net of (a) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such transaction, (b) all payments made on any Debt which is secured by any Property subject to such transaction, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such Property, or which must by its terms, or in order to obtain a necessary consent to such transaction, or by applicable law, be repaid out of the proceeds from such transaction, (c) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such transaction and (d) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the Property disposed in such transaction and retained by the Company or any Restricted Subsidiary after such transaction. "New Credit Facility" means the credit facilities made available pursuant to the Senior Secured Credit Agreement dated as of the Issue Date among the Company, Holding, the lenders party thereto, Salomon Smith Barney Inc, as Arranger, Advisor and Syndication Agent and Bankers Trust Company, as Administrative Agent. "Notes" means the 9 1/8% Senior Subordinated Notes due 2008 of the Company. "Officer" means the Chief Executive Officer, the President, the Chief Financial Officer or any Executive Vice President of the Company. "Officers' Certificate" means a certificate signed by two Officers of the Company, at least one of whom shall be the principal executive officer or principal financial officer of the Company, and delivered to the Transfer Agent. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Transfer Agent. The counsel may be an employee of or counsel to the Company. "Permitted Debt" means: (a) Debt of the Company evidenced by the Notes and of Subsidiary Guarantors evidenced by Subsidiary Guaranties; (b) (i) Debt under the Credit Facility; provided that the aggregate principal amount of all such Debt under the Credit Facility comprised of (A) term loans at any one time outstanding shall not exceed $40.0 million minus all principal amounts repaid in respect of such term loans and (B) revolving credit loans and obligations at any one time outstanding shall not exceed the greater of (x) $60.0 million and (y) the sum of the amounts equal to (1) 60% of the net book value of the inventory of the Company and the Restricted Subsidiaries and (2) 85% of the net book value of the accounts receivable of the Company and the Restricted Subsidiaries, in each case as of the most recent fiscal quarter ending at least 45 days prior to the date of determination and (ii) Guarantees of Debt under the Credit Facility; (c) Debt in respect of Capital Lease Obligations and Purchase Money Debt, provided that (i) the aggregate principal amount of such Debt does not exceed the Fair Market Value (on the date of the Incurrence thereof) of the Property acquired, constructed or leased (including costs of installation, taxes and delivery charges with respect to such acquisition, construction or lease) and (ii) the aggregate principal amount of all Debt Incurred and then outstanding pursuant to this clause (c) (together with all Permitted Refinancing Debt Incurred in respect of Debt previously Incurred pursuant to this clause (c) and then outstanding) does not exceed $15.0 million; (d) Debt of the Company owing to and held by any Wholly Owned Subsidiary and Debt of a Wholly Owned Subsidiary owing to and held by the Company or any Wholly Owned Subsidiary; provided, however, that any subsequent issue or transfer of Capital Stock or other event that results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of any such Debt (except to the Company or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Debt by the issuer thereof; (e) Debt of a Wholly Owned Subsidiary Incurred and outstanding on or prior to the date on which such Wholly Owned Restricted Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary (other than Debt Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of transactions pursuant to which such Wholly Owned Restricted Subsidiary became a Subsidiary of the Company or was otherwise acquired by the Company); provided that at the time such Wholly Owned Restricted Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary and after giving pro forma effect to the Incurrence of such Debt, the Company would have been able to Incur $1.00 of additional Debt pursuant to clause (a) of paragraph (l)(ii); (f) Debt under Interest Rate Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting interest rate risk in the ordinary course of the financial management of the Company or such Restricted Subsidiary and not for speculative purposes, provided that the obligations under such agreements are directly related to payment obligations on Debt otherwise permitted by the terms of paragraph (l)(ii); (g) Debt under Currency Exchange Protection Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting currency exchange rate risks directly related to transactions entered into by the Company or such Restricted Subsidiary in the ordinary course of business and not for speculative purposes; (h) Debt in connection with one or more standby letters of credit or performance bonds issued for the account of the Company or any Restricted Subsidiary in the ordinary course of business or pursuant to self-insurance obligations and not in connection with the borrowing of money or the obtaining of advances; (i) Debt outstanding on the Issue Date not otherwise described in clauses (a) through (h) above; (j) Debt not otherwise described in clauses (a) through (i) above and clause (1) below in an aggregate principal amount outstanding at any one time not to exceed $15.0 million; (k) Permitted Refinancing Debt Incurred in respect of Debt Incurred pursuant to clause (a) of paragraph (l)(ii) and clauses (a), (c), (e) and (i) above, subject, in the case of clause (c) above, to the limitations set forth in the proviso thereto; and (l) Debt of the Company under the Company Exchange Debentures. "Permitted Holders" means Helen Hudson Lovaas, any member of the senior management of the Company or Holding on the Issue Date and Freeman Spogli & Co. Incorporated or any successor entity thereof controlled by the principals of Freeman Spogli & Co. Incorporated or any entity controlled by, or under common control with, Freeman Spogli & Co. Incorporated. "Permitted Investment" means any Investment by the Company or a Restricted Subsidiary in (a) any Restricted Subsidiary or any Person that will, upon the making of such Investment, become a Restricted Subsidiary; provided -------- that the primary business of such Restricted Subsidiary is a Related Business; (b) any Person if as a result of such Investment such Person is merged or consolidated with or into, or transfers or conveys all or substantially all its Property to, the Company or a Restricted Subsidiary; provided that such Person's - -------- primary business is a Related Business; (c) Temporary Cash Investments; (d) receivables owing to the Company or a Restricted Subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms - -------- ------- may include such concessionary trade terms as the Company or such Restricted Subsidiary deems reasonable under the circumstances; (e) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (f) (i) loans and advances to employees made in the ordinary course of business consistent with past practices of the Company or such Restricted Subsidiary, as the case may be; provided that such loans and -------- advances do not exceed $1.0 million at any one time outstanding and (ii) loans and advances to, or the receipt of Employee Notes from, employees of Holding, the Company or any of their Subsidiaries made or received in connection with the substantially concurrent purchase of common stock of the Company or Holding by such employees; provided that the aggregate principal amount of such loans, - -------- ---- advances and notes payable shall not exceed $1.0 million at any one time outstanding; (g) stock, obligations or other securities received in settlement of debts created in the ordinary course of business and owing to the Company or a Restricted Subsidiary or in satisfaction of judgments; (h) any Person to the extent such Investment represents the non-cash portion of the consideration received in connection with a disposition of assets; and (i) Investments in Persons engaged in a Related Business not to exceed $10.0 million at any one time outstanding (it being agreed that an Investment shall cease to be outstanding to the extent of dividends, repayments of loans or advances or other transfers of Property received by the Company or any Restricted Subsidiary from such Persons, provided that such amounts do not increase the amount of Restricted Payments which the Company and the Restricted Subsidiaries may make pursuant to clause (c)(iv)(A) of paragraph (l)(iii)). "Permitted Refinancing Debt" means any Debt that Refinances any other Debt, including any successive Refinancings, so long as (a) such Debt is in an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) not in excess of the sum of (i) the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding of the Debt being Refinanced and (ii) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, related to such Refinancing, (b) the Average Life of such Debt is equal to or greater than the Average Life of the Debt being Refinanced and (c) the Stated Maturity of such Debt is no earlier than the Stated Maturity of the Debt being Refinanced; provided, however, that Permitted Refinancing Debt shall not include (x) Debt of a Subsidiary that Refinances Debt of the Company or (y) Debt of the Company or a Restricted Subsidiary that Refinances Debt of an Unrestricted Subsidiary. "Person" means any individual, corporation, company (including any limited liability company), partnership, joint venture, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock" means any Capital Stock of a Person, however designated, which entitles the holder thereof to a preference with respect to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of any other class of Capital Stock issued by such Person. "pro forma" means, with respect to any calculation made or required to be made pursuant to the terms hereof, a calculation performed in accordance with Article 11 of Regulation S-X promulgated under the Securities Act, as interpreted in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, or otherwise a calculation made in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, as the case may be. "Property" means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including Capital Stock in, and other securities of, any other Person. "Public Equity Offering" means an underwritten public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act. "Purchase Money Debt" means Debt (a) consisting of the deferred purchase price of property, conditional sale obligations, obligations under any title retention agreement, other purchase money obligations and obligations in respect of industrial revenue bonds, in each case where the maturity of such Debt does not exceed the anticipated useful life of the asset being financed, and (b) Incurred to finance the acquisition or construction by the Company or a Restricted Subsidiary of such asset, including remodeling thereof and additions and improvements thereto; provided, however, that such Debt is Incurred within 180 days after such acquisition of such asset by the Company or a Restricted Subsidiary or completion of such construction, remodeling, addition or improvement, as the case may be. "Redeemable Stock" means, with respect to any Person, any Capital Stock that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable, in either case at the option of the holder thereof) or otherwise (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b) is or may become redeemable or repurchaseable at the option of the holder thereof, in whole or in part, or (c) is convertible or exchangeable, in either case at the option of the holder thereof, for Debt or Disqualified Stock. "Refinance" means, in respect of any Debt, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Debt, in exchange or replacement for, such Debt. "Refinanced" and "Refinancing" shall have correlative meanings. "Registered Exchange Offer" means the proposed offer to the Holders to issue and deliver to such Holders, upon redemption of the Initial Company Preferred Stock a like liquidation preference of Series B Stock. "Registration Agreement" means the Registration Agreement, dated April 7, 1998, among the Company, Holding and Salomon Brothers Inc and BT Alex. Brown Incorporated. "Regulation S Company Preferred Stock" means all Initial Company Preferred Stock offered and sold outside the United States in reliance on Regulation S under the Securities Act. "Related Business" means any business that is related, ancillary or complementary to the businesses of the Company and the Restricted Subsidiaries on the Issue Date. "Restricted Payment" means (a) any dividend or distribution (whether made in cash, securities or other Property) declared or paid on or with respect to any shares of Parity Stock or Junior Stock of the Company or any Capital Stock of any Restricted Subsidiary (including any payment in connection with any merger or consolidation with or into the Company or any Restricted Subsidiary), except for any dividend or distribution which is made solely to the Company or a Restricted Subsidiary (and, if such Restricted Subsidiary is not a Wholly Owned Subsidiary, to the other shareholders of such Restricted Subsidiary on a pro rata basis or on a basis that results in the receipt by the Company or a Restricted Subsidiary of dividends or distributions of greater value than it would receive on a pro rata basis) or any dividend or distribution payable solely in shares of Junior Stock (other than Disqualified Stock) of the Company; (b) the purchase, repurchase, redemption, acquisition or retirement for value of any Parity Stock or Junior Stock of the Company or any Affiliate of the Company (other than from the Company or any Capital Stock of any Restricted Subsidiary) or any securities exchangeable for or convertible into any such Parity Stock, Junior Stock or Capital Stock, including the exercise of any option to exchange any Parity Stock, Junior Stock or Capital Stock (other than for or into Capital Stock of the Company that is not Disqualified Stock); or (c) any Investment (other than Permitted Investments) in any Person. "Restricted Subsidiary" means (a) any Subsidiary of the Company unless such Subsidiary shall have been designated an Unrestricted Subsidiary as permitted or required pursuant to paragraph (l)(vii) and (b) an Unrestricted Subsidiary which is redesignated as a Restricted Subsidiary as permitted pursuant to paragraph (l)(vii). "Rule 144A Company Preferred Stock" means the Initial Company Preferred Stock issued in reliance on Rule 144A under the Securities Act. "S&P" means Standard & Poor's Ratings Service or any successor to the rating agency business thereof. "Sale and Leaseback Transaction" means any arrangement relating to Property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such Property to another Person and the Company or a Restricted Subsidiary leases it from such Person. "Securities Act" means the Securities Act of 1933. "Shelf Registration Statement" means a "shelf" registration statement of the Company pursuant to the provisions of the Registration Agreement which covers the Initial Company Preferred Stock and the Series B Stock on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the SEC, all amendments and supplements to such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless such contingency has occurred). "Subsidiary" means, in respect of any Person, any corporation, company, association, partnership, joint venture or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled directly or indirectly, by (a) such Person, (b) such Person and one or more Subsidiaries of such Person or (c) one or more Subsidiaries of such Person. "Subsidiary Guarantor" means each Subsidiary of the Company that becomes a Subsidiary Guarantor pursuant to the terms of the Notes. "Subsidiary Guaranty" means a Guarantee of the Notes on the terms set forth in the Indenture by a Subsidiary Guarantor of the Company's obligations with respect to the Notes. "Temporary Cash Investments" means any of the following: (a) Investments in U.S. Government Obligations; (b) Investments in time deposit accounts, certificates of deposit and money market deposits maturing within 90 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America or any state thereof having capital, surplus and undivided profits aggregating in excess of $500 million and whose long-term debt is rate "A-3" or "A-" or higher according to Moody's or S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)); (c) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (a) entered into with a bank meeting the qualifications described in clause (b) above; (d) Investments in commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's or "A-" (or higher) according to S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)); (e) direct obligations (or certificates representing an ownership interest in such obligations) of any state of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of such state is pledged and which are not callable or redeemable at the issuer's option, provided that (i) the long-term debt of such state is rated "A- 3" or "A-1" or higher according to Moody's or S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)) and (ii) such obligations mature within 180 days of the date of acquisition thereof; and (f) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (a) through (e) above. "Unrestricted Subsidiary" means (a) any Subsidiary of the Company in existence on the Issue Date that is not a Restricted Subsidiary; (b) any Subsidiary of an Unrestricted Subsidiary; and (c) any Subsidiary of the Company that is designated after the Issue Date as an Unrestricted Subsidiary as permitted or required pursuant to paragraph (l)(vii) and not thereafter redesignated as a Restricted Subsidiary as permitted pursuant thereto. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "Voting Stock" of a corporation means all classes of Capital Stock of such corporation then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means, at any time, a Restricted Subsidiary all the Voting Stock of which (except directors' qualifying shares) is at such time owned, directly or indirectly, by the Company and its other Wholly Owned Subsidiaries. 5. The foregoing Certificate of Determination has been duly approved by the required vote of holders of the Company's Senior PIK Preferred Stock (pursuant to the voting rights of such stock set forth in the Amended and Restated Certificate of Determination for that series). The Company has outstanding 300,000 shares of Senior PIK Preferred Stock. The vote required to approve this Certificate of Determination was more than two-thirds of the outstanding Senior PIK Preferred Stock, and the number of shares voting in favor of this Certificate of Determination equaled or exceeded the vote required. The undersigned each further declares under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of his own knowledge and that this certificate has been executed on April 8, 1998 in Temecula, California. /s/ Richard W. Johansen - ------------------------------ Richard W. Johansen, President /s/ Jay R. Ogram - ------------------------------ Jay R. Ogram, Chief Financial Officer CERTIFICATE OF AMENDMENT OF THE AMENDED AND RESTATED CERTIFICATE OF DETERMINATION OF HUDSON RESPIRATORY CARE INC. Charles A. French and Patrick Yount certify that: 1. They are the duly elected and acting President and Secretary, respectively, of Hudson Respiratory Care Inc., a California corporation (the "Corporation"). 2. The first sentence of section (a) of the Amended and Restated Certificate of Determination of the Corporation (the "Certificate of Determination") is hereby deleted and replaced in its entirety with the following: "The designation of such series of Preferred Stock is the 11 1/2 % Senior PIK Preferred Stock due 2010, $.01 par value, (the "Senior PIK Preferred Stock"), and the number of shares of such Senior PIK Preferred Stock is 800,000." 3. The last two sentences of section (d)(i) of the Certificate of Determination of the Corporation are hereby deleted and replaced in their entirety with the following: "Any dividend on the Senior PIK Preferred Stock payable pursuant to this paragraph (d)(i) on or prior to April 15, 2004 shall be, at the option of the Company, payable (1) in cash or (2) through the issuance of a number of additional shares (including fractional shares) of Senior PIK Preferred Stock (the "Additional Shares") equal to the dividend amount divided by the Liquidation Preference of such Additional Shares. With respect to dividends payable after April 15, 2004, all dividends shall be payable solely in cash." 4. Section (g)(ii)(A)(1) of the Certificate of Determination of the Corporation is hereby deleted and replaced in its entirety with the following: "dividends on the Senior PIK Preferred Stock are in arrears and unpaid and, in the case of dividends payable after April 15, 2004, are not paid in cash for six or more Dividend Periods (whether or not consecutive) (a "Dividend Default");" 5. The above amendment of the Certificate of Determination has been approved by the Board of Directors of the Corporation. 6. The foregoing amendment of the Certificate of Determination has been duly approved by the required vote of the shareholders of each class of stock of the Corporation in accordance with Section 903 of the California Corporations Code. The total number of outstanding shares of each class entitled to vote with respect to the amendment was 10,654,293 Common shares, 526,028 Senior PIK Preferred shares and 3,000 Junior Preferred shares. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the common shares, more than 50% of the Senior PIK Preferred Shares and more than two-thirds of the Junior Preferred Shares. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Executed at Los Angeles, California on May 20, 2003. /s/ Charles A. French ---------------------------------------- Charles A. French, President /s/ Patrick Young ---------------------------------------- Patrick Yount, Secretary Certificate of Amendment of the Amended and Restated Certificate of Determination of Hudson Respiratory Care Inc. for its 11 1/2% Senior PIK Preferred Stock due 2010 Charles A. French and Patrick Yount certify that: 1. They are the duly elected and acting President and Secretary, respectively, of Hudson Respiratory Care Inc., a California corporation (the "Corporation"). 2. The Corporation filed an Amended and Restated Certificate of Determination for its 11 1/2% Senior PIK Preferred Stock due 2010 (the "Certificate of Determination") with the California Secretary of State on April 8, 1998 (as amended on May 27, 2003). 3. The last two sentences of section (d)(i) of the Certificate of Determination of the Corporation are hereby deleted and replaced in their entirety with the following: "Any dividend on the Senior PIK Preferred Stock payable pursuant to this paragraph (d)(i) on or prior to April 15, 2005 shall be, at the option of the Company, payable (1) in cash or (2) through the issuance of a number of additional shares (including fractional shares) of Senior PIK Preferred Stock (the "Additional Shares") equal to the dividend amount divided by the Liquidation Preference of such Additional Shares. With respect to dividends payable after April 15, 2005, all dividends shall be payable solely in cash." 4 Section (g)(ii)(A)(1) of the Certificate of Determination of the Corporation is hereby deleted and replaced in its entirety with the following: "dividends on the Senior PIK Preferred Stock are in arrears and unpaid and, in the case of dividends payable after April 15, 2005, are not paid in cash for six or more Dividend Periods (whether or not consecutive) (a "Dividend Default");" 5 The above amendment of the Certificate of Determination has been approved by the Board of Directors of the Corporation. 6 The foregoing amendment of the Certificate of Determination has been duly approved by the required vote of the shareholders of each class of stock of the Corporation in accordance with Section 903 of the California Corporations Code. The total number of outstanding shares of each class entitled to vote with respect to the amendment was 10,654,293 shares of common stock, 526,028 shares of 11 1/2% Senior PIK Preferred Stock due 2010 and 3,000 shares of 12% Junior Convertible Preferred Stock. No shares of the Corporation's 11 1/2% Senior Redeemable PIK Preferred Stock have been issued. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the common shares, more than 50% of the Senior PIK Preferred Shares and more than two-thirds of the Junior Preferred Shares. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Executed at Los Angeles, California on October 2, 2003. /s/ Charles A. French ---------------------------------------- Charles A. French, President /s/ Patrick Yount ---------------------------------------- Patrick Yount, Secretary CERTIFICATE OF DETERMINATION OF PREFERENCES OF 12% JUNIOR CONVERTIBLE CUMULATIVE PREFERRED STOCK OF HUDSON RESPIRATORY CARE INC. a California corporation The undersigned certify that: A. They are the President and Secretary, respectively , of Hudson Respiratory Care Inc., a California corporation (the "Company"). B. The authorized number of shares of Preferred Stock is 2,000,000 of which 397,694 shares have been issued. The authorized number of shares of 12% Junior Convertible Cumulative Preferred Stock is 10,000 shares, none of which has been issued. C. Pursuant to the authority given by the Company's Amended and Restated Articles of Incorporation, the Board of Directors of the Corporation (the "Board") duly has approved and adopted the following recitals and resolutions: WHEREAS, the Articles of Incorporation of the Company authorize the Board of Directors to determine the designations and powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference, of any series of Preferred Stock, and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series. NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby establish a series of Preferred Stock as follows: (a) The designation of such series of Preferred Stock is the 12% Junior Convertible Cumulative Preferred Stock (the "Junior Preferred Stock"), and the number of shares of such Junior Preferred Stock is 10,000; (b) The designations and powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidations preference granted to and imposed upon Junior Preferred Stock and the holders thereof (the "Holders") shall be as set forth below: (c) Ranking. The Junior Preferred Stock will, with respect to dividend rights and rights on liquidations, winding-up and dissolutions, rank (i) senior to common stock of the Company (the "Common Stock") and to each other series of Preferred Stock established hereafter by the Board of Directors the terms of which do not expressly provide that it ranks senior to, or on parity with, the Junior Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution of the Company, (ii) junior to the 111/2% Senior PIK Preferred Stock due 2010 (the "Senior PIK Preferred Stock") as to dividend rights and rights on liquidation, winding-up and dissolution of the Company, and (iii) on a parity with each other series of Preferred Stock established hereafter by the Board of Directors, the terms of which expressly provide that such class or series will rank on a parity with the Junior Preferred as to dividend rights and right on liquidation, winding-up and dissolutions (collectively referred to as "Parity Stock"). (d) Dividends. (i) The holders of shares of Junior Preferred Stock then outstanding shall be entitled to receive, prior to any payment or declaration of dividends in respect of the outstanding Common Stock or any other capital stock of the Company (other than the Senior Preferred Stock or Parity Stock), when and if declared by the Board, out of funds legally available for the payment of dividends, cumulative dividends at the rate of (a) $120 per share plus (b) an amount determined by applying a 12% annual rate compounded semi-annually to any accrued but unpaid dividend amount from the last day of the period when such dividend accrues to the actual date of payment of such dividend. Such dividends on the outstanding shares of Junior Preferred Stock shall be payable on each April 15 and October 15 (each such date being a "Dividend Payment Date"). The Board may fix a record date for the determination of holders of shares of Junior Preferred Stock entitled to receive payment of a dividend declared thereon, which record date shall not be more than 60 days prior to the date fixed for the payment thereof. Each of such semi-annual dividends (whether payable in cash or in stock) shall be fully cumulative and shall accrue from day to day (whether or not declared) from the first day of each period in which such dividend may be payable as herein provided, except that with respect to the first semi-annual dividend, such dividend shall accrue from the date of issuance of the Junior Preferred Stock. Dividends, when, as permitted by the debt agreements of the Company or any of its Subsidiaries, or, at the Company's option, by issuing shares, of Junior Preferred Stock shall constitute full payment of the Dividend. (ii) All dividends paid with respect to shares of the Junior Preferred Stock pursuant to this paragraph (d) shall be paid pro rata to the Holders entitled thereto. (iii) No full dividends may be declared or paid or funds set apart for the payment of dividends by the Company on the Junior Preferred Stock for any period unless full cumulative dividends with respect to each Dividend Payment Date ending on or before such period shall have been or contemporaneously are declared and paid in full or declared and, if payable in cash, a sufficient sum in cash set apart for such payment on the Senior PIK Preferred Stock. If full dividends are not so paid, the Parity Stock will share dividends pro rata with the Junior Preferred Stock. (iv) No dividend whatsoever may be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Junior Preferred Stock with respect to any Dividend Period unless all dividends for all preceding Dividend Periods have been declared and paid or declared and, if payable in cash, a sufficient sum in cash set apart for the payment of such dividend, upon all outstanding shares of Junior Preferred Stock. (v) No full dividends may be declared or paid or funds set apart for the payment of dividends by the Company on any Parity Stock for any period unless full cumulative dividends in respect of each Dividend Period ending on or before such period shall have been or contemporaneously are declared and paid in full or declared and, if payable in cash, a sufficient sum in cash set apart for such payment on the Junior Preferred Stock. If full dividends are not so paid, the Junior Preferred Stock will share dividends pro rata with the Parity Stock. (vi) The Company will not (A) declare, pay or set apart funds for the payment of any dividend or other distribution with respect to any Junior Stock or (B) repurchase, redeem or otherwise retire any Junior Stock or Parity Stock, nor may funds be set apart for payment with respect thereto, unless all accrued and unpaid dividends with respect to the Junior Preferred Stock at the time such dividends are payable have been paid or funds have been set apart for payment of such dividends, if payable in cash. As used herein, the term "dividend" does not include dividends payable solely in shares of Junior Stock on Junior Stock. (vii) Dividends on account of arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record on such date, not more than 45 days prior to the payment thereof, as may be fixed by the Board of Directors of the Company. (viii) Dividends payable on the Junior Preferred Stock for any period other than a Dividend Period shall be computed on the basis of a 360-day year comprised of twelve 30-day months and the actual number of days elapsed in the period for which payable and will be deemed to accrue on a daily basis. Dividends payable on the Junior Preferred Stock for a full Dividend Period will be computed by dividing the per annum dividend rate by two. (e) Liquidation Preference. Upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, each Holder of Junior Preferred Stock will be entitled to be paid, out of the assets of the Company available for distribution to its shareholders, an amount (the "Liquidation Preference") equal to the sum of (i) $1,000 per share of Junior Preferred Stock held by such Holder plus (ii) an amount in cash equal to all accumulated and unpaid dividends (whether or not declared, and including any accrual amounts thereon as provided in subsection (d)(i) above) thereon to the date fixed for liquidation, dissolution or winding-up before any distribution is made on any Junior Stock, including, without limitation, common stock of the Company. All assets or surplus funds of the Company available for distribution to its shareholders, whether such assets are capital, surplus or earnings, shall be distributed in the following order of priority: (i) First, ratably among the holders of the Senior PIK Preferred Stock (in proportion to the full liquidation preference and accumulated and unpaid dividends that would be payable on such shares of Senior PIK Preferred Stock, if amounts payable thereon had been paid in full); (ii) Second, ratably among the holders of the Junior Preferred Stock and the Parity Stock (in proportion to the full liquidation preference and accumulated and unpaid dividends that would be payable on such shares of Junior Preferred Stock and the Parity Stock, respectively, if all amounts payable thereon had been paid in full) in any distribution of assets of the Company to which each is entitled. (iii) Third, ratably among the holders of the Junior Stock. After payment of the full amount of the Liquidation Preference of the outstanding shares of Junior Preferred Stock (plus all accumulated and unpaid dividends), the holders of shares of Junior Preferred Stock will not be entitled to any further participation in any distribution of assets of the Company. For the purposes of this paragraph (e), neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more other entities shall be deemed to be a liquidation, dissolution or winding-up of the Company. (f) Optional Redemption. (i) Each share of the Junior Preferred Stock may be redeemed at any time or from time to time, in whole or in part, at the option of the Company at the redemption price of the 100% of the Liquidation Preference of such share(the "Redemption Price"). (ii) In the event of a redemption of only a portion of the then outstanding shares of Junior Preferred Stock, the Company shall effect such redemption on a pro rata basis, except that the Company may redeem all of the shares held by Holders of fewer than 100 shares (or all of the shares held by Holders who would hold lower than 100 shares as a result of such redemption), as may be determined by the Company. (iii) Procedure for Optional Redemption. (A) On and after the Optional Redemption Date (the "Redemption Date"), unless the Company defaults in the payment of the applicable redemption price, dividends will cease to accumulate on shares of Junior Preferred Stock called for redemption and all rights of Holders of such shares will terminate except for the right to receive the Optional Redemption Price, without interest; provided, however, that if a notice of redemption shall have been given as provided in subparagraph (iii)(B) and the funds necessary for redemption (including an amount in respect of all dividends that will accrue to the Redemption Date) shall have been segregated and irrevocably set apart by the Company, in trust for the benefit of the Holders of the shares called for redemption, then dividends shall cease to accumulate on the Redemption Date on the shares to be redeemed and, at the close of business on the day on which such funds are segregated and set apart, the Holders of the shares to be redeemed shall, with respect to the shares to be redeemed, cease to be Stockholders of the Company and shall be entitled only to receive the Optional Redemption Price, for such shares without interest from the Redemption Date. (B) With respect to a redemption, the Company will send a written notice of redemption by first class mail to each holder of record of shares of Junior Preferred Stock, not fewer than 30 days nor more than 60 days prior to the Redemption Date at its registered address (the "Redemption Notice") and notice, if mailed in the manner herein provided, shall conclusively be presumed to have been given, whether or not the Holder receives such notice; provided, however, that no failure to give such notice nor any deficiency therein shall affect the validity of the procedure for the redemption of any shares of Junior Preferred Stock to be redeemed except as to the Holder or Holders to whom the Company has failed to give said notice or except as to the Holder or Holders whose notice was defective. The Redemption Notice shall state: (1) the Optional Redemption Price; (2) whether all or less than all the outstanding shares of Junior Preferred Stock are to be redeemed and the total number of shares of Junior Preferred Stock being redeemed; (3) the Redemption Date; (4) that the Holder is to surrender to the Company, in the manner, at the place or places and at the price designated, his certificate or certificates representing the shares of Junior Preferred Stock to be redeemed; and (5) that dividends on the shares of the Junior Preferred Stock to be redeemed shall cease to accumulate on such Redemption Date unless the Company defaults in the payment of the Optional Redemption Price. (C) Each Holder of Junior Preferred Stock shall surrender the certificate or certificates representing such shares of Junior Preferred Stock to the Company, duly endorsed (or otherwise in proper form for transfer, as determined by the Company), in the manner and at the place designated in the Redemption Notice, and on the Redemption Date the full Optional Redemption Price, for such shares shall be payable in cash to the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event that less than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (g) Voting Rights. (i) The Holders of Junior Preferred Stock, in addition to any other voting rights required under California law, shall be entitled, subject to paragraph (g)(ii)(A), to cast a one-half vote per share on matters required or permitted to be voted upon by the shareholders of the Company, and the Junior Preferred Stock shall vote together with the Company's common stock ("Common Stock") as a single class on all such matters. Further, the Holders of the Junior Preferred Stock, voting as a separate class, shall have the voting rights set forth in paragraph (g)(ii). (ii) (A) So long as any shares of Junior Preferred Stock are outstanding, the Company will not authorize, create or increase the authorized amount of any class or series of Capital Stock or Preferred Stock, the terms of which expressly provide that such class or series will rank senior to the Junior Preferred Stock as to dividend rights and rights upon liquidation, winding-up and dissolution of the Company (collectively referred to as "Senior Stock") or Parity Stock without the affirmative vote or consent of Holders of at least two-thirds of the shares of Junior Preferred Stock then outstanding, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting. (B) So long as any shares of the Junior Preferred Stock are outstanding, the Company will not amend this Certificate of Determination so as to affect adversely the specified rights, preferences, privileges or voting rights of Holders of shares of Junior Preferred Stock or to authorize the issuance of any additional shares of Junior Preferred Stock (except to authorize the issuance of additional shares of Junior Preferred Stock to be paid as dividends on the Junior Preferred Stock, for which no consent shall be necessary) without the affirmative vote or consent of Holders of at least a majority of the issued and then outstanding shares of Junior Preferred Stock, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting; provided that this paragraph shall not prohibit the merger of the Company and a Wholly Owned Subsidiary of the Company or the Company incorporated in another state of the United States solely for the purpose of reincorporating the Company to the extent that the surviving corporation issues to the Company shares of a series of Preferred Stock having an aggregate liquidation preference equal to the Liquidation Preference of the Junior Preferred Stock outstanding immediately prior to such merger and terms and provisions substantially similar to those of the Junior Preferred Stock. (C) Except as required under California law or as set forth in paragraph (g)(ii)(A) or (B) above, (x) the creation, authorization or issuance of any shares of any Junior Stock, Parity Stock or Senior Stock, including the designation of a series thereof within the existing class of Junior Preferred Stock, or (y) the increase or decrease in the amount of authorized capital stock of any class, including any Junior Preferred Stock, shall not require the consent of Holders of Junior Preferred Stock and shall not be deemed to affect adversely the rights, preferences, privileges or voting rights of shares of Junior Preferred Stock. (h) Conversion or Exchange. (i) Optional Conversion. Each share of Junior Preferred Stock shall be convertible, without the payment of any additional consideration by the Holder thereof and at the option of the Holder thereof, at any time after the date of issuance of such share, at the office of the Company into such number of fully paid and nonassessable shares of Common Stock as determined by dividing $1,000 (the "Original Purchase Price") by the Conversion Price in effect at the time of conversion. In addition, each Holder of Junior Preferred Stock shall also receive in respect of each share converted all accrued and unpaid dividends on such share payable at the election of the Holder, either (1) in a number of additional shares of Common Stock obtained by dividing the amount of accrued and unpaid dividends on each share of Junior Preferred Stock by the Conversion Price in effect at the time of the conversion or (2) in cash in the amount of such accrued and unpaid dividends on such share of Junior Preferred Stock. The initial Conversion Price at which shares of Common Stock shall be deliverable upon conversion(the "Conversion Price") shall be $10 per share. Such Conversion Price shall be subject to adjustment as provided in section (h)(vi) below. (ii) Automatic Conversion. Each share of Junior Preferred Stock shall automatically be converted into that number of shares of Common Stock as determined by dividing $1,000 (the "Original Purchase Price") by the Conversion Price in effect at the time of conversion. In addition, each Holder of Junior Preferred Stock shall also received for accrued and unpaid dividends on each share, subject to the election of the Holder, either (1) a number of additional shares of Common Stock obtained by dividing the amount of accrued and unpaid dividends on each share of Junior Preferred Stock by the Conversion Price in effect at the time of the conversion or (2) cash in the amount of such accrued and unpaid dividends on such share of Junior Preferred Stock upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of the Company's Common Stock.. (B) Additionally, each share series of Junior Preferred Stock shall be automatically converted into shares of Common Stock at the Conversion Price in effect at the time of conversion upon the optional conversion into Common Stock of a cumulative number of shares of Junior Preferred Stock representing two thirds of the aggregate number of shares of Junior Preferred Stock theretofore issued by the Company. (iii) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Junior Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Company shall pay cash equal to such fraction multiplied by the Conversion Price. (iv) Mechanics of Optional Conversion. Before any holder of Junior Preferred Stock shall be entitled to convert the same into full shares of Common Stock, such Holder shall surrender the certificate or certificates therefor, endorsed or accompanied by written instrument or instruments of transfer, in a form satisfactory to the Company, duly executed by the registered Holder or by such Holder's his or its attorney duly authorized in writing, at the office of the Company, and shall give written notice to the Company at such office that such holder elects to convert the same and shall state therein such Holder's name or the names of the nominees in which such Holder wishers the certificate or certificates for shares of Common Stock to be issued. The Company shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Junior Preferred Stock, or to his or its nominee or nominees, a certificate or certificates for the number of shares of Common stock to which such holder shall be entitled as aforesaid, together with cash in lieu of any fraction of a share. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Junior Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. From and after such date, all rights of the Holder with respect to the Junior Preferred Stock so converted shall terminate, except only the right of such holder, upon surrender of his or its certificate or certificates therefor, to receive certificates for the number of shares of Common Stock issuable upon conversion thereof and cash for fractional shares. (v) Mechanics of Automatic Conversion. All holders of record of shares of Junior Preferred Stock will be given written notice of the date of any automatic conversion referenced in Section (h) (ii). Such notice will be sent by mail, first class, postage prepaid, to each record holder of Junior Preferred Stock at such holder's address appearing on the stock register. Each holder of shares of Junior Preferred Stock shall, promptly after receiving such notice, surrender such holder's certificate or certificates for all such shares to the Company at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock or other securities to which such holder is entitled. Upon the date of any such automatic conversion, all rights with respect to the Junior Preferred Stock will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefor, to receive certificates for the number of shares of Common Stock or other securities into which such Junior Preferred Stock has been converted and cash for fractional shares, plus any dividends thereon declared and unpaid as of the time of such conversion. All certificates evidencing shares of Junior Preferred Stock which are automatically converted in accordance with the provisions hereof shall, from and after the date of such automatic conversion, be deemed to have been retired and canceled and the shares of Junior Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates. As soon as practicable after the date of any such automatic conversion and the surrender of the certificate or certificates for Junior Preferred Stock as aforesaid, the Company shall cause to be issued and delivered to such holder, or to such holder's written order, a certificate or certificates for the number of full shares of Common Stock or other securities issuable on such conversion in accordance with the provisions hereof and cash as provided in Subsection (h) (iii) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. (vi) Certain Adjustments to Conversion Price. (A) Adjustment for Stock Splits, Stock Dividends and Combinations of Common Stock. In the event the outstanding shares of Common Stock shall, after the filing of this Certificate of Designation, be further subdivided (split), or combined (reverse split), by reclassification or otherwise, or in the event of any dividend or other distribution payable on the Common Stock in shares of Common Stock, the Conversion Price in effect immediately prior to such subdivision, combination, dividend or other distribution shall, concurrently with the effectiveness of such subdivision, combination or dividend or other distribution, be proportionately adjusted. (B) Adjustment for Merger or Reorganization, Etc. In case of a reclassification, reorganization or exchange transaction or any consolidation or merger of the Company with another corporation (other than a merger or other reorganization which is deemed to be a liquidation pursuant to Section (d)), each share of Junior Preferred Stock shall thereafter be convertible into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Company deliverable upon conversion of such Junior Preferred Stock would have been entitled upon such reclassification, reorganization, exchange, consolidation, merger or conveyance; and, in any such case, appropriate adjustment (as determined by the Board) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of the Junior Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustments of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Junior Preferred Stock. (C) Adjustments for Other Dividends and Distributions. In the event the Company at any time or from time to time after the filing of this Certificate of Determination makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company other than shares of Common Stock, then and in each such event provision shall be made so that the holders of Junior Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Company which they would have received had their Junior Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section (h) with respect to the rights of the holders of the Junior Preferred Stock. (i) Reissuance of Junior Preferred Stock. Shares of Junior Preferred Stock that have been issued and reacquired in any manner shall not be reissued as shares of Junior Preferred Stock and shall (upon compliance with any applicable provisions of the laws of California) have the status of authorized and unissued shares of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of Preferred Stock; provided, however, that so long as any shares of Junior Preferred Stock are outstanding, any issuance of such shares must be in compliance with the terms hereof. (j) Certificates. (i) Form and Dating. The Junior Preferred Stock shall be in the form approved by the Company in accordance with the applicable provision of the laws of California. The Junior Preferred Stock certificate may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). (ii) Execution. Two Officers shall sign the certificates representing Junior Preferred Stock for the Company by manual or facsimile signature. The Company's seal shall be impressed, affixed, imprinted or reproduced on the Junior Preferred Stock and may be in facsimile form. (iii) Legend. Each certificate evidencing the Junior Preferred Stock shall bear a legend in substantially the following form: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION REGISTERED UNDER SUCH ACT OR PURSUANT TO AN AVAILABLE EXEMPTION THEREFROM UNDER SAID ACT OR THE RULES AND REGULATIONS PROMULGATED THEREUNDER. RESOLVED FURTHER, that the President and Secretary of the Company are hereby authorized and directed to execute, acknowledge, file and record a Certificate of Determination of Preferences in accordance with the foregoing resolutions and provisions of California law. The undersigned each further declares under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of his own knowledge and that this certificate has been executed on August 2, 2001 in Temecula, California. /s/ Richard W. Johansen ---------------------------------------- Richard W. Johansen, President /s/ Patrick Yount ---------------------------------------- Patrick Yount, Secretary EX-10.1 4 dex101.txt LOAN AND SECURITY AGREEMENT (WELLS FARGO AS AGENT) Exhibit 10.1 ================================================================================ LOAN AND SECURITY AGREEMENT by and among HUDSON RESPIRATORY CARE INC. as Borrower, THE LENDERS THAT ARE SIGNATORIES HERETO as the Lenders, and WELLS FARGO FOOTHILL, INC. as the Arranger and Administrative Agent Dated as of October 7, 2003 ================================================================================ TABLE OF CONTENTS 1. DEFINITIONS AND CONSTRUCTION..............................................1 1.1 Definitions........................................................1 1.2 Accounting Terms..................................................36 1.3 Code..............................................................36 1.4 Construction......................................................36 1.5 Schedules and Exhibits............................................37 2. LOAN AND TERMS OF PAYMENT................................................37 2.1 Revolver Advances.................................................37 2.2 [Intentionally Omitted]...........................................39 2.3 Borrowing Procedures and Settlements..............................39 2.4 Payments..........................................................47 2.5 Overadvances......................................................53 2.6 Interest Rates and Letter of Credit Fee: Rates, Payments, and Calculations..................................................54 2.7 Cash Management...................................................55 2.8 Crediting Payments................................................57 2.9 Designated Account................................................57 2.10 Maintenance of Loan Account; Statements of Obligations............57 2.11 Fees..............................................................58 2.12 Letters of Credit.................................................58 2.13 LIBOR Option......................................................62 2.14 Capital Requirements..............................................65 2.15 Designated Senior Debt............................................65 3. CONDITIONS; TERM OF AGREEMENT............................................65 3.1 Conditions Precedent to the Initial Extension of Credit...........65 3.2 Conditions Subsequent to the Initial Extension of Credit..........70 3.3 Conditions Precedent to all Extensions of Credit..................70 3.4 Term..............................................................70 3.5 Effect of Termination.............................................71 3.6 Early Termination by Borrower.....................................71 4. CREATION OF SECURITY INTERESTS...........................................72 4.1 Grant of Security Interest........................................72 4.2 Negotiable Collateral.............................................72 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral.............................................72 4.4 Filing of Financing Statements; Commercial Tort Claims; Delivery of Additional Documentation Required.....................73 4.5 Power of Attorney.................................................74 4.6 Right to Inspect..................................................74 -1- 4.7 Control Agreements................................................74 5. REPRESENTATIONS AND WARRANTIES...........................................75 5.1 No Encumbrances...................................................75 5.2 Eligible Accounts.................................................75 5.3 Eligible Inventory................................................75 5.4 Equipment.........................................................76 5.5 Location of Inventory and Equipment...............................76 5.6 Inventory Records.................................................76 5.7 State of Incorporation; Location of Chief Executive Office; FEIN; Organizational ID Number; Commercial Tort Claims............76 5.8 Due Organization and Qualification; Subsidiaries..................76 5.9 Due Authorization; No Conflict....................................77 5.10 Litigation........................................................79 5.11 No Material Adverse Change........................................79 5.12 Fraudulent Transfer...............................................79 5.13 Employee Benefits.................................................79 5.14 Environmental Condition...........................................79 5.15 Brokerage Fees....................................................80 5.16 Intellectual Property.............................................80 5.17 Leases............................................................80 5.18 Deposit Accounts and Securities Accounts..........................80 5.19 Complete Disclosure...............................................80 5.20 Indebtedness......................................................81 5.21 Subordinated Notes Indenture......................................81 5.22 CFCs..............................................................81 6. AFFIRMATIVE COVENANTS....................................................81 6.1 Accounting System.................................................81 6.2 Collateral Reporting..............................................81 6.3 Financial Statements, Reports, Certificates.......................83 6.4 Guarantor Reports.................................................85 6.5 Returns...........................................................85 6.6 Maintenance of Properties.........................................85 6.7 Taxes.............................................................85 6.8 Insurance.........................................................86 6.9 Location of Inventory and Equipment...............................87 6.10 Compliance with Laws..............................................87 6.11 Leases............................................................87 6.12 Existence.........................................................87 6.13 Environmental.....................................................87 6.14 Disclosure Updates................................................88 6.15 Formation of Subsidiaries.........................................88 -2- 6.16 Amendment of Preferred Stock......................................88 7. NEGATIVE COVENANTS.......................................................89 7.1 Indebtedness......................................................89 7.2 Liens.............................................................90 7.3 Restrictions on Fundamental Changes...............................90 7.4 Disposal of Assets................................................90 7.5 Change Name.......................................................90 7.6 Nature of Business................................................91 7.7 Prepayments and Amendments........................................91 7.8 Change of Control.................................................91 7.9 Consignments......................................................91 7.10 Distributions.....................................................91 7.11 Accounting Methods................................................91 7.12 Investments.......................................................91 7.13 Transactions with Affiliates......................................92 7.14 Suspension........................................................92 7.15 [Intentionally Omitted]...........................................92 7.16 Use of Proceeds...................................................92 7.17 Inventory and Equipment with Bailees..............................92 7.18 Financial Covenants...............................................92 7.19 Payments on Affiliate Notes.......................................93 7.20 Limitation on Indebtedness of Unrestricted Subsidiaries...........93 8. EVENTS OF DEFAULT........................................................94 9. THE LENDER GROUP'S RIGHTS AND REMEDIES...................................96 9.1 Rights and Remedies...............................................96 9.2 Remedies Cumulative...............................................98 10. TAXES AND EXPENSES.......................................................98 11. WAIVERS; INDEMNIFICATION.................................................99 11.1 Demand; Protest; etc..............................................99 11.2 The Lender Group's Liability for Borrower Collateral..............99 11.3 Indemnification...................................................99 12. NOTICES.................................................................100 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER..............................101 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS..............................102 14.1 Assignments and Participations...................................102 14.2 Successors.......................................................105 -3- 15. AMENDMENTS; WAIVERS.....................................................105 15.1 Amendments and Waivers...........................................105 15.2 Replacement of Holdout Lender....................................106 15.3 No Waivers; Cumulative Remedies..................................107 16. AGENT; THE LENDER GROUP.................................................107 16.1 Appointment and Authorization of Agent...........................107 16.2 Delegation of Duties.............................................108 16.3 Liability of Agent...............................................108 16.4 Reliance by Agent................................................108 16.5 Notice of Default or Event of Default............................109 16.6 Credit Decision..................................................109 16.7 Costs and Expenses; Indemnification..............................110 16.8 Agent in Individual Capacity.....................................110 16.9 Successor Agent..................................................111 16.10 Lender in Individual Capacity....................................111 16.11 Withholding Taxes................................................112 16.12 Collateral Matters...............................................114 16.13 Restrictions on Actions by Lenders; Sharing of Payments..........115 16.14 Agency for Perfection............................................115 16.15 Payments by Agent to the Lenders.................................115 16.16 Concerning the Collateral and Related Loan Documents.............116 16.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information............116 16.18 Several Obligations; No Liability................................117 16.19 Legal Representation of Agent....................................117 17. GENERAL PROVISIONS......................................................118 17.1 Effectiveness....................................................118 17.2 Section Headings.................................................118 17.3 Interpretation...................................................118 17.4 Severability of Provisions.......................................118 17.5 Amendments in Writing............................................118 17.6 Counterparts; Telefacsimile Execution............................118 17.7 Revival and Reinstatement of Obligations.........................118 17.8 Confidentiality..................................................119 17.9 Integration......................................................120 -4- EXHIBITS AND SCHEDULES Exhibit A-1 Form of Assignment and Acceptance Exhibit C-1 Form of Compliance Certificate Exhibit L-1 Form of LIBOR Notice Schedule A-1 Agent's Account Schedule C-1 Commitments Schedule D-1 Designated Account Schedule E-1 Eligible Inventory Locations Schedule P-1 Permitted Liens Schedule R-1 Real Property Collateral Schedule 2.7(a) Cash Management Banks Schedule 5.5 Locations of Inventory and Equipment Schedule 5.7(a) States of Organization Schedule 5.7(b) Chief Executive Offices Schedule 5.7(c) FEINs Schedule 5.7(d) Commercial Tort Claims Schedule 5.8(b) Capitalization of Borrower Schedule 5.8(c) Capitalization of Borrower's Subsidiaries Schedule 5.10 Litigation Schedule 5.14 Environmental Matters Schedule 5.16 Intellectual Property Schedule 5.18 Deposit Accounts and Securities Accounts Schedule 5.20 Permitted Indebtedness -5- LOAN AND SECURITY AGREEMENT --------------------------- THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of October 7, 2003, by and among, on the one hand, the lenders identified on the signature pages hereof (such lenders, together with their respective successors and permitted assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders") and WELLS FARGO FOOTHILL, INC., a California corporation, as the arranger and administrative agent for the Lenders ("Agent"), and, on the other hand, HUDSON RESPIRATORY CARE INC., a California corporation ("Borrower"). The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Account" means an account (as that term is defined in the Code), and any and all supporting obligations in respect thereof. "Account Debtor" means any Person who is obligated under, with respect to, or on account of, an Account, chattel paper, or a General Intangible. "Additional Documents" has the meaning set forth in Section 4.4(c). "Advances" means Revolver A Advances, Revolver B Advances, Revolver C Advances, or Revolver D Advances, as the context requires. "Affiliate" means, as applied to any Person, any other Person who, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" means the possession, directly or indirectly through one or more intermediaries, of the power to direct the management and policies of a Person, whether through the ownership of Stock, by contract, or otherwise; provided, however, that, for purposes of the definition of Eligible Accounts and Section 7.13 hereof: (a) any Person which owns directly or indirectly 10% or more of the Stock having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed an Affiliate of such Person, (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person, and (c) each partnership or joint venture in which a Person is a partner or joint venturer shall be deemed an Affiliate of such Person. -1- "Affiliate Subordination Agreement" means a subordination agreement executed and delivered by each holder of a Subordinated Convertible Note and Agent, the form and substance of which is satisfactory to Agent. "Agent" means WFF, in its capacity as arranger and administrative agent hereunder, and any successor thereto. "Agent Advances" has the meaning set forth in Section 2.3(e)(i). "Agent-Related Persons" means Agent, together with its Affiliates, officers, directors, employees, attorneys, and agents. "Agent's Account" means the Deposit Account of Agent identified on Schedule A-1. "Agent's Liens" means the Liens granted by Borrower or its Subsidiaries to Agent under this Agreement or the other Loan Documents. "Agreement" has the meaning set forth in the preamble to this Agreement. "Applicable Base Rate Revolver A Margin" and "Applicable Base Rate Revolver B Margin", and "Applicable Base Rate Revolver C Margin" mean, as of any date of determination, the following margins based upon the most recent calculation of TFQ EBITDA (determined as set forth in the following paragraph); provided, however, that for the period from the Closing Date until the first day of the month following the date Agent receives Borrower's audited financial statements in respect of Borrower's fiscal year ending December 31, 2003, the Applicable Base Rate Revolver A Margin shall be 0 percentage points, the Applicable Base Rate Revolver B Margin shall be 0.50 percentage points, and the Applicable Base Rate Revolver C Margin shall be 1.0 percentage points:
- ---------------------------------------------------------------------------------------------------------- Level TFQ EBITDA Applicable Base Rate Applicable Base Rate Applicable Base Rate Revolver A Margin Revolver B Margin Revolver C Margin - ---------------------------------------------------------------------------------------------------------- I less than or equal 0.50 percentage points 1.0 percentage points 1.5 percentage points to $20,000,000 - ---------------------------------------------------------------------------------------------------------- II greater than 0 percentage points 0.5 percentage points 1.0 percentage points $20,000,000 but less than or equal to $30,000,000 - ---------------------------------------------------------------------------------------------------------- III greater than -0.5 percentage points 0 percentage points 0.5 percentage points $30,000,000 - ----------------------------------------------------------------------------------------------------------
-2- After the initial adjustment set forth above, the Applicable Base Rate Revolver A Margin, the Applicable Base Rate Revolver B Margin, and the Applicable Base Rate Revolver C Margin shall be based upon the most recent calculation of TFQ EBITDA and shall be redetermined each fiscal quarter of Borrower as of the first day of the month following the date Agent receives the certified calculation of TFQ EBITDA in a Compliance Certificate pursuant to Section 6.3(a) hereof; provided, however, that if Borrower fails to deliver a Compliance Certificate when it is due, the applicable margin shall be set at the margin in the row styled "Level I" as of the first day of the month following the date on which the Compliance Certificate was required to be delivered until the date on which the Compliance Certificate is delivered (on which date (but not retroactively), without constituting a waiver of any Default or Event of Default occasioned by the failure to timely deliver the Compliance Certificate, the applicable margin shall be set at the margin based upon the TFQ EBITDA calculation disclosed by the Compliance Certificate). "Applicable Letter of Credit Fee Percentage" means, as of any date of determination, the following percentage based upon the most recent calculation of TFQ EBITDA (determined as set forth in the following paragraph); provided, however, that for the period from the Closing Date until the first day of the month following the date Agent receives Borrower's audited financial statements in respect of Borrower's fiscal year ending December 31, 2003, the Applicable Letter of Credit Fee Percentage shall be 2.0%: - -------------------------------------------------------------------------------- Applicable Letter of Credit Fee Level TFQ EBITDA Percentage - -------------------------------------------------------------------------------- I less than or equal to 2.5% $20,000,000 - -------------------------------------------------------------------------------- II greater than $20,000,000 but 2.0% less than or equal to $30,000,000 - -------------------------------------------------------------------------------- III greater than $30,000,000 1.5% - -------------------------------------------------------------------------------- After the initial adjustment set forth above, the Applicable Letter of Credit Fee Percentage shall be based upon the most recent calculation of TFQ EBITDA and shall be -3- redetermined each fiscal quarter of Borrower as of the first day of the month following the date Agent receives the certified calculation of TFQ EBITDA in a Compliance Certificate pursuant to Section 6.3(a) hereof; provided, however, that if Borrower fails to deliver a Compliance Certificate when it is due, the applicable percentage shall be set at the percentage in the row styled "Level I" as of the first day of the month following the date on which the Compliance Certificate was required to be delivered until the date on which the Compliance Certificate is delivered (on which date (but not retroactively), without constituting a waiver of any Default or Event of Default occasioned by the failure to timely deliver the Compliance Certificate, the applicable percentage shall be set at the percentage based upon the TFQ EBITDA calculation disclosed by the Compliance Certificate). "Applicable LIBOR Rate Revolver A Margin", "Applicable LIBOR Rate Revolver B Margin", and "Applicable LIBOR Rate Revolver C Margin" mean, as of any date of determination, the following margins based upon the most recent calculation of TFQ EBITDA (determined as set forth in the following paragraph); provided, however, that for the period from the Closing Date until the first day of the month following the date Agent receives Borrower's audited financial statements in respect of Borrower's fiscal year ending December 31, 2003, the Applicable LIBOR Rate Revolver A Margin shall be 2.5 percentage points, the Applicable LIBOR Rate Revolver B Margin shall be 3.0 percentage points, and the Applicable LIBOR Rate Revolver C Margin shall be 3.5 percentage points:
- ------------------------------------------------------------------------------------------------- Applicable LIBOR Rate Applicable LIBOR Rate Applicable LIBOR Rate Level TFQ EBITDA Revolver A Margin Revolver B Margin Revolver C Margin - ------------------------------------------------------------------------------------------------- I less than or equal 3.0 percentage points 3.5 percentage points 4.0 percentage points to $20,000,000 - ------------------------------------------------------------------------------------------------- II greater than 2.5 percentage points 3.0 percentage points 3.5 percentage points $20,000,000 but less than or equal to $30,000,000 - ------------------------------------------------------------------------------------------------- III greater than 2.0 percentage points 2.5 percentage points 3.25 percentage points $30,000,000 - -------------------------------------------------------------------------------------------------
After the initial adjustment set forth above, the Applicable LIBOR Rate Revolver A Margin, the Applicable LIBOR Rate Revolver B Margin, and the Applicable LIBOR Rate Revolver C Margin shall be based upon the most recent calculation of TFQ EBITDA and shall be redetermined each fiscal quarter of Borrower as of the first day of the -4- month following the date Agent receives the certified calculation of TFQ EBITDA in a Compliance Certificate pursuant to Section 6.3(a) hereof; provided, however, that if Borrower fails to deliver a Compliance Certificate when it is due, the applicable margin shall be set at the margin in the row styled "Level I" as of the first day of the month following the date on which the Compliance Certificate was required to be delivered until the date on which the Compliance Certificate is delivered (on which date (but not retroactively), without constituting a waiver of any Default or Event of Default occasioned by the failure to timely deliver the Compliance Certificate, the applicable margin shall be set at the margin based upon the TFQ EBITDA calculation disclosed by the Compliance Certificate). "Applicable Prepayment Premium" means, as of any date of determination, an amount equal to (a) during the period from and after the date of the execution and delivery of this Agreement up to the date that is the first anniversary of the Closing Date, 3.0% times the Revolver A Maximum Amount, (b) during the period from and including the date that is the first anniversary of the Closing Date up to the date that is the second anniversary of the Closing Date, 2.0% times the Revolver A Maximum Amount, and (c) during the period from and including the date that is the second anniversary of the Closing Date up to the date that is the third anniversary of the Closing Date, 1.0% times the Revolver A Maximum Amount. "Applicable Revolver D Margin" means 1.50 percentage points. "Assignee" has the meaning set forth in Section 14.1(a). "Assignment and Acceptance" means an Assignment and Acceptance Agreement substantially in the form of Exhibit A-1. "Authorized Person" means any officer or employee of Borrower. "Availability" means, as of any date of determination, the amount that Borrower is entitled to borrow as Advances hereunder (after giving effect to all then outstanding Obligations and all sublimits and reserves then applicable hereunder). "Bankruptcy Code" means title 11 of the United States Code, as in effect from time to time. "Base LIBOR Rate" means the rate per annum, determined by Agent in accordance with its customary procedures, and utilizing such electronic or other quotation sources as it considers appropriate (rounded upwards, if necessary, to the next 1/100%), to be the rate at which Dollar deposits (for delivery on the first day of the requested Interest Period) are offered to major banks in the London interbank market 2 Business Days prior to the commencement of the requested Interest Period, for a term and in an amount comparable to the Interest Period and the amount of the LIBOR Rate Loan requested (whether as an initial LIBOR Rate Loan or as a continuation of an extant LIBOR Rate Loan or as a -5- conversion of a Base Rate Loan to a LIBOR Rate Loan) by Borrower in accordance with this Agreement, which determination shall be conclusive in the absence of manifest error. "Base Rate" means, the rate of interest announced, from time to time, within Wells Fargo at its principal office in San Francisco as its "prime rate", with the understanding that the "prime rate" is one of Wells Fargo's base rates (not necessarily the lowest of such rates) and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto and is evidenced by the recording thereof after its announcement in such internal publications as Wells Fargo may designate. "Base Rate Loan" means the portion of the Advances that bears interest at a rate determined by reference to the Base Rate. "Benefit Plan" means a "defined benefit plan" (as defined in Section 3(35) of ERISA) for which Borrower or any Subsidiary or ERISA Affiliate of Borrower has been an "employer" (as defined in Section 3(5) of ERISA) within the past six years. "Board of Directors" means the board of directors (or comparable managers) of Borrower or any committee thereof duly authorized to act on behalf of the board of directors (or comparable managers). "Books" means Borrower's and its Subsidiaries' now owned or hereafter acquired books and records (including all of their Records indicating, summarizing, or evidencing their assets (including the Collateral) or liabilities, all of Borrower's or its Subsidiaries' Records relating to their business operations or financial condition, and all of their goods or General Intangibles related to such information). "Borrower" has the meaning set forth in the preamble to this Agreement. "Borrower Collateral" means all of Borrower's now owned or hereafter acquired right, title, and interest in and to each of the following: (a) all of its Accounts, (b) all of its Books, (c) all of its commercial tort claims, (d) all of its Deposit Accounts, (e) all of its Equipment, (f) all of its General Intangibles, (g) all of its Inventory, -6- (h) all of its Investment Property (including all of its securities and Securities Accounts), (i) all of its Negotiable Collateral, (j) money or other assets of Borrower that now or hereafter come into the possession, custody, or control of any member of the Lender Group, and (k) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the foregoing, and any and all Accounts, Books, Deposit Accounts, Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, Real Property, money, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof; provided, however, that Borrower Collateral does not include any Excluded Collateral. "Borrower Preferred Stock" means (a) 300,000 shares of Borrower's 11-1/2% Senior PIK Preferred Stock due 2010 (liquidation preference $100 per share) and such additional shares of Borrower's 11-1/2% Senior PIK Preferred Stock due 2010 as may be issued in lieu of cash dividends thereon and (b) 3,000 shares of Borrower's 12% Junior Convertible Preferred Stock (liquidation preference $1,000 per share) and such additional shares of Borrower's 12% Junior Convertible Preferred Stock as may be issued in lieu of cash dividends thereon. "Borrowing" means a borrowing hereunder consisting of Advances made on the same day by the Lenders (or Agent on behalf thereof), or by Swing Lender in the case of a Swing Loan, or by Agent in the case of an Agent Advance. "Borrowing Base A" means, as of any date of determination, the result of: (a) the lesser of (i) 85% of the amount of Eligible Accounts less the amount, if any, of the Dilution Reserve, and (ii) an amount equal to Borrower's Collections with respect to Accounts for the immediately preceding 45 day period, plus (b) the lowest of (i) $1,000,000 -7- (ii) 75% of the amount of Eligible Foreign Accounts less the amount, if any, of the Dilution Reserve, and (iii) 10% of the amount of credit availability created by clause (a) above, plus (c) the lowest of (i) $7,5000,000, (ii) 65% of the value of Eligible Inventory, (iii) 85% times the then extant Net Liquidation Percentage times the book value of Borrower's Inventory, and (iv) 65% of the amount of credit availability created by clause (a) above, minus (d) the sum of (i) the Real Property Collateral Reserve, (ii) the Rent Reserve, and (iii) the aggregate amount of reserves, if any, established by Agent under Section 2.1(e). "Borrowing Base B" means, as of any date of determination, 80% of the net orderly liquidation value of Borrower's Equipment, based on the most recent appraisal conducted by an appraiser selected by Agent. "Borrowing Base C" means, as of any date of determination, 60% of the fair market value of the Real Property Collateral, based on the most recent appraisal conducted by an appraiser selected by Agent. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks are authorized or required to close in the state of California, except that, if a determination of a Business Day shall relate to a LIBOR Rate Loan, the term "Business Day" also shall exclude any day on which banks are closed for dealings in Dollar deposits in the London interbank market. "Capital Expenditures" means, with respect to any Person for any period, the aggregate of all expenditures by such Person and its Subsidiaries during such period that are capital expenditures as determined in accordance with GAAP, whether such expenditures are paid in cash or financed. "Capital Lease" means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. -8- "Capitalized Lease Obligation" means that portion of the obligations under a Capital Lease that is required to be capitalized in accordance with GAAP. "Cash Equivalents" means (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within 1 year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof maturing within 1 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 Rating Group ("S&P") or Moody's Investors Service, Inc. ("Moody's"), (c) commercial paper maturing no more than 270 days from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's, (d) certificates of deposit or bankers' acceptances maturing within 1 year from the date of acquisition thereof issued by any bank organized under the laws of the United States or any state thereof having at the date of acquisition thereof combined capital and surplus of not less than $250,000,000, (e) demand Deposit Accounts maintained with any bank organized under the laws of the United States or any state thereof so long as the amount maintained with any individual bank is less than or equal to $100,000 and is insured by the Federal Deposit Insurance Corporation, and (f) Investments in money market funds substantially all of whose assets are invested in the types of assets described in clauses (a) through (e) above. "Cash Management Account" has the meaning set forth in Section 2.7(a). "Cash Management Agreements" means those certain cash management agreements, in form and substance satisfactory to Agent, each of which is among Borrower or one of its Subsidiaries, Agent, and one of the Cash Management Banks. "Cash Management Bank" has the meaning set forth in Section 2.7(a). "CFC" means a controlled foreign corporation (as that term is defined in the IRC). "Change of Control" means that (a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act), other than Permitted Holders, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 20%, or more, of the Stock of Borrower having the right to vote for the election of members of the Board of Directors, (b) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act), other than Permitted Holders, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 20%, or more, of the Stock of Holding having the right to vote for the election of members of Holding's board of directors, (c) a majority of the members of the Board of Directors do not constitute Continuing Directors, or (d) Borrower ceases to own, directly or indirectly, and -9- control 100% of the outstanding Stock of HRC and each of the Restricted Subsidiaries extant as of the Closing Date. "Closing Date" means the date of the making of the initial Advance (or other extension of credit) hereunder. "Closing Date Business Plan" means the set of Projections of Borrower for the 3 year period following the Closing Date (on a year by year basis, and for the 1 year period following the Closing Date and the full year of 2004, on a quarter by quarter basis), in form and substance (including as to scope and underlying assumptions) satisfactory to Agent. "Code" means the California Uniform Commercial Code, as in effect from time to time. "Collateral" means all assets and interests in assets and proceeds thereof now owned or hereafter acquired by Borrower or the Restricted Subsidiaries in or upon which a Lien is granted under any of the Loan Documents. "Collateral Access Agreement" means a landlord waiver, bailee letter, or acknowledgement agreement of any lessor, warehouseman, processor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in Borrower's or the Restricted Subsidiaries' Books, Equipment, or Inventory, in each case, in form and substance satisfactory to Agent. "Collections" means all cash, checks, notes, instruments, and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds). "Commercial Tort Claim Assignment" has the meaning set forth in Section 4.4(b). "Commitment" means, with respect to each Lender, its Revolver A Commitment, its Revolver B Commitment, its Revolver C Commitment, its Revolver D Commitment, or its Total Commitment, as the context requires, and, with respect to all Lenders, their Revolver A Commitments, their Revolver B Commitments, their Revolver C Commitments, their Revolver D Commitments, or their Total Commitments, as the context requires, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 or in the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1. "Compliance Certificate" means a certificate substantially in the form of Exhibit C-1 delivered by the chief financial officer of Borrower to Agent. -10- "Continuing Director" means (a) any member of the Board of Directors who was a director (or comparable manager) of Borrower on the Closing Date, and (b) any individual who becomes a member of the Board of Directors after the Closing Date if such individual was appointed or nominated for election to the Board of Directors by a majority of the Continuing Directors, but excluding any such individual originally proposed for election in opposition to the Board of Directors in office at the Closing Date in an actual or threatened election contest relating to the election of the directors (or comparable managers) of Borrower and whose initial assumption of office resulted from such contest or the settlement thereof. "Control Agreement" means a control agreement, in form and substance satisfactory to Agent, executed and delivered by Borrower or one of the Restricted Subsidiaries, Agent, and the applicable securities intermediary (with respect to a Securities Account) or bank (with respect to a Deposit Account). "Daily Balance" means, as of any date of determination and with respect to any Obligation, the amount of such Obligation owed at the end of such day. "Default" means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default. "Defaulting Lender" means any Lender that fails to make any Advance (or other extension of credit) that it is required to make hereunder on the date that it is required to do so hereunder. "Defaulting Lender Rate" means (a) for the first 3 days from and after the date the relevant payment is due, the Base Rate, and (b) thereafter, the interest rate then applicable to Revolver C Advances that are Base Rate Loans (inclusive of the Applicable Base Rate Revolver C Margin applicable thereto). "Deposit Account" means any deposit account (as that term is defined in the Code). "Designated Account" means the Deposit Account of Borrower identified on Schedule D-1. "Designated Account Bank" has the meaning ascribed thereto on Schedule D-1. "Dilution" means, as of any date of determination, a percentage, based upon the experience of the immediately prior 90 consecutive days, that is the result of dividing the Dollar amount of (a) bad debt write-downs, discounts, advertising allowances, credits, or other dilutive items (but excluding rebates) with respect to Borrower's Accounts during such period, by (b) Borrower's billings with respect to Accounts during such period. -11- "Dilution Reserve" means, as of any date of determination, an amount sufficient to reduce the advance rate against Eligible Accounts and Eligible Foreign Accounts by 1 percentage point for each percentage point by which Dilution is in excess of 5%. "Disbursement Letter" means an instructional letter executed and delivered by Borrower to Agent regarding the extensions of credit to be made on the Closing Date, the form and substance of which is satisfactory to Agent. "Dollars" or "$" means United States dollars. "EBITDA" means, with respect to any fiscal period, Borrower's and the Restricted Subsidiaries' consolidated net earnings (or loss), minus extraordinary gains and interest income, plus (a) non-cash extraordinary losses, (b) Interest Expense (including any non-cash interest expense), (c) taxes based on or determined by reference to income, (d) depreciation and amortization, (e) non-recurring charges incurred in Borrower's fiscal year ending December 31, 2003 associated with the financing provided under the Loan Documents and the repayment of Indebtedness under the Existing Credit Agreement, (f) non-recurring charges incurred in Borrower's fiscal year ending December 31, 2003 associated with the operations of Borrower and the Restricted Subsidiaries in an amount not to exceed $2,000,000, (g) other non-cash charges (including noncash compensation charges), in each case for such period and as determined in accordance with GAAP. "Eligible Accounts" means those Accounts created by Borrower in the ordinary course of its business, that arise out of Borrower's sale of goods or rendition of services, that comply with each of the representations and warranties respecting Eligible Accounts made in the Loan Documents, and that are not excluded as ineligible by virtue of one or more of the excluding criteria set forth below; provided, however, that such criteria may be revised from time to time by Agent in Agent's Permitted Discretion to address the results of any audit performed by Agent from time to time after the Closing Date. In determining the amount to be included, Eligible Accounts shall be calculated net of customer deposits and unapplied cash. Eligible Accounts shall not include the following: (a) (i) Accounts that the Account Debtor has failed to pay within 90 days of original invoice date or 60 days after due date; provided that with respect to Accounts with selling terms of 60 days, Accounts that the Account Debtor has failed to pay within 120 days shall be Eligible Accounts up to an aggregate amount of $500,000 at any time outstanding, or (ii) Accounts with selling terms of more than 60 days, (b) Accounts owed by an Account Debtor (or its Affiliates) where 50% or more of all Accounts owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (a) above, -12- (c) Accounts with respect to which the Account Debtor is an Affiliate of Borrower or an employee or agent of Borrower or any Affiliate of Borrower, (d) Accounts arising in a transaction wherein goods are placed on consignment or are sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a bill and hold, or any other terms by reason of which the payment by the Account Debtor may be conditional, (e) Accounts that are not payable in Dollars, (f) Accounts with respect to which the Account Debtor either (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States or any state thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (y) the Account is supported by an irrevocable letter of credit satisfactory to Agent (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Agent and is directly drawable by Agent, or (z) the Account is covered by credit insurance in form, substance, and amount, and by an insurer, satisfactory to Agent, (g) Accounts with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (exclusive, however, of Accounts with respect to which Borrower has complied, to the reasonable satisfaction of Agent, with the Assignment of Claims Act, 31 USC Section 3727), or (ii) any state of the United States, (h) Accounts with respect to which the Account Debtor is a creditor of Borrower, has or has asserted a right of setoff, or has disputed its obligation to pay all or any portion of the Account, to the extent of such claim, right of setoff, or dispute, (i) Accounts with respect to an Account Debtor whose total obligations owing to Borrower exceed 10% (such percentage, as applied to a particular Account Debtor, being subject to reduction by Agent in its Permitted Discretion if the creditworthiness of such Account Debtor deteriorates) of all Eligible Accounts (except Accounts with respect to which the Account Debtor is Cardinal Health Medical Products & Services, McKesson General Medical Corp., or Owens & Minor, Inc. in which case the applicable percentage limitation is 30%, 25%, and 25%, respectively, but not to exceed 65% in the aggregate), to the extent of the obligations owing by such Account Debtor in excess of such percentage; provided, however, that, in each case, the amount of Eligible Accounts that are excluded because they exceed the foregoing percentage shall be determined by Agent based on all of the otherwise Eligible Accounts prior to giving effect to any eliminations based upon the foregoing concentration limit, -13- (j) Accounts with respect to which the Account Debtor is subject to an Insolvency Proceeding, is not Solvent, has gone out of business, or as to which Borrower has received notice of an imminent Insolvency Proceeding or a material impairment of the financial condition of such Account Debtor, (k) Accounts with respect to which the Account Debtor is located in a state or jurisdiction (e.g., New Jersey, Minnesota, and West Virginia) that requires, as a condition to access to the courts of such jurisdiction, that a creditor qualify to transact business, file a business activities report or other report or form, or take one or more other actions, unless Borrower has so qualified, filed such reports or forms, or taken such actions (and, in each case, paid any required fees or other charges), except to the extent that Borrower may qualify subsequently as a foreign entity authorized to transact business in such state or jurisdiction and gain access to such courts, without incurring any cost or penalty viewed by Agent to be significant in amount, and such later qualification cures any access to such courts to enforce payment of such Account, (l) Accounts, the collection of which, Agent, in its Permitted Discretion, believes to be doubtful by reason of the Account Debtor's financial condition, (m) Accounts that are not subject to a valid and perfected first priority Agent's Lien, (n) Accounts with respect to which (i) the goods giving rise to such Account have not been shipped and billed to the Account Debtor, or (ii) the services giving rise to such Account have not been performed and billed to the Account Debtor, or (o) Accounts that represent the right to receive progress payments or other advance billings that are due prior to the completion of performance by Borrower of the subject contract for goods or services. "Eligible Foreign Accounts" means those Accounts of Borrower which do not qualify as Eligible Accounts solely because the Account Debtor with respect to such Accounts maintains its chief executive office outside of the United States or is organized under the laws of a jurisdiction other than the United States or any state thereof (it being understood that any Account that is an Eligible Account due to the effect of subclauses (y) or (z) of clause (f) in the definition of "Eligible Accounts" shall not also be considered as an Eligible Foreign Account under this definition); provided that Eligible Foreign Accounts shall not include the following: (a) Accounts that are not payable in Dollars; (b) Accounts that the Account Debtor has failed to pay within 60 days of original invoice date; or (c) Accounts with respect to an Account Debtor whose total obligations owing to Borrower exceed 10% (such percentage, as applied to a particular Account Debtor, being subject to reduction by Agent in its Permitted Discretion if the creditworthiness of such Account Debtor deteriorates) of all Eligible Accounts and Eligible Foreign Accounts, to the extent of the obligations owing by such Account Debtor in excess of such percentage; provided, -14- however, that, in each case, the amount of Eligible Foreign Accounts that are excluded because they exceed the foregoing percentage shall be determined by Agent based on all of the otherwise Eligible Foreign Accounts prior to giving effect to any eliminations based upon the foregoing concentration limit, "Eligible Inventory" means Inventory consisting of first quality finished goods held for sale in the ordinary course of Borrower's business, that complies with each of the representations and warranties respecting Eligible Inventory made in the Loan Documents, and that is not excluded as ineligible by virtue of the one or more of the excluding criteria set forth below; provided, however, that such criteria may be revised from time to time by Agent in Agent's Permitted Discretion to address the results of any audit or appraisal performed by Agent from time to time after the Closing Date. In determining the amount to be so included, Inventory shall be valued at the lower of cost or market on a basis consistent with Borrower's historical accounting practices. An item of Inventory shall not be included in Eligible Inventory if: (a) Borrower does not have good, valid, and marketable title thereto, (b) it is not located at one of the locations in the continental United States set forth on Schedule E-1 (or in-transit from one such location to another such location), (c) it is located on real property leased by Borrower (other than the Specified Locations so long as a Rent Reserve is in effect) or in a contract warehouse, in each case, unless it is subject to a Collateral Access Agreement executed by the lessor or warehouseman, as the case may be, and unless it is segregated or otherwise separately identifiable from goods of others, if any, stored on the premises, (d) it is not subject to a valid and perfected first priority Agent's Lien, (e) it consists of goods returned or rejected by Borrower's customers, or (f) it consists of goods that are obsolete or slow moving, restrictive or custom items, work-in-process, raw materials, or goods that constitute spare parts, packaging and shipping materials, supplies used or consumed in Borrower's business, bill and hold goods, defective goods, "seconds," or Inventory acquired on consignment. "Eligible Transferee" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $250,000,000, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a political subdivision of -15- any such country and which has total assets in excess of $250,000,000, provided that such bank is acting through a branch or agency located in the United States, (c) a finance company, insurance company, or other financial institution or fund that is engaged in making, purchasing, or otherwise investing in commercial loans in the ordinary course of its business and having (together with its Affiliates) total assets in excess of $250,000,000, (d) any Affiliate (other than individuals) of a Lender, (e) so long as no Event of Default has occurred and is continuing, any other Person approved by Agent and Borrower (which approval of Borrower shall not be unreasonably withheld, delayed, or conditioned), and (f) during the continuation of an Event of Default, any other Person approved by Agent. "Environmental Actions" means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter, or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or releases of Hazardous Materials from (a) any assets, properties, or businesses of Borrower, its Subsidiaries, or any of their predecessors in interest, (b) from adjoining properties or businesses, or (c) from or onto any facilities which received Hazardous Materials generated by Borrower, its Subsidiaries, or any of their predecessors in interest. "Environmental Law" means any applicable federal, state, provincial, foreign or local statute, law, rule, regulation, ordinance, code, binding and enforceable guideline, binding and enforceable written policy, or rule of common law now or hereafter in effect and in each case as amended, or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, to the extent binding on Borrower or its Subsidiaries, relating to the environment, employee health and safety, or Hazardous Materials, including CERCLA; RCRA; the Federal Water Pollution Control Act, 33 USC Section 1251 et seq; the Toxic Substances Control Act, 15 USC Section 2601 et seq; the Clean Air Act, 42 USC Section 7401 et seq.; the Safe Drinking Water Act, 42 USC Section 3803 et seq.; the Oil Pollution Act of 1990, 33 USC Section 2701 et seq.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 USC Section 11001 et seq.; the Hazardous Material Transportation Act, 49 USC Section 1801 et seq.; and the Occupational Safety and Health Act, 29 USC Section651 et seq. (to the extent it regulates occupational exposure to Hazardous Materials); any state and local or foreign counterparts or equivalents, in each case as amended from time to time. "Environmental Liabilities and Costs" means all liabilities, monetary obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts, or consultants, and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand by any Governmental Authority or any third party, and which relate to any Environmental Action. -16- "Environmental Lien" means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs. "Equipment" means equipment (as that term is defined in the Code) and includes machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), computer hardware, tools, parts, and goods (other than consumer goods, farm products, or Inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto. "ERISA Affiliate" means (a) any Person subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower or its Subsidiaries under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower or its Subsidiaries under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which Borrower or any of its Subsidiaries is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any Person subject to ERISA that is a party to an arrangement with Borrower or any of its Subsidiaries and whose employees are aggregated with the employees of Borrower or its Subsidiaries under IRC Section 414(o). "Event of Default" has the meaning set forth in Section 8. "Excess Availability" means, as of any date of determination, the amount equal to Availability minus the aggregate amount, if any, of all trade payables of Borrower and the Restricted Subsidiaries aged in excess of historical levels with respect thereto and all book overdrafts of Borrower and the Restricted Subsidiaries in excess of historical practices with respect thereto, in each case as determined by Agent in its Permitted Discretion. "Exchange Act" means the Securities Exchange Act of 1934, as in effect from time to time. "Excluded Collateral" means (a) 33-1/3% of the issued and outstanding Stock of the Mexican Subsidiaries and the proceeds thereof and (b) any licenses, permits, or agreements solely in the event and to the extent that a grant of a Lien on such license, permit, or agreement would result in a breach or termination of the terms of, or constitute a default under, or termination of any such license, permit, or agreement (other than to the extent that any such term would be rendered ineffective pursuant to Section 9-406, 9-407, or 9-408 of the Uniform Commercial Code (or any successor provision or provisions) of any relevant jurisdiction) and, in any event, immediately upon the ineffectiveness, lapse or termination of any such terms or potential default under such license, permit, or agreement, the Excluded -17- Collateral shall not include, and Borrower shall be deemed to have granted a security interest in, all such licenses, permits, and agreements; provided, however, that Excluded Collateral shall not include (and, accordingly, Borrower Collateral shall include) any and all proceeds of any of such assets; provided, further, that, any license, permit, or agreement qualifying as Excluded Collateral no longer shall constitute Excluded Collateral (and instead shall constitute Borrower Collateral) from and after such time as the licensor or other party to such license, permit, or agreement consents to the grant of a Lien in favor of Agent in such license, permit, or agreement. "Existing Agent" means Deutsche Bank Trust Company Americas, as administrative agent for the lenders under the Existing Credit Agreement. "Existing Credit Agreement" means the Amended and Restated Credit Agreement dated May 14, 2002, among Borrower, the lenders party thereto, and Existing Agent, as amended from time to time. "Extraordinary Receipts" means any Collections received by Borrower or any of its Subsidiaries not in the ordinary course of business (and not consisting of proceeds described in Section 2.4(c)(ii) hereof), including, (a) foreign, United States, state or local tax refunds, (b) pension plan reversions, (c) proceeds of insurance (including proceeds of the key man life insurance policies) to the extent such proceeds exceed the Dollar amount set forth in Section 6.8(b) and Agent elects to apply such proceeds to payment of the Obligations, (d) judgments, proceeds of settlements or other consideration of any kind in connection with any cause of action other than causes of action to collect Accounts, (e) condemnation awards (and payments in lieu thereof), (f) indemnity payments and (g) any purchase price adjustment received in connection with any purchase agreement. "Family Member" means, with respect to any individual, any other individual having a relationship by blood (to the second degree of consanguinity), marriage, or adoption to such individual. "Family Trusts" means, with respect to any individual, trusts or other estate planning vehicles established for the benefit of such individual or Family Members of such individual and in respect of which such individual serves as trustee or in a similar capacity. "Fee Letter" means that certain fee letter, dated as of even date herewith, between Borrower and Agent, in form and substance satisfactory to Agent. "FEIN" means Federal Employer Identification Number. "Funding Date" means the date on which a Borrowing occurs. "Funding Losses" has the meaning set forth in Section 2.13(b)(ii). -18- "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "General Intangibles" means general intangibles (as that term is defined in the Code), including payment intangibles, contract rights, rights to payment, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trade secrets, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, insurance premium rebates, tax refunds, and tax refund claims, and any and all supporting obligations in respect thereof, and any other personal property other than Accounts, Deposit Accounts, goods, Investment Property, and Negotiable Collateral. "Governing Documents" means, with respect to any Person, the certificate or articles of incorporation, by-laws, or other organizational documents of such Person. "Governmental Authority" means any federal, state, local, or other governmental or administrative body, instrumentality, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body. "Guarantor" means each of (a) Holding and (b) IH Holding. "Guarantor Security Agreement" means one or more security agreements executed and delivered by each Guarantor in favor of Agent, in each case, in form and substance satisfactory to Agent. "Guaranty" means that certain general continuing guaranty executed and delivered by each Guarantor in favor of Agent, for the benefit of the Lender Group, in form and substance satisfactory to Agent. "Hazardous Materials" means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. -19- "Hedge Agreement" means any and all agreements or documents now existing or hereafter entered into by Borrower or its Subsidiaries that provide for an interest rate, credit, commodity or equity swap, cap, floor, collar, forward foreign exchange transaction, currency swap, cross currency rate swap, currency option, or any combination of, or option with respect to, these or similar transactions, for the purpose of hedging Borrower's or its Subsidiaries' exposure to fluctuations in interest or exchange rates, loan, credit exchange, security, or currency valuations or commodity prices. "Holding" means River Holding Corp., a Delaware corporation. "Holding Preferred Stock" means (a) 300,000 shares of Holding's 11-1/2% Senior PIK Preferred Stock due 2010 (liquidation preference $100 per share) and such additional shares of Holding's 11-1/2% Senior PIK Preferred Stock due 2010 as may be issued in lieu of cash dividends thereon and (b) 3,000 shares of Holding's 12% Junior Convertible Cumulative Preferred Stock due 2010 (liquidation preference $1,000 per share) and such additional shares of Holding's 12% Junior Convertible Cumulative Preferred Stock due 2010 as may be issued in lieu of cash dividends thereon. "Holding Stock Pledge Agreement" means a stock pledge agreement, in form and substance satisfactory to Agent, executed and delivered by Holding and Agent with respect to the pledge of the Stock of Borrower. "Holdout Lender" has the meaning set forth in Section 15.2(a). "HRC" means HRC Holding Inc., a Delaware corporation. "HRC Notes" means those certain Unsecured Senior Promissory Notes due 2004 issued by HRC to certain Affiliates, shareholders, and officers of Borrower in the aggregate principal amount of $10,100,000 and those certain HRC Holding Inc. Promissory Notes issued by HRC to certain Affiliates of Borrower in the aggregate principal amount of $2,264,241. "IH Holding" means IH Holding LLC, a Delaware limited liability company. "Indebtedness" means, without duplication, (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all Capitalized Lease Obligations, (d) all obligations or liabilities of others secured by a Lien on any asset of a Person or its Subsidiaries, irrespective of whether such obligation or liability is assumed, (e) all obligations to pay the deferred purchase price of assets (other than trade payables incurred in the ordinary course of business and repayable in accordance with customary trade practices), (f) all obligations owing under Hedge Agreements, and (g) any obligation guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, -20- co-made, discounted, or sold with recourse) any obligation of any other Person that constitutes Indebtedness under any of clauses (a) through (f) above. The amount of Indebtedness attributed to a Person under clause (d) shall be equal to the fair market value of the assets of such Person that are subject to the Lien. "Indemnified Liabilities" has the meaning set forth in Section 11.3. "Indemnified Person" has the meaning set forth in Section 11.3. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other state or federal bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "Intercompany Subordination Agreement" means a subordination agreement executed and delivered by Borrower, Holding, HRC, of the Restricted Subsidiaries and Agent, the form and substance of which is satisfactory to Agent. "Intercreditor Agreement" means that certain intercreditor agreement between WFF and Post, the form and substance of which is satisfactory to WFF and Post. "Interest Expense" means, for any period, the aggregate of the interest expense of Borrower and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. "Interest Period" means, with respect to each LIBOR Rate Loan, a period commencing on the date of the making of such LIBOR Rate Loan (or the continuation of a LIBOR Rate Loan or the conversion of a Base Rate Loan to a LIBOR Rate Loan) and ending 1, 2, or 3 months thereafter; provided, however, that (a) if any Interest Period would end on a day that is not a Business Day, such Interest Period shall be extended (subject to clauses (c)-(e) below) to the next succeeding Business Day, (b) interest shall accrue at the applicable rate based upon the LIBOR Rate from and including the first day of each Interest Period to, but excluding, the day on which any Interest Period expires, (c) any Interest Period that would end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day, (d) with respect to an Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period), the Interest Period shall end on the last Business Day of the calendar month that is 1, 2, or 3 months after the date on which the Interest Period began, as applicable, and (e) Borrower may not elect an Interest Period which will end after the Maturity Date. "Inventory" means inventory (as that term is defined in the Code). -21- "Investment" means, with respect to any Person, any investment by such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances, or capital contributions (excluding (a) commission, travel, and similar advances to officers and employees of such Person made in the ordinary course of business, and (b) bona fide Accounts arising in the ordinary course of business consistent with past practice), purchases or other acquisitions of Indebtedness, Stock, or all or substantially all of the assets of such other Person (or of any division or business line of such other Person), and any other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "Investment Property" means investment property (as that term is defined in the Code), and any and all supporting obligations in respect thereof. "IRC" means the Internal Revenue Code of 1986, as in effect from time to time. "Issuing Lender" means WFF or any other Lender that, at the request of Borrower and with the consent of Agent, agrees, in such Lender's sole discretion, to become an Issuing Lender for the purpose of issuing L/Cs or L/C Undertakings pursuant to Section 2.12. "L/C" has the meaning set forth in Section 2.12(a). "L/C Disbursement" means a payment made by the Issuing Lender pursuant to a Letter of Credit. "L/C Undertaking" has the meaning set forth in Section 2.12(a). "Lender" and "Lenders" have the respective meanings set forth in the preamble to this Agreement, and shall include any other Person made a party to this Agreement in accordance with the provisions of Section 14.1. "Lender Group" means, individually and collectively, each of the Lenders (including the Issuing Lender) and Agent. "Lender Group Expenses" means all (a) costs or expenses (including taxes, and insurance premiums) required to be paid by Borrower or its Subsidiaries under any of the Loan Documents that are paid, advanced, or incurred by the Lender Group, (b) fees or charges paid or incurred by Agent in connection with the Lender Group's transactions with Borrower or its Subsidiaries, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic collateral appraisals or business valuations to the extent of the -22- fees and charges (and up to the amount of any limitation) contained in this Agreement), real estate surveys, real estate title policies and endorsements, and environmental audits, (c) costs and expenses incurred by Agent in the disbursement of funds to Borrower or other members of the Lender Group (by wire transfer or otherwise), (d) charges paid or incurred by Agent resulting from the dishonor of checks, (e) reasonable costs and expenses paid or incurred by the Lender Group to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated, (f) audit fees and expenses of Agent related to audit examinations of the Books to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, (g) reasonable costs and expenses of third party claims or any other suit paid or incurred by the Lender Group in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or the Lender Group's relationship with Borrower or any its Subsidiaries, (h) Agent's reasonable costs and expenses (including attorneys fees) incurred in advising, structuring, drafting, reviewing, administering, syndicating, or amending the Loan Documents, (i) Agent's and each Lender's reasonable costs and expenses (including attorneys, accountants, consultants, and other advisors fees and expenses) incurred in terminating, enforcing (including attorneys, accountants, consultants, and other advisors fees and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning Borrower or its Subsidiaries or in exercising rights or remedies under the Loan Documents), or defending the Loan Documents, irrespective of whether suit is brought, or in taking any Remedial Action concerning the Collateral, and (j) any costs, expenses, or other amounts which are chargeable to Agent pursuant to the Intercreditor Agreement. "Lender-Related Person" means, with respect to any Lender, such Lender, together with such Lender's Affiliates, officers, directors, employees, attorneys, and agents. "Letter of Credit" means an L/C or an L/C Undertaking, as the context requires. "Letter of Credit Usage" means, as of any date of determination, the aggregate undrawn amount of all outstanding Letters of Credit. "LIBOR Deadline" has the meaning set forth in Section 2.13(b)(i). "LIBOR Notice" means a written notice in the form of Exhibit L-1. "LIBOR Rate" means, for each Interest Period for each LIBOR Rate Loan, the rate per annum determined by Agent (rounded upwards, if necessary, to the next 1/100%) by dividing (a) the Base LIBOR Rate for such Interest Period, by (b) 100% minus the Reserve Percentage. The LIBOR Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage. -23- "LIBOR Rate Loan" means each portion of an Advance that bears interest at a rate determined by reference to the LIBOR Rate. "Lien" means any interest in an asset securing an obligation owed to, or a claim by, any Person other than the owner of the asset, irrespective of whether (a) such interest is based on the common law, statute, or contract, (b) such interest is recorded or perfected, and (c) such interest is contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances. Without limiting the generality of the foregoing, the term "Lien" includes the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also includes reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Real Property. "Loan Account" has the meaning set forth in Section 2.10. "Loan Documents" means this Agreement, the Affiliate Subordination Agreement, the Cash Management Agreements, the Control Agreements, the Disbursement Letter, the Fee Letter, the Guarantor Security Agreement, the Guaranty, the Holding Stock Pledge Agreement, the Intercompany Subordination Agreement, the Letters of Credit, the Mortgages, the Officers' Certificate, the Patent Security Agreement, the Stock Pledge Agreement, the Trademark Security Agreement, any note or notes executed by Borrower in connection with this Agreement and payable to a member of the Lender Group, and any other agreement entered into, now or in the future, by Borrower and the Lender Group in connection with this Agreement. "Material Adverse Change" means (a) a material adverse change in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrower and its Subsidiaries, taken as a whole, (b) a material impairment of Borrower's and its Subsidiaries ability to perform their obligations under the Loan Documents to which they are parties or of the Lender Group's ability to enforce the Obligations or realize upon the Collateral, or (c) a material impairment of the enforceability or priority of the Agent's Liens with respect to the Collateral as a result of an action or failure to act on the part of Borrower or its Subsidiaries. "Maturity Date" has the meaning set forth in Section 3.4. "Mexican Subsidiaries" means Industrias Hudson, S.A. de C.V. and Hudson Respiratory Care Tecate, S. de R.L. de C.V. "Mortgage Policy" has the meaning set forth in Section 3.1(v). -24- "Mortgages" means, individually and collectively, one or more mortgages, deeds of trust, or deeds to secure debt, executed and delivered by Borrower or its Subsidiaries in favor of Agent, in form and substance satisfactory to Agent, that encumber the Real Property Collateral and the related improvements thereto. "Negotiable Collateral" means letters of credit, letter of credit rights, instruments, promissory notes, drafts, documents, and chattel paper (including electronic chattel paper and tangible chattel paper), and any and all supporting obligations in respect thereof. "Net Cash Proceeds" means, with respect to any sale or disposition by any Person or any Subsidiary thereof of property or assets, the amount of Collections received (directly or indirectly) from time to time (whether as initial consideration or through the payment of deferred consideration) by or on behalf of such Person or such Subsidiary, in connection therewith after deducting therefrom only (i) the amount of any Indebtedness secured by any Permitted Lien on any asset (other than (A) Indebtedness owing to Agent or any Lender under this Agreement or the other Loan Documents and (B) Indebtedness assumed by the purchaser of such asset) which is required to be, and is, repaid in connection with such disposition, (ii) reasonable expenses related thereto incurred by such Person or such Subsidiary in connection therewith, (iii) taxes paid or payable to any taxing authorities by such Person or such Subsidiary in connection therewith, in each case to the extent, but only to the extent, that the amounts so deducted are, at the time of receipt of such cash, actually paid or payable to a Person that is not an Affiliate and are properly attributable to such transaction, and (iv) reasonable reserves as determined in accordance with GAAP in respect of (a) liabilities relating to the property or assets sold or disposed of that are retained by such Person and (b) indemnification liabilities relating to the sale or disposition. "Net Liquidation Percentage" means the percentage of the book value of Borrower's Inventory that is estimated to be recoverable in an orderly liquidation of such Inventory, such percentage to be as determined from time to time by a qualified appraisal company selected by Agent. "Obligations" means all loans, Advances, debts, principal, interest (including any interest that, but for the commencement of an Insolvency Proceeding, would have accrued), contingent reimbursement obligations with respect to outstanding Letters of Credit, premiums, liabilities (including all amounts charged to Borrower's Loan Account pursuant hereto), obligations (including indemnification obligations), fees (including the fees provided for in the Fee Letter), charges, costs, Lender Group Expenses (including any fees or expenses that, but for the commencement of an Insolvency Proceeding, would have accrued), lease payments, guaranties, covenants, and duties of any kind and description owing by Borrower to the Lender Group pursuant to or evidenced by the Loan Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all interest not paid when due -25- and all Lender Group Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. Any reference in this Agreement or in the Loan Documents to the Obligations shall include all extensions, modifications, renewals, or alterations thereof, both prior and subsequent to any Insolvency Proceeding. "Officers' Certificate" means the representations and warranties of officers form submitted by Agent to Borrower, together with Borrower's completed responses to the inquiries set forth therein, the form and substance of such responses to be satisfactory to Agent. "Originating Lender" has the meaning set forth in Section 14.1(e). "Overadvance" has the meaning set forth in Section 2.5. "Participant" has the meaning set forth in Section 14.1(e). "Patent Security Agreement" means a patent security agreement executed and delivered by Borrower and Agent, the form and substance of which is satisfactory to Agent. "Pay-Off Letter" means a letter, in form and substance satisfactory to Agent, from Existing Agent to Agent respecting the amount necessary to repay in full all of the obligations of Borrower and its Subsidiaries owing under the Existing Credit Agreement and obtain a release of all of the Liens existing under the Existing Credit Agreement in and to the assets of Borrower and its Subsidiaries. "Permitted Discretion" means a determination made in the exercise of reasonable (from the perspective of a secured asset-based lender) business judgment. "Permitted Dispositions" means (a) sales or other dispositions of Equipment that is substantially worn, damaged, or obsolete in the ordinary course of business, (b) sales of Inventory to buyers in the ordinary course of business, (c) the use or transfer of money or Cash Equivalents in a manner that is not prohibited by the terms of this Agreement or the other Loan Documents, and (d) the licensing, on a non-exclusive basis, of patents, trademarks, copyrights, and other intellectual property rights in the ordinary course of business. "Permitted Holder" means each of (a) Holding, (b) FS Equity Partners III, L.P., (c) FS Equity Partners IV, LP, and (d) Helen Hudson Lovaas, her Family Members, and her Family Trusts. "Permitted Intercompany Investments" means Investments by Borrower in the Mexican Subsidiaries made in the ordinary course of business in amounts that are consistent with past practices so long as (a) the Mexican Subsidiaries do not conduct any business that is different from that which was conducted as of the Closing Date and (b) neither of the Mexican -26- Subsidiaries has cash on hand at any time for a period of more than 7 days that exceeds $75,000. "Permitted Investments" means (a) Investments in cash and Cash Equivalents, (b) Investments in negotiable instruments for collection, (c) advances made in connection with purchases of goods or services in the ordinary course of business, (d) Investments received in settlement of amounts due to Borrower or any of its Subsidiaries effected in the ordinary course of business or owing to Borrower or any of its Subsidiaries as a result of Insolvency Proceedings involving an Account Debtor or upon the foreclosure or enforcement of any Lien in favor of Borrower or its Subsidiaries, and (e) Permitted Intercompany Investments. "Permitted Liens" means (a) Liens held by Agent, (b) Liens for unpaid taxes that either (i) are not yet delinquent, or (ii) do not constitute an Event of Default hereunder and are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interests of lessors under operating leases, (e) purchase money Liens or the interests of lessors under Capital Leases to the extent that such Liens or interests secure Permitted Purchase Money Indebtedness and so long as such Lien attaches only to the asset purchased or acquired and the proceeds thereof, (f) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of business and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet delinquent, or (ii) are the subject of Permitted Protests, (g) Liens arising from deposits made in compliance with obtaining worker's compensation or other unemployment insurance, (h) Liens or deposits to secure performance of bids, tenders, contracts, or leases incurred in the ordinary course of business and not in connection with the borrowing of money, (i) Liens granted as security for surety, indemnity, or appeal bonds in connection with obtaining such bonds in the ordinary course of business, (j) Liens resulting from any judgment or award that is not an Event of Default hereunder, (k) with respect to any Real Property, easements, rights of way, reservations, zoning, and other restrictions on use, and such other charges and encumbrances as do not, in any case, materially interfere with or impair the use or operation thereof, and (l) Liens granted to Post to secure Indebtedness under the Post Loan Documents.. "Permitted Protest" means the right of Borrower or any of the Restricted Subsidiaries to protest any Lien (other than any Lien that secures the Obligations), taxes (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the Books of Borrower or such Restricted Subsidiary in such amount as is required under GAAP, (b) any such protest is instituted promptly and prosecuted diligently by Borrower or such Restricted Subsidiary, as applicable, in good faith, and (c) Agent is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Agent's Liens. -27- "Permitted Purchase Money Indebtedness" means, as of any date of determination, Purchase Money Indebtedness incurred after the Closing Date in an aggregate principal amount outstanding at any one time not in excess of $2,000,000. "Person" means natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Post" means MW Post Advisory Group, LLC. "Post Loan Agreement" means that certain Loan and Security Agreement, dated as of the date hereof, among Borrower, the lenders party thereto, and Post, as agent for such lenders, providing for such lenders to make revolving loans in an aggregate amount of $30,000,000 to Borrower on the Closing Date. "Post Loan Documents" means the Post Loan Agreement and the other "Loan Documents" (as defined in the Post Loan Agreement). "Projections" means Borrower's forecasted (a) balance sheets, (b) profit and loss statements, and (c) cash flow statements, all prepared on a basis consistent with Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. "Pro Rata Share" means, as of any date of determination: (a) with respect to a Lender's obligation to make Revolver A Advances and receive payments of principal, interest, fees, costs, and expenses with respect thereto, (i) prior to the Revolver A Commitments being terminated or reduced to zero, the percentage obtained by dividing (y) such Lender's Revolver A Commitment, by (z) the aggregate Revolver A Commitments of all Lenders, and (ii) from and after the time that the Revolver A Commitments have been terminated or reduced to zero, the percentage obtained by dividing (y) the aggregate outstanding principal amount of such Lender's Revolver A Advances by (z) the aggregate outstanding principal amount of all Revolver A Advances, (b) with respect to a Lender's obligation to participate in Letters of Credit, to reimburse the Issuing Lender, and to receive payments of fees with respect thereto, (i) prior to the Revolver A Commitments being terminated or reduced to zero, the percentage obtained by dividing (y) such Lender's Revolver A Commitment, by (z) the aggregate Revolver A Commitments of all Lenders, and (ii) from and after the time that the Revolver A Commitments have been terminated or reduced to zero, the percentage obtained by dividing (y) the aggregate outstanding principal amount of such Lender's Revolver A Advances by (z) the aggregate outstanding principal amount of all Revolver A Advances, -28- (c) with respect to a Lender's obligation to make Revolver B Advances and receive payments of principal, interest, fees, costs, and expenses with respect thereto, (i) prior to the Revolver B Commitments being terminated or reduced to zero, the percentage obtained by dividing (y) such Lender's Revolver B Commitment, by (z) the aggregate Revolver B Commitments of all Lenders, and (ii) from and after the time that the Revolver B Commitments have been terminated or reduced to zero, the percentage obtained by dividing (y) the aggregate outstanding principal amount of such Lender's Revolver B Advances by (z) the aggregate outstanding principal amount of all Revolver B Advances, (d) with respect to a Lender's obligation to make Revolver C Advances and receive payments of principal, interest, fees, costs, and expenses with respect thereto, (i) prior to the Revolver C Commitments being terminated or reduced to zero, the percentage obtained by dividing (y) such Lender's Revolver C Commitment, by (z) the aggregate Revolver C Commitments of all Lenders, and (ii) from and after the time that the Revolver C Commitments have been terminated or reduced to zero, the percentage obtained by dividing (y) the aggregate outstanding principal amount of such Lender's Revolver C Advances by (z) the aggregate outstanding principal amount of all Revolver C Advances, (e) with respect to a Lender's obligation to make Revolver D Advances and receive payments of principal, interest, fees, costs, and expenses with respect thereto, (i) prior to the Revolver D Commitments being terminated or reduced to zero, the percentage obtained by dividing (y) such Lender's Revolver D Commitment, by (z) the aggregate Revolver D Commitments of all Lenders, and (ii) from and after the time that the Revolver D Commitments have been terminated or reduced to zero, the percentage obtained by dividing (y) the aggregate outstanding principal amount of such Lender's Revolver D Advances by (z) the aggregate outstanding principal amount of all Revolver D Advances, and (f) with respect to all other matters as to a particular Lender (including the indemnification obligations arising under Section 16.7), the percentage obtained by dividing (i) such Lender's aggregate amount of Revolver Commitments by (ii) the aggregate amount of Revolver Commitments of all Lenders; provided, however, that in the event the Revolver Commitments have been terminated or reduced to zero, Pro Rata Share under this clause shall be the percentage obtained by dividing (A) the outstanding principal amount of such Lender's Advances plus such Lender's ratable portion of the Risk Participation Liability with respect to outstanding Letters of Credit by (B) the outstanding principal amount of all Advances plus the aggregate amount of the Risk Participation Liability with respect to outstanding Letters of Credit. "Purchase Money Indebtedness" means Indebtedness (other than the Obligations, but including Capitalized Lease Obligations), incurred at the time of, or within 30 days after, the acquisition of any fixed assets for the purpose of financing all or any part of the acquisition cost thereof. -29- "Qualified Cash" means, as of any date of determination, the amount of unrestricted cash and Cash Equivalents of Borrower and its Subsidiaries that is in Deposit Accounts or in Securities Accounts, or any combination thereof, and which such Deposit Account or Securities Account is the subject of a Control Agreement and is maintained by a branch office of the bank or securities intermediary located within the United States. "Real Property" means any estates or interests in real property now owned or hereafter acquired by Borrower or its Subsidiaries and the improvements thereto. "Real Property Collateral" means the parcel or parcels of Real Property identified on Schedule R-1 and any Real Property hereafter acquired by Borrower or its Subsidiaries. "Real Property Collateral Reserve" has the meaning set forth in the definition of "Revolver C Maximum Amount". "Record" means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. "Remedial Action" means all actions taken to (a) clean up, remove, remediate, contain, treat, monitor, assess, evaluate, or in any way address Hazardous Materials in the indoor or outdoor environment, (b) prevent or minimize a release or threatened release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform any pre-remedial studies, investigations, or post-remedial operation and maintenance activities, or (d) conduct any other actions authorized by 42 USC Section 9601. "Rent Reserve" means, as of any date of determination following the Closing Date, with respect to each of the Specified Locations as to which a Collateral Access Agreement has not been received by such date, a reserve in an amount equal to 3 months rent under the lease with respect to each such Specified Location. "Replacement Lender" has the meaning set forth in Section 15.2(a). "Report" has the meaning set forth in Section 16.17. "Required Availability" means that the sum of (a) Excess Availability, plus (b) Qualified Cash exceeds $9,000,000. "Required Lenders" means, at any time, Lenders whose aggregate Pro Rata Shares (calculated under clause (f) of the definition of Pro Rata Shares) equal or exceed 50.1%. "Reserve Percentage" means, on any day, for any Lender, the maximum percentage prescribed by the Board of Governors of the Federal Reserve System (or any -30- successor Governmental Authority) for determining the reserve requirements (including any basic, supplemental, marginal, or emergency reserves) that are in effect on such date with respect to eurocurrency funding (currently referred to as "eurocurrency liabilities") of that Lender, but so long as such Lender is not required or directed under applicable regulations to maintain such reserves, the Reserve Percentage shall be zero. "Restricted Group" means Borrower and the Restricted Subsidiaries. "Restricted Subsidiary" means any Subsidiary of Borrower other than an Unrestricted Subsidiary. "Revolver A Advances" has the meaning set forth in Section 2.1(a). "Revolver A Availability" means, as of any date of determination, the amount that Borrower is entitled to borrow as Revolver A Advances hereunder (after giving effect to all then outstanding Obligations and all sublimits and reserves then applicable hereunder). "Revolver A Commitment" means, with respect to each Lender, its Revolver A Commitment, and, with respect to all Lenders, their Revolver A Commitments, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 or in the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1. "Revolver A Excess Availability" means, as of any date of determination, the amount equal to Revolver A Availability minus the aggregate amount, if any, of all trade payables of Borrower and the Restricted Subsidiaries aged in excess of historical levels with respect thereto and all book overdrafts of Borrower and the Restricted Subsidiaries in excess of historical practices with respect thereto, in each case as determined by Agent in its Permitted Discretion. "Revolver A Maximum Amount" means $30,000,000. "Revolver A Usage" means, as of any date of determination, the sum of (a) the then extant amount of outstanding Revolver A Advances, plus (b) the then extant amount of the Letter of Credit Usage. "Revolver B Advances" has the meaning set forth in Section 2.1(b). "Revolver B Commitment" means, with respect to each Lender, its Revolver B Commitment, and, with respect to all Lenders, their Revolver B Commitments, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 or in the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1. -31- "Revolver B Maximum Amount" means $2,400,000 which amount shall be reduced by $40,000 on the first day of each month, commencing on November 1, 2003, until such amount is zero. "Revolver C Advances" has the meaning set forth in Section 2.1(c). "Revolver C Commitment" means, with respect to each Lender, its Revolver C Commitment, and, with respect to all Lenders, their Revolver C Commitments, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 or in the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1. "Revolver C Maximum Amount" means $5,600,000 which amount shall be reduced by $66,667 on the first day of each month, commencing on November 1, 2003, until such amount is zero; provided that Borrower may elect by notice to Agent, in lieu of each $66,667 monthly reduction, to create a reserve against Borrowing Base A in the same amount (the aggregate amount of such reserves being referred to as, the "Real Property Collateral Reserve") so long as, after giving effect to the addition of each such amount to the Real Property Collateral Reserve, there is Revolver A Excess Availability of at least $1. "Revolver Commitment" means, with respect to each Lender, its Revolver A Commitment, its Revolver B Commitment, its Revolver C Commitment, or its Revolver D Commitment, as the context requires, and, with respect to all Lenders, their Revolver A Commitments, their Revolver B Commitments, their Revolver C Commitments, or their Revolver D Commitments, as the context requires, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 or in the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1. "Revolver D Advances" has the meaning set forth in Section 2.1(d). "Revolver D Commitment" means, with respect to each Lender, its Revolver D Commitment, and, with respect to all Lenders, their Revolver D Commitments, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 or in the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1. "Revolver D Maximum Amount" means $6,000,000 which amount shall be reduced by $200,000 on the first day of each month, commencing on November 1, 2003, until such amount is zero. "Revolver Usage" means, as of any date of determination, the sum of (a) the then extant amount of outstanding Advances, plus (b) the then extant amount of the Letter of Credit Usage. -32- "Risk Participation Liability" means, as to each Letter of Credit, all reimbursement obligations of Borrower to the Issuing Lender with respect to an L/C Undertaking, consisting of (a) the amount available to be drawn or which may become available to be drawn, (b) all amounts that have been paid by the Issuing Lender to the Underlying Issuer to the extent not reimbursed by Borrower, whether by the making of a Revolver A Advance or otherwise, and (c) all accrued and unpaid interest, fees, and expenses payable with respect thereto. "SEC" means the United States Securities and Exchange Commission and any successor thereto. "Securities Account" means a securities account (as that term is defined in the Code). "Senior Notes" means those certain Unsecured Senior Promissory Notes due 2004, issued by Borrower to certain Affiliates, shareholders, and officers of Borrower in the aggregate principal amount of $12,000,000. "Settlement" has the meaning set forth in Section 2.3(f)(i). "Settlement Date" has the meaning set forth in Section 2.3(f)(i). "Solvent" means, with respect to any Person on a particular date, that, at fair valuations, the sum of such Person's assets is greater than all of such Person's debts. "Specified Locations" means Borrower's business premises located at 900 University, Arlington Heights, Illinois; 800 Mark Street, Elk Grove Village, Illinois; 27731 Diaz Road, Temecula, California; and 28381 Vincent Moraga Drive, Temecula, California. "Stock" means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "Stock Pledge Agreement" means a stock pledge agreement, in form and substance satisfactory to Agent, executed and delivered by Borrower, IH Holding, and Agent with respect to the pledge of the Stock of HRC and the Restricted Subsidiaries. "Subordinated Convertible Notes" means those certain Senior Subordinated Convertible Promissory Notes due 2005, issued by Borrower to certain Affiliates, shareholders, and officers of Borrower in the aggregate principal amount of $14,951,250. "Subordinated Notes" means Borrower's 9-1/8% Senior Subordinated Notes due 2008 issued pursuant to the Subordinated Notes Indenture. -33- "Subordinated Notes Indenture" means that certain Indenture dated as of April 7, 1998, among Borrower, Holding, and United States Trust Company of New York, as trustee. "Subsidiary" of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of Stock having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. "Swing Lender" means WFF or any other Lender that, at the request of Borrower and with the consent of Agent agrees, in such Lender's sole discretion, to become the Swing Lender under Section 2.3(d). "Swing Loan" has the meaning set forth in Section 2.3(d)(i). "Taxes" has the meaning set forth in Section 16.11. "Temecula Mortgage" means a Mortgage encumbering the Real Property Collateral that is commonly known as 27711 Diaz Road, Temecula, California 92589. "TFQ EBITDA" means, as of any date of determination, EBITDA of Borrower and the Restricted Subsidiaries for the 4 fiscal quarter period most recently ended. "Total Commitment" means, with respect to each Lender, its Total Commitment, and, with respect to all Lenders, their Total Commitments, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 attached hereto or on the signature page of the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1. "Trademark Security Agreement" means a trademark security agreement executed and delivered by Borrower and Agent, the form and substance of which is satisfactory to Agent. "Triggering Event" means (a) the occurrence of any Event of Default or (b) the sum of (i) Revolver A Excess Availability plus (ii) Qualified Cash is less than $2,500,000 for any 5 consecutive Business Days; provided that (A) with respect to the period from the first day through the fifteenth day following the due date of an interest payment on the Subordinated Notes, such amount shall be $1,500,000 and (B) with respect to the period from the sixteenth day through the thirtieth day following the due date of an interest payment on the Subordinated Notes, such amount shall be $2,000,000. -34- "UCC Filing Authorization Letter" means a letter duly executed by Borrower and each Guarantor authorizing Agent to file appropriate financing statements on Form UCC-1 without the signature of Borrower or such Guarantor, as applicable, in such office or offices as may be necessary or, in the opinion of Agent, desirable to perfect the security interests purported to be created by the Loan Documents. "United States" means the United States of America. "Underlying Issuer" means a third Person which is the beneficiary of an L/C Undertaking and which has issued a letter of credit at the request of the Issuing Lender for the benefit of Borrower. "Underlying Letter of Credit" means a letter of credit that has been issued by an Underlying Issuer. "Unrestricted Subsidiary" means (a) any Subsidiary of Borrower that at the time of determination is designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (b) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of Borrower (including any newly acquired or newly formed Subsidiary of Borrower) to be an Unrestricted Subsidiary; provided, however, that at the time of such designation and in the case of clauses (x) and (y), at all times thereafter (x) neither such Subsidiary nor any of its Subsidiaries owns any Stock or Indebtedness of, or owns or holds any Lien on any property of, Borrower or any Restricted Subsidiary of Borrower; (y) neither Holding, Borrower, nor any Restricted Subsidiary has guaranteed any Indebtedness or other obligation of such Subsidiary, and no Indebtedness of such Subsidiary shall constitute Indebtedness of Holding, Borrower, or any Restricted Subsidiary; and (z) except in the case of HRC Holding Inc., Hudson Euro Co. S.a.r.l. and Steamer Holding AB and any of their Subsidiaries, such Subsidiary has total consolidated assets of $1,000 or less; provided that no Person designated as a "Restricted Subsidiary" under the Post Loan Documents or otherwise providing any guaranty of the obligations under the Post Loan Documents or a lien on any of its assets to secure obligations under the Post Loan Documents may be an "Unrestricted Subsidiary" under this Agreement. "Unrestricted Subsidiaries EBITDA" means, with respect to any fiscal period, the Unrestricted Subsidiaries' consolidated net earnings (or loss), minus extraordinary gains and interest income, plus (a) non-cash extraordinary losses, (b) Interest Expense (including -35- any non-cash interest expense), (c) taxes based on or determined by reference to income, (d) depreciation and amortization, and (e) other non-cash charges (including noncash compensation charges), in each case for such period and as determined in accordance with GAAP. "Unrestricted Subsidiaries TFQ EBITDA" means as of any date of determination, Unrestricted Subsidiaries EBITDA for the 4 fiscal quarter period most recently ended. "Voidable Transfer" has the meaning set forth in Section 17.7. "Wells Fargo" means Wells Fargo Bank, National Association, a national banking association. "WFF" means Wells Fargo Foothill, Inc., a California corporation. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP; provided that for purposes of construing the accounting terms that compose the definition of "EBITDA", such terms shall be interpreted in accordance with GAAP applied on a basis consistent with the interpretation of such terms used in Borrower's financial statements for its fiscal year ended December 31, 2002. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrower" is used in respect of a financial covenant or a related definition, it shall be understood to mean Borrower and its Subsidiaries on a consolidated basis unless the context clearly requires otherwise. 1.3 Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 1.4 Construction. Unless the context of this Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in the other Loan Documents to any agreement, instrument, or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein). Any reference herein to the payment in full or repayment in full of the Obligations shall mean the payment -36- in full in cash of all Obligations other than contingent indemnification Obligations and contingent expense reimbursement Obligations. Any reference herein to any Person shall be construed to include such Person's successors and assigns. Any requirement of a writing contained herein or in the other Loan Documents shall be satisfied by the transmission of a Record and any Record transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein. 1.5 Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 2. LOAN AND TERMS OF PAYMENT. 2.1 Revolver Advances. (a) Subject to the terms and conditions of this Agreement, and during the term of this Agreement, each Lender with a Revolver A Commitment agrees (severally, not jointly or jointly and severally) to make advances ("Revolver A Advances") to Borrower in an amount at any one time outstanding not to exceed such Lender's Pro Rata Share of an amount equal to the lesser of (i) the Revolver A Maximum Amount, less the Letter of Credit Usage, less the outstanding amount of Revolver B Advances, less the outstanding amount of Revolver C Advances, less the outstanding amount of Revolver D Advances, or (ii) Borrowing Base A less the Letter of Credit Usage. (b) Subject to the terms and conditions of this Agreement, and during the term of this Agreement, each Lender with a Revolver B Commitment agrees (severally, not jointly or jointly and severally) to make advances ("Revolver B Advances") to Borrower in an amount at any one time outstanding not to exceed such Lender's Pro Rata Share of an amount equal to the lesser of (i) the Revolver B Maximum Amount, or (ii) Borrowing Base B. Borrower may terminate the Revolver B Commitments by written notice to Agent and the Lenders holding Revolver B Commitments at any time during the term of this Agreement, without premium or penalty, so long as there are no Revolver B Advances then outstanding. (c) Subject to the terms and conditions of this Agreement, and during the term of this Agreement, each Lender with a Revolver C Commitment agrees (severally, not jointly or jointly and severally) to make advances ("Revolver C Advances") to Borrower in an amount at any one time outstanding not to exceed such Lender's Pro Rata Share of an amount equal to the lesser of (i) the Revolver C Maximum Amount, or (ii) Borrowing Base C. Borrower may terminate the Revolver C Commitments by written notice to Agent and the Lenders holding Revolver C Commitments at any time during the term of this Agreement, without premium or penalty, so long as there are no Revolver C Advances then outstanding. -37- (d) Subject to the terms and conditions of this Agreement, and during the term of this Agreement, each Lender with a Revolver D Commitment agrees (severally, not jointly or jointly and severally) to make advances ("Revolver D Advances") to Borrower in an amount at any one time outstanding not to exceed such Lender's Pro Rata Share of an amount equal to the Revolver D Maximum Amount. Borrower may terminate the Revolver D Commitments by written notice to Agent and the Lenders holding Revolver D Commitments at any time during the term of this Agreement, without premium or penalty, so long as there are no Revolver D Advances then outstanding. (e) Anything to the contrary in this Section 2.1 notwithstanding ,Agent shall have the right to establish reserves in such amounts, and with respect to such matters, as Agent in its Permitted Discretion shall deem necessary or appropriate, against Borrowing Base A, including reserves with respect to (i) sums that Borrower is required to pay (such as taxes, assessments, insurance premiums, or, in the case of leased assets, rents or other amounts payable under such leases) and has failed to pay under any Section of this Agreement or any other Loan Document, and (ii) amounts owing by Borrower or its Subsidiaries to any Person to the extent secured by a Lien on, or trust over, any of the Collateral (other than any existing Permitted Lien set forth on Schedule P-1 which is specifically identified thereon as entitled to have priority over the Agent's Liens), which Lien or trust, in the Permitted Discretion of Agent likely would have a priority superior to the Agent's Liens (such as Liens or trusts in favor of landlords, warehousemen, carriers, mechanics, materialmen, laborers, or suppliers, or Liens or trusts for ad valorem, excise, sales, or other taxes where given priority under applicable law) in and to such item of the Collateral. In addition to the foregoing, but subject to Section 4.6, Agent shall have the right to have the Borrower's Inventory reappraised by a qualified appraisal company selected by Agent from time to time after the Closing Date for the purpose of re-determining the Net Liquidation Percentage of the Eligible Inventory and, as a result, re-determining Borrowing Base A. (f) Amounts borrowed under the Revolver A Commitments pursuant to this Section 2.1 may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. Amounts borrowed under the Revolver B Commitments, the Revolver C Commitments (subject to Section 2.1(j)), and the Revolver D Commitments pursuant to this Section 2.1 may be repaid by Borrower at any time, without premium or penalty (but subject to the terms of Section 3.6 with respect to the early termination of this Agreement), irrespective of the scheduled commitment reductions set forth in the definitions of "Revolver B Maximum Amount", "Revolver C Maximum Amount", and "Revolver D Maximum Amount", but any such amounts that are repaid may not subsequently be reborrowed. (g) Lenders with Revolver A Commitments shall have no obligation to make additional Revolver A Advances hereunder to the extent such additional Revolver A Advances would cause the Revolver A Usage to exceed the Revolver A Maximum Amount. -38- (h) On no more than 2 occasions within 24 months after the Closing Date, upon 5 Business Days prior written notice by Borrower to Agent, Borrower may, without premium or penalty, reduce the Revolver A Maximum Amount to an amount not less than the greater of (i) the sum of (A) the aggregate unpaid principal amount of all Revolver A Advances, Revolver B Advances, Revolver C Advances, and Revolver D Advances (including Swing Loans and Agent Advances) then outstanding, (B) the aggregate principal amount of all Revolver A Advances, Revolver B Advances, Revolver C Advances, and Revolver D Advances not yet made as to which a request has been made by Borrower under Section 2.3, and (C) the then extant Letter of Credit Usage, or (ii) $25,000,000. Each such reduction shall be in an amount which is an integral multiple of $1,000,000 and shall be irrevocable. Once reduced, the Revolver A Maximum Amount may not be increased. Each such reduction of the Revolver A Maximum Amount shall reduce the Revolver A Commitment of each Lender proportionately in accordance with its Pro Rata Share thereof. The unused line fee set forth in Section 2.11(a) is calculated by reference to the Revolver A Maximum Amount and a decrease in the amount of the Revolver A Maximum Amount pursuant hereto will have the effect of decreasing the unused line fee. (i) If Borrower has elected to create the Real Property Collateral Reserve in lieu of the scheduled reductions to the Revolver C Maximum Amount and so long as no Event of Default has occurred and is continuing, Borrower shall be entitled to request an adjustment of the Real Property Collateral Reserve on an annual basis, commencing on October 1, 2004, in the following manner. On or before September 1 of each year, commencing on September 1, 2004, Borrower shall make a written request to Agent to order a new appraisal of the fair market value of the Real Property Collateral (which appraisal shall be conducted at Borrower's expense). If the results of such appraisal are that the fair market value of the Real Property Collateral has not declined since the Closing Date, the Real Property Collateral Reserve shall be eliminated. If, on the other hand, the results of such appraisal are that the fair market value of the Real Property Collateral has declined since the Closing Date, the Real Property Collateral Reserve shall be eliminated and the Revolver C Maximum Amount shall be reduced by the amount of the Real Property Collateral Reserve prior to its elimination. After each such elimination of the Real Property Collateral Reserve, Borrower, subject to the terms and conditions hereof, may elect to establish a new Real Property Collateral Reserve commencing on the following November 1. (j) Anything herein to the contrary notwithstanding, in no event shall any Lender be obligated to make any Advances to Borrower if, after giving effect to such Advances, the sum of all outstanding Obligations plus the Indebtedness owing to the lenders under the Post Loan Documents would exceed the amount of Indebtedness permitted under Section 4.03 of the Subordinated Notes Indenture. 2.2 [Intentionally Omitted]. 2.3 Borrowing Procedures and Settlements. -39- (a) Procedure for Borrowing. Each Borrowing shall be made by an irrevocable written request by an Authorized Person delivered to Agent (which notice must be received by Agent no later than 10:00 a.m. (California time) on the Business Day prior to the date that is the requested Funding Date specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day; provided, however, that in the case of a request for Swing Loan in an amount of $5,000,000, or less, such notice will be timely received if it is received by Agent no later than 10:00 a.m. (California time) on the Business Day that is the requested Funding Date) specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day. In lieu of delivering the above-described written request, any Authorized Person may give Agent telephonic notice of such request by the required time. In such circumstances, Borrower agrees that any such telephonic notice will be confirmed in writing within 24 hours of the giving of such notice and the failure to provide such written confirmation shall not affect the validity of the request. (b) Agent's Election. Promptly after receipt of a request for a Borrowing pursuant to Section 2.3(a), Agent shall elect, in its discretion, (i) to have the terms of Section 2.3(c) apply to such requested Borrowing, or (ii) if the Borrowing is for an Advance, to request Swing Lender to make a Swing Loan pursuant to the terms of Section 2.3(d) in the amount of the requested Borrowing; provided, however, that if Swing Lender declines in its sole discretion to make a Swing Loan pursuant to Section 2.3(d), Agent shall elect to have the terms of Section 2.3(c) apply to such requested Borrowing and shall cause such Advance to be funded on the same day as requested so long as the request is received no later than 10:00 a.m. (California time). (c) Making of Loans. (i) In the event that Agent shall elect to have the terms of this Section 2.3(c) apply to a requested Borrowing as described in Section 2.3(b), then promptly after receipt of a request for a Borrowing pursuant to Section 2.3(a), Agent shall notify the Lenders, not later than 1:00 p.m. (California time) on the Business Day immediately preceding the Funding Date applicable thereto, by telecopy, telephone, or other similar form of transmission, of the requested Borrowing. Each Lender shall make the amount of such Lender's Pro Rata Share of the requested Borrowing available to Agent in immediately available funds, to Agent's Account, not later than 10:00 a.m. (California time) on the Funding Date applicable thereto. After Agent's receipt of the proceeds of such Advances, Agent shall make the proceeds thereof available to Borrower on the applicable Funding Date by transferring immediately available funds equal to such proceeds received by Agent to Borrower's Designated Account; provided, however, that, subject to the provisions of Section 2.3(i), Agent shall not request any Lender to make, and no Lender shall have the obligation to make, any Advance if Agent shall have actual -40- knowledge that (1) one or more of the applicable conditions precedent set forth in Section 3 will not be satisfied on the requested Funding Date for the applicable Borrowing unless such condition has been waived, or (2) the requested Borrowing would exceed the Availability on such Funding Date. (ii) Unless Agent receives notice from a Lender on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, prior to 9:00 a.m. (California time) on the date of such Borrowing, that such Lender will not make available as and when required hereunder to Agent for the account of Borrower the amount of that Lender's Pro Rata Share of the Borrowing, Agent may assume that each Lender has made or will make such amount available to Agent in immediately available funds on the Funding Date and Agent may (but shall not be so required), in reliance upon such assumption, make available to Borrower on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to Agent in immediately available funds and Agent in such circumstances has made available to Borrower such amount, that Lender shall on the Business Day following such Funding Date make such amount available to Agent, together with interest at the Defaulting Lender Rate for each day during such period. A notice submitted by Agent to any Lender with respect to amounts owing under this subsection shall be conclusive, absent manifest error. If such amount is so made available, such payment to Agent shall constitute such Lender's Advance on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to Agent on the Business Day following the Funding Date, Agent will notify Borrower of such failure to fund and, upon demand by Agent, Borrower shall pay such amount to Agent for Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Advances composing such Borrowing. The failure of any Lender to make any Advance on any Funding Date shall not relieve any other Lender of any obligation hereunder to make an Advance on such Funding Date, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on any Funding Date. (iii) Agent shall not be obligated to transfer to a Defaulting Lender any payments made by Borrower to Agent for the Defaulting Lender's benefit, and, in the absence of such transfer to the Defaulting Lender, Agent shall transfer any such payments to each other non-Defaulting Lender member of the Lender Group ratably in accordance with their Commitments (but only to the extent that such Defaulting Lender's Advance was funded by the other members of the Lender Group) or, if so directed by Borrower and if no Default or Event of Default had occurred and is continuing (and to the extent such -41- Defaulting Lender's Advance was not funded by the Lender Group), retain same to be re-advanced to Borrower as if such Defaulting Lender had made Advances to Borrower. Subject to the foregoing, Agent may hold and, in its Permitted Discretion, re-lend to Borrower for the account of such Defaulting Lender the amount of all such payments received and retained by Agent for the account of such Defaulting Lender. Solely for the purposes of voting or consenting to matters with respect to the Loan Documents, such Defaulting Lender shall be deemed not to be a "Lender" and such Lender's Commitment shall be deemed to be zero. This Section shall remain effective with respect to such Lender until (x) the Obligations under this Agreement shall have been declared or shall have become immediately due and payable, (y) the non-Defaulting Lenders, Agent, and Borrower shall have waived such Defaulting Lender's default in writing, or (z) the Defaulting Lender makes its Pro Rata Share of the applicable Advance and pays to Agent all amounts owing by Defaulting Lender in respect thereof. The operation of this Section shall not be construed to increase or otherwise affect the Commitment of any Lender, to relieve or excuse the performance by such Defaulting Lender or any other Lender of its duties and obligations hereunder, or to relieve or excuse the performance by Borrower of its duties and obligations hereunder to Agent or to the Lenders other than such Defaulting Lender. Any such failure to fund by any Defaulting Lender shall constitute a material breach by such Defaulting Lender of this Agreement and shall entitle Borrower at its option, upon written notice to Agent, to arrange for a substitute Lender to assume the Commitment of such Defaulting Lender, such substitute Lender to be acceptable to Agent. In connection with the arrangement of such a substitute Lender, the Defaulting Lender shall have no right to refuse to be replaced hereunder, and agrees to execute and deliver a completed form of Assignment and Acceptance in favor of the substitute Lender (and agrees that it shall be deemed to have executed and delivered such document if it fails to do so) subject only to being repaid its share of the outstanding Obligations (including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever; provided, however, that any such assumption of the Commitment of such Defaulting Lender shall not be deemed to constitute a waiver of any of the Lender Groups' or Borrower's rights or remedies against any such Defaulting Lender arising out of or in relation to such failure to fund. (d) Making of Swing Loans. (i) In the event Agent shall elect, with the consent of Swing Lender, as a Lender, to have the terms of this Section 2.3(d) apply to a requested Borrowing as described in Section 2.3(b), Swing Lender as a Lender shall make such Advance in the amount of such Borrowing (any such Advance made solely by Swing Lender as a Lender pursuant to this Section 2.3(d) being -42- referred to as a "Swing Loan" and such Advances being referred to collectively as "Swing Loans") available to Borrower on the Funding Date applicable thereto by transferring immediately available funds to Borrower's Designated Account. Each Swing Loan shall be deemed to be an Advance hereunder and shall be subject to all the terms and conditions applicable to other Advances, except that no such Swing Loan shall be eligible to be a LIBOR Rate Loan and all payments on any Swing Loan shall be payable to Swing Lender as a Lender solely for its own account (and for the account of the holder of any participation interest with respect to such Swing Loan). Subject to the provisions of Section 2.3(i), Agent shall not request Swing Lender as a Lender to make, and Swing Lender as a Lender shall not make, any Swing Loan if Agent has actual knowledge that (i) one or more of the applicable conditions precedent set forth in Section 3 will not be satisfied on the requested Funding Date for the applicable Borrowing unless such condition has been waived, or (ii) the requested Borrowing would exceed the Revolver A Availability on such Funding Date. Swing Lender as a Lender shall not otherwise be required to determine whether the applicable conditions precedent set forth in Section 3 have been satisfied on the Funding Date applicable thereto prior to making, in its sole discretion, any Swing Loan. (ii) The Swing Loans shall be secured by the Agent's Liens, constitute Obligations hereunder, and bear interest at the rate applicable from time to time to Revolver A Advances that are Base Rate Loans. (e) Agent Advances. (i) Agent hereby is authorized by Borrower and the Lenders, from time to time in Agent's sole discretion, (1) after the occurrence and during the continuance of a Default or an Event of Default, or (2) at any time that any of the other applicable conditions precedent set forth in Section 3 have not been satisfied, to make Advances to Borrower on behalf of the Lenders that Agent, in its Permitted Discretion deems necessary or desirable (A) to preserve or protect the Collateral, or any portion thereof, (B) to enhance the likelihood of repayment of the Obligations, or (C) to pay any other amount chargeable to Borrower pursuant to the terms of this Agreement, including Lender Group Expenses and the costs, fees, and expenses described in Section 10 (any of the Advances described in this Section 2.3(e) shall be referred to as "Agent Advances"). Each Agent Advance shall be deemed to be an Advance hereunder, except that no such Agent Advance shall be eligible to be a LIBOR Rate Loan and all payments thereon shall be payable to Agent solely for its own account. -43- (ii) The Agent Advances shall be repayable on demand, secured by the Agent's Liens granted to Agent under the Loan Documents, constitute Obligations hereunder, and bear interest at the rate applicable from time to time to Revolver A Advances that are Base Rate Loans. (f) Settlement. It is agreed that each Lender's funded portion of the Advances is intended by the Lenders to equal, at all times, such Lender's Pro Rata Share of the outstanding Advances. Such agreement notwithstanding, Agent, Swing Lender, and the other Lenders agree (which agreement shall not be for the benefit of or enforceable by Borrower) that in order to facilitate the administration of this Agreement and the other Loan Documents, settlement among them as to the Advances, the Swing Loans, and the Agent Advances shall take place on a periodic basis in accordance with the following provisions: (i) Agent shall request settlement ("Settlement") with the Lenders on a weekly basis, or on a more frequent basis if so determined by Agent, (1) on behalf of Swing Lender, with respect to each outstanding Swing Loan, (2) for itself, with respect to each Agent Advance, and (3) with respect to Borrower's or its Subsidiaries' Collections received, as to each by notifying the Lenders by telecopy, telephone, or other similar form of transmission, of such requested Settlement, no later than 2:00 p.m. (California time) on the Business Day immediately prior to the date of such requested Settlement (the date of such requested Settlement being the "Settlement Date"). Such notice of a Settlement Date shall include a summary statement of the amount of outstanding Advances, Swing Loans, and Agent Advances for the period since the prior Settlement Date. Subject to the terms and conditions contained herein (including Section 2.3(c)(iii)): (y) if a Lender's balance of the Advances (including Swing Loans and Agent Advances) exceeds such Lender's Pro Rata Share of the Advances (including Swing Loans and Agent Advances) as of a Settlement Date, then Agent shall, by no later than 12:00 p.m. (California time) on the Settlement Date, transfer in immediately available funds to a Deposit Account of such Lender (as such Lender may designate), an amount such that each such Lender shall, upon receipt of such amount, have as of the Settlement Date, its Pro Rata Share of the Advances (including Swing Loans and Agent Advances), and (z) if a Lender's balance of the Advances (including Swing Loans and Agent Advances) is less than such Lender's Pro Rata Share of the Advances (including Swing Loans and Agent Advances) as of a Settlement Date, such Lender shall no later than 12:00 p.m. (California time) on the Settlement Date transfer in immediately available funds to the Agent's Account, an amount such that each such Lender shall, upon transfer of such amount, have as of the Settlement Date, its Pro Rata Share of the Advances (including Swing Loans and Agent Advances). Such amounts made available to Agent under clause (z) of the immediately preceding sentence shall be applied against the amounts of the applicable -44- Swing Loans or Agent Advances and, together with the portion of such Swing Loans or Agent Advances representing Swing Lender's Pro Rata Share thereof, shall constitute Advances of such Lenders. If any such amount is not made available to Agent by any Lender on the Settlement Date applicable thereto to the extent required by the terms hereof, Agent shall be entitled to recover for its account such amount on demand from such Lender together with interest thereon at the Defaulting Lender Rate. (ii) In determining whether a Lender's balance of the Advances, Swing Loans, and Agent Advances is less than, equal to, or greater than such Lender's Pro Rata Share of the Advances, Swing Loans, and Agent Advances as of a Settlement Date, Agent shall, as part of the relevant Settlement, apply to such balance the portion of payments actually received in good funds by Agent with respect to principal, interest, fees payable by Borrower and allocable to the Lenders hereunder, and proceeds of Collateral. To the extent that a net amount is owed to any such Lender after such application, such net amount shall be distributed by Agent to that Lender as part of such next Settlement. (iii) Between Settlement Dates, Agent, to the extent no Agent Advances or Swing Loans are outstanding, may pay over to Swing Lender any payments received by Agent, that in accordance with the terms of this Agreement would be applied to the reduction of the Advances, for application to Swing Lender's Pro Rata Share of the Advances. If, as of any Settlement Date, Collections of Borrower or its Subsidiaries received since the then immediately preceding Settlement Date have been applied to Swing Lender's Pro Rata Share of the Advances other than to Swing Loans, as provided for in the previous sentence, Swing Lender shall pay to Agent for the accounts of the Lenders, and Agent shall pay to the Lenders, to be applied to the outstanding Advances of such Lenders, an amount such that each Lender shall, upon receipt of such amount, have, as of such Settlement Date, its Pro Rata Share of the Advances. During the period between Settlement Dates, Swing Lender with respect to Swing Loans, Agent with respect to Agent Advances, and each Lender (subject to the effect of letter agreements between Agent and individual Lenders) with respect to the Advances other than Swing Loans and Agent Advances, shall be entitled to interest at the applicable rate or rates payable under this Agreement on the daily amount of funds employed by Swing Lender, Agent, or the Lenders, as applicable. (g) Notation. Agent shall record on its books the principal amount of the Advances owing to each Lender, including the Swing Loans owing to Swing Lender, and Agent Advances owing to Agent, and the interests therein of each Lender, from time to time and such records shall, absent manifest error, conclusively be presumed to be correct -45- and accurate. In addition, each Lender is authorized, at such Lender's option, to note the date and amount of each payment or prepayment of principal of such Lender's Advances in its books and records, including computer records. (h) Lenders' Failure to Perform. All Advances (other than Swing Loans and Agent Advances) shall be made by the Lenders contemporaneously and in accordance with their Pro Rata Shares. It is understood that (i) no Lender shall be responsible for any failure by any other Lender to perform its obligation to make any Advance (or other extension of credit) hereunder, nor shall any Commitment of any Lender be increased or decreased as a result of any failure by any other Lender to perform its obligations hereunder, and (ii) no failure by any Lender to perform its obligations hereunder shall excuse any other Lender from its obligations hereunder. (i) Optional Overadvances. Any contrary provision of this Agreement notwithstanding, the Lenders hereby authorize Agent or Swing Lender, as applicable, and Agent or Swing Lender, as applicable, may, but is not obligated to, knowingly and intentionally, continue to make Revolver A Advances (including Swing Loans) to Borrower notwithstanding that an Overadvance exists or thereby would be created, so long as (i) after giving effect to such Revolver A Advances, the outstanding Revolver A Usage does not exceed Borrowing Base A by more than $3,000,000, (ii) after giving effect to such Revolver A Advances, the outstanding Revolver A Usage (except for and excluding amounts charged to the Loan Account for interest, fees, or Lender Group Expenses) does not exceed the Revolver A Maximum Amount, and (iii) at the time of the making of any such Revolver A Advance, Agent does not believe, in good faith, that the Overadvance created by such Revolver A Advance will be outstanding for more than 90 days. The foregoing provisions are for the exclusive benefit of Agent, Swing Lender, and the Lenders and are not intended to benefit Borrower in any way. The Revolver A Advances and Swing Loans, as applicable, that are made pursuant to this Section 2.3(i) shall be subject to the same terms and conditions as any other Revolver A Advance or Swing Loan, as applicable, except that they shall not be eligible for the LIBOR Option and the rate of interest applicable thereto shall be the rate applicable to Revolver A Advances that are Base Rate Loans under Section 2.6(c) hereof without regard to the presence or absence of a Default or Event of Default. (A) In the event Agent obtains actual knowledge that the Revolver A Usage exceeds the amounts permitted by the preceding paragraph, regardless of the amount of, or reason for, such excess, Agent shall notify the Lenders as soon as practicable (and prior to making any (or any additional) intentional Overadvances (except for and excluding amounts charged to the Loan Account for interest, fees, or Lender Group Expenses) unless Agent determines that prior notice would result in imminent harm to the Collateral or its value), and the Lenders with Revolver A Commitments thereupon shall, together with -46- Agent, jointly determine the terms of arrangements that shall be implemented with Borrower intended to reduce, within a reasonable time, the outstanding principal amount of the Revolver A Advances to Borrower to an amount permitted by the preceding paragraph. In the event Agent or any Lender disagrees over the terms of reduction or repayment of any Overadvance, the terms of reduction or repayment thereof shall be implemented according to the determination of the Required Lenders. (B) Each Lender with a Revolver Commitment shall be obligated to settle with Agent as provided in Section 2.3(f) for the amount of such Lender's Pro Rata Share of any unintentional Overadvances by Agent reported to such Lender, any intentional Overadvances made as permitted under this Section 2.3(i), and any Overadvances resulting from the charging to the Loan Account of interest, fees, or Lender Group Expenses. 2.4 Payments. (a) Payments by Borrower. (i) Except as otherwise expressly provided herein, all payments by Borrower shall be made to Agent's Account for the account of the Lender Group and shall be made in immediately available funds, no later than 11:00 a.m. (California time) on the date specified herein. Any payment received by Agent later than 11:00 a.m. (California time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day. (ii) Unless Agent receives notice from Borrower prior to the date on which any payment is due to the Lenders that Borrower will not make such payment in full as and when required, Agent may assume that Borrower has made (or will make) such payment in full to Agent on such date in immediately available funds and Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrower does not make such payment in full to Agent on the date when due, each Lender severally shall repay to Agent on demand such amount distributed to such Lender, together with interest thereon at the Defaulting Lender Rate for each day from the date such amount is distributed to such Lender until the date repaid. (b) Apportionment and Application of Payments. -47- (i) Except as otherwise provided with respect to Defaulting Lenders and except as otherwise provided in the Loan Documents (including letter agreements between Agent and individual Lenders), aggregate principal and interest payments shall be apportioned ratably among the Lenders (according to the unpaid principal balance of the Obligations to which such payments relate held by each Lender) and payments of fees and expenses (other than fees or expenses that are for Agent's separate account, after giving effect to any letter agreements between Agent and individual Lenders) shall be apportioned ratably among the Lenders having a Pro Rata Share of the type of Commitment or Obligation to which a particular fee relates. All payments shall be remitted to Agent and, except as otherwise specifically provided in Section 2.4(b)(iii) or Section 2.4(d), all such payments, and all proceeds of Collateral received by Agent, shall be applied as follows: (A) first, to pay any Lender Group Expenses then due to Agent under the Loan Documents, until paid in full, (B) second, to pay any Lender Group Expenses then due to the Lenders under the Loan Documents, on a ratable basis, until paid in full, (C) third, to pay any fees then due to Agent (for its separate account, after giving effect to any letter agreements between Agent and individual Lenders) under the Loan Documents until paid in full, (D) fourth, to pay any fees then due to any or all of the Lenders (after giving effect to any letter agreements between Agent and individual Lenders) under the Loan Documents, on a ratable basis, until paid in full, (E) fifth, to pay interest due in respect of all Agent Advances until paid in full, (F) sixth, ratably to pay interest due in respect of the Revolver A Advances (other than Agent Advances), the Swing Loans, the Revolver B Advances, the Revolver C Advances, and the Revolver D Advances until paid in full, (G) seventh, to pay the principal of all Agent Advances until paid in full, (H) eighth, so long as no Event of Default has occurred and is continuing to pay the principal of all Revolver D Advances until paid in full, -48- (I) ninth, so long as no Event of Default has occurred and is continuing to pay the principal of all Revolver C Advances until paid in full, (J) tenth, so long as no Event of Default has occurred and is continuing to pay the principal of all Revolver B Advances until paid in full, (K) eleventh, to pay the principal of all Swing Loans until paid in full, (L) twelfth, so long as no Event of Default has occurred and is continuing, to pay the principal of all Revolver A Advances until paid in full, (M) thirteenth, if an Event of Default has occurred and is continuing, ratably (i) to pay the principal of all Revolver A Advances until paid in full, and (ii) to Agent, to be held by Agent, for the ratable benefit of Issuing Lender and those Lenders having a Revolver Commitment, as cash collateral in an amount up to 105% of the then extant Letter of Credit Usage until paid in full, (N) fourteenth, if an Event of Default has occurred and is continuing, to pay the principal of all Revolver D Advances until paid in full, (O) fifteenth, if an Event of Default has occurred and is continuing, to pay the principal of all Revolver C Advances until paid in full, (P) sixteenth, if an Event of Default has occurred and is continuing, to pay the principal of all Revolver B Advances until paid in full, (Q) seventeenth, if an Event of Default has occurred and is continuing, to pay any other Obligations, and (R) eighteenth, to Borrower (to be wired to the Designated Account) or such other Person entitled thereto under applicable law. (ii) Agent promptly shall distribute to each Lender, pursuant to the applicable wire instructions received from each Lender in writing, such funds as it may be entitled to receive, subject to a Settlement delay as provided in Section 2.3(f). -49- (iii) In each instance, so long as no Event of Default has occurred and is continuing, this Section 2.4(b) shall not be deemed to apply to any payment by Borrower specified by Borrower to be for the payment of specific Obligations then due and payable (or prepayable) under any provision of this Agreement. (iv) For purposes of the foregoing, "paid in full" means payment of all amounts owing under the Loan Documents according to the terms thereof, including loan fees, service fees, professional fees, interest (and specifically including interest accrued after the commencement of any Insolvency Proceeding), default interest, interest on interest, and expense reimbursements, whether or not any of the foregoing would be or is allowed or disallowed in whole or in part in any Insolvency Proceeding. (v) In the event of a direct conflict between the priority provisions of this Section 2.4 and other provisions contained in any other Loan Document, it is the intention of the parties hereto that such priority provisions in such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of this Section 2.4 shall control and govern. (c) Mandatory Prepayments. (i) Immediately upon any sale or disposition by Borrower or any of the Restricted Subsidiaries of property or assets (other than sales or dispositions of Inventory in the ordinary course of business or a sale of the Stock of HRC), Borrower shall prepay the outstanding principal amount of the Advances and cash collateralize the Letters of Credit in accordance with subsection (d) below in an amount equal to 100% of the Net Cash Proceeds received by such Person in connection with such sales or dispositions to the extent that the aggregate amount of Net Cash Proceeds received by Borrower and the Restricted Subsidiaries (and not paid to Agent as a prepayment of the Advances or to cash collateralize the Letters of Credit) for all such sales or dispositions exceeds $50,000 in any fiscal year; provided that (A) if any such sale or disposition is a Permitted Disposition of Equipment that is not subject to a Lien of the type described in clause (e) of the definition of "Permitted Liens", Borrower may elect to use the proceeds of such sale or disposition, up to a maximum of $400,000 during any fiscal year of Borrower, to purchase new Equipment so long as such proceeds are remitted to Agent to pay down Revolver A Advances, a reserve is imposed by Agent reducing Revolver A Availability in the amount of such proceeds, and Borrower completes the purchase of such new Equipment within 90 days of such sale or disposition (it -50- being understood that upon the purchase of new Equipment the reserve will be released, and if Borrower fails to complete the purchase of new Equipment within 90 days, the reserve will be released and the amount of such proceeds will be applied as a mandatory prepayment in accordance with Section 2.4(d)(ii)(A)(3)); and (B) if any such sale or disposition is a Permitted Disposition of Equipment that is subject to a Lien of the type described in clause (e) of the definition of "Permitted Liens", Borrower may elect to use the proceeds of such sale or disposition to purchase new Equipment so long as Borrower completes the purchase of such new Equipment within 180 days of such sale or disposition (it being understood that if Borrower fails to complete the purchase of new Equipment within 180 days, the amount of such proceeds shall be applied as a mandatory prepayment in accordance with Section 2.4(d)(ii)(A)(3)). Nothing contained in this paragraph (i) shall permit Borrower or any of the Restricted Subsidiaries to sell or otherwise dispose of any property or assets other than in accordance with Section 7.4. (ii) Upon the receipt by Borrower or any of the Restricted Subsidiaries of any Extraordinary Receipts, Borrower shall prepay the outstanding principal of the Advances and cash collateralize the Letters of Credit in accordance with subsection (d) below in an amount equal to 100% of such Extraordinary Receipts, net of any reasonable expenses incurred in collecting such Extraordinary Receipts, to the extent that the aggregate amount of Extraordinary Receipts (other than proceeds of insurance) received by Borrower and the Restricted Subsidiaries (and not paid to Agent as a prepayment of the Advances or to cash collateralize the Letters of Credit) from and after the Closing Date exceeds $300,000. (d) Application of Mandatory Prepayments. (i) Each prepayment pursuant to subclause (c)(ii) above (except with respect to insurance proceeds and condemnation awards related to a casualty or loss of Collateral) shall, (A) so long as no Event of Default shall have occurred and be continuing, be applied, first, to the outstanding principal amount of Revolver D Advances until paid in full, second, to the outstanding principal amount of Revolver C Advances until paid in full, third, to the outstanding principal amount of Revolver B Advances until paid in full, and fourth, to the outstanding principal amount of Revolver A Advances and to cash collateral in an amount equal to 105% of the then extant Letter of Credit Usage until paid in full, and (B) if an Event of Default shall have occurred and be continuing, be applied in the manner set forth in set forth in Section 2.4(b)(i). Each such prepayment of Revolver B Advances, Revolver C Advances, and Revolver D Advances shall be applied against the scheduled reductions of the Revolver B Commitment, the Revolver C Commitment, and -51- the Revolver D Commitment, respectively, in the inverse order of maturity and shall result in permanent reductions of such Commitments in the amount of the applicable reduction. (ii) Each prepayment pursuant to subclause (c)(i) above and (c)(ii) with respect to insurance proceeds and condemnation awards related to a casualty or loss of Collateral, shall, (A) so long as no Event of Default shall have occurred and be continuing, be applied as follows: (1) if the proceeds are from any sale or disposition of any Accounts or Inventory of Borrower or the Restricted Subsidiaries, such proceeds shall be applied, first, to the outstanding principal amount of Revolver A Advances and cash collateral in an amount equal to 105% of the then extant Letter of Credit Usage until paid in full, second, to the outstanding principal amount of Revolver D Advances until paid in full, third, to the outstanding principal amount of Revolver C Advances until paid in full, and fourth, to the outstanding principal amount of Revolver B Advances until paid in full. Each such prepayment of Revolver B Advances, Revolver C Advances, and Revolver D Advances shall be applied against the scheduled reductions of the Revolver B Commitment, the Revolver C Commitment, and the Revolver D Commitment, respectively, in the inverse order of maturity and shall result in permanent reductions of such Commitments in the amount of the applicable reduction; (2) if the proceeds are from the sale or disposition of any assets consisting of the Real Property Collateral or any insurance policy or condemnation award relating to the Real Property Collateral, such proceeds shall be applied, first, to the outstanding principal amount of Revolver C Advances until paid in full, second, to the outstanding principal amount of Revolver D Advances until paid in full, third, to the outstanding principal amount of Revolver B Advances until paid in full, and fourth, to the outstanding principal amount of Revolver A Advances and to cash collateral in an amount equal to 105% of the then extant Letter of Credit Usage until paid in full. Each such prepayment of Revolver B Advances, Revolver C Advances, and Revolver D Advances shall be applied against the scheduled reductions of the Revolver B Commitment, the Revolver C Commitment, and the Revolver D Commitment, respectively, in the inverse order of maturity and shall result in permanent reductions of such Commitments in the amount of the applicable reduction; (3) if the proceeds are from the sale or disposition of any assets consisting of Borrower's or any -52- Restricted Subsidiary's Equipment or any insurance policy or condemnation award relating to Borrower's or any Restricted Subsidiary's Equipment, such proceeds shall be applied, first, to the outstanding principal amount of Revolver B Advances until paid in full, second, to the outstanding principal amount of Revolver D Advances until paid in full, third, to the outstanding principal amount of Revolver C Advances until paid in full, and fourth, to the outstanding principal amount of Revolver A Advances and to cash collateral in an amount equal to 105% of the then extant Letter of Credit Usage until paid in full. Each such prepayment of Revolver B Advances, Revolver C Advances, and Revolver D Advances shall be applied against the scheduled reductions of the Revolver B Commitment, the Revolver C Commitment, and the Revolver D Commitment, respectively, in the inverse order of maturity and shall result in permanent reductions of such Commitments in the amount of the applicable reduction; (B) if an Event of Default shall have occurred and be continuing, be applied in the manner set forth in Section 2.4(b)(i). (e) Sale of Stock of HRC. Upon any sale or other disposition of the Stock of HRC, Borrower shall use the proceeds of such sale or other disposition to prepay the Indebtedness under the Post Loan Documents and the Obligations. As between the Lender Group and the lenders under the Post Loan Documents, the proceeds of the Stock of HRC shall be allocated as set forth in the Intercreditor Agreement. To the extent any of such proceeds are available to be applied to the Obligations, (A) so long as no Event of Default shall have occurred and be continuing, such proceeds shall be applied, first, to the outstanding principal amount of Revolver D Advances until paid in full, second, to the outstanding principal amount of Revolver C Advances until paid in full, third, to the outstanding principal amount of Revolver B Advances until paid in full, and fourth, to the outstanding principal amount of Revolver A Advances and to cash collateral in an amount equal to 105% of the then extant Letter of Credit Usage until paid in full, and (B) if an Event of Default shall have occurred and be continuing, such proceeds shall be applied in the manner set forth in set forth in Section 2.4(b)(i). 2.5 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to the Lender Group pursuant to Section 2.1 or Section 2.12 is greater than either the Dollar or percentage limitations set forth in Section 2.1 or Section 2.12, as applicable (an "Overadvance"), Borrower immediately shall pay to Agent, in cash, the amount of such excess, which amount shall be used by Agent to reduce the Obligations in accordance with the priorities set forth in Section 2.4(b). The foregoing notwithstanding, any optional Overadvance made pursuant to Section 2.3(i) shall be repaid in accordance with the terms of a written agreement between Agent and Borrower (if such an agreement is made) or on demand, as applicable. In addition, Borrower hereby promises to pay the Obligations (including principal, interest, fees, costs, and expenses) in Dollars in full as and when due and payable under the terms of this Agreement and the other Loan Documents. -53- 2.6 Interest Rates and Letter of Credit Fee: Rates, Payments, and Calculations. (a) Interest Rates. Except as provided in clause (c) below, all Obligations (except for undrawn Letters of Credit) that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof as follows (i) if the relevant Obligation is a Revolver A Advance that is a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate plus the Applicable LIBOR Rate Revolver A Margin, (ii) if the relevant Obligation is a Revolver B Advance that is a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate plus the Applicable LIBOR Rate Revolver B Margin, (iii) if the relevant Obligation is a Revolver B Advance that is a Base Rate Loan, at a per annum rate equal to the Base Rate plus the Applicable Base Rate Revolver B Margin, (iv) if the relevant Obligation is a Revolver C Advance that is a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate plus the Applicable LIBOR Rate Revolver C Margin, (v) if the relevant Obligation is a Revolver C Advance that is a Base Rate Loan, at a per annum rate equal to the Base Rate plus the Applicable Base Rate Revolver C Margin, (vi) if the relevant Obligation is a Revolver D Advance, at a per annum rate equal to the Base Rate plus the Applicable Revolver D Margin, and (vii) otherwise, at a per annum rate equal to the Base Rate plus the Applicable Base Rate Revolver A Margin. The foregoing notwithstanding, at no time shall any portion of the Obligations bear interest on the Daily Balance thereof at a per annum rate less than 3.25%. To the extent that interest accrued hereunder at the rate set forth herein would be less than the foregoing minimum daily rate, the interest rate chargeable hereunder for such day automatically shall be deemed increased to the minimum rate. (b) Letter of Credit Fee. Borrower shall pay Agent (for the ratable benefit of the Lenders with a Revolver Commitment, subject to any letter agreement between Agent and individual Lenders), a Letter of Credit fee (in addition to the charges, commissions, fees, and costs set forth in Section 2.12(e)) which shall accrue at a rate equal to the Applicable Letter of Credit Fee Percentage per annum times the Daily Balance of the undrawn amount of all outstanding Letters of Credit. (c) Default Rate. Upon the occurrence and during the continuation of an Event of Default (and at the election of Agent or the Required Lenders), (i) all Obligations (except for undrawn Letters of Credit) that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof at a per annum rate equal to 3 percentage points above the per annum rate otherwise applicable hereunder, and -54- (ii) the Letter of Credit fee provided for above shall be increased to 3 percentage points above the per annum rate otherwise applicable hereunder. (d) Payment. Except as provided to the contrary in Section 2.13(a), interest, Letter of Credit fees, and all other fees payable hereunder shall be due and payable, in arrears, on the first day of each month at any time that Obligations or Commitments are outstanding. Borrower hereby authorizes Agent, from time to time without prior notice to Borrower, to charge such interest and fees, all Lender Group Expenses (as and when incurred), the charges, commissions, fees, and costs provided for in Section 2.12(e) (as and when accrued or incurred), the fees and costs provided for in Section 2.11 (as and when accrued or incurred), and all other payments as and when due and payable under any Loan Document (including the amounts due and payable with respect to the reduction of the Revolver B Maximum Amount, the Revolver C Maximum Amount, and the Revolver D Maximum Amount) to Borrower's Loan Account, which amounts thereafter shall constitute Revolver A Advances hereunder and shall accrue interest at the rate then applicable to Revolver A Advances hereunder. Any interest not paid when due shall be compounded by being charged to Borrower's Loan Account and shall thereafter constitute Revolver A Advances hereunder and shall accrue interest at the rate then applicable to Revolver A Advances that are Base Rate Loans hereunder. (e) Computation. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed. In the event the Base Rate is changed from time to time hereafter, the rates of interest hereunder based upon the Base Rate automatically and immediately shall be increased or decreased by an amount equal to such change in the Base Rate. (f) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrower and the Lender Group, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto, as of the date of this Agreement, Borrower is and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrower in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.7 Cash Management. (a) Borrower shall and shall cause each of the Restricted Subsidiaries to (i) establish and maintain cash management services of a type and on terms -55- satisfactory to Agent at one or more of the banks set forth on Schedule 2.7(a) (each, a "Cash Management Bank"), and shall request in writing and otherwise take such reasonable steps to ensure that all of its and the Restricted Subsidiaries' Account Debtors forward payment of the amounts owed by them directly to such Cash Management Bank, and (ii) deposit or cause to be deposited promptly, and in any event no later than the first Business Day after the date of receipt thereof, all of their Collections (including those sent directly by their Account Debtors to a Cash Management Bank) into a bank account in Agent's name (a "Cash Management Account") at one of the Cash Management Banks. (b) Each Cash Management Bank shall establish and maintain Cash Management Agreements with Agent and Borrower, in form and substance acceptable to Agent. Each such Cash Management Agreement shall provide, among other things, that (i) all items of payment deposited in such Cash Management Account and proceeds thereof are held by such Cash Management Bank as agent or bailee-in-possession for Agent, (ii) the Cash Management Bank has no rights of setoff or recoupment or any other claim against the applicable Cash Management Account other than for payment of its service fees and other charges directly related to the administration of such Cash Management Account and for returned checks or other items of payment, and (iii) it immediately will forward by daily sweep all amounts in the applicable Cash Management Account to the Agent's Account. Subject to the mandatory prepayment provisions set forth in Section 2.4, (i) at any time that no Event of Default has occurred and is continuing and there are outstanding Revolver A Advances, Agent, in accordance with Section 2.8, shall apply to such outstanding Revolver A Advances all amounts that have been swept from a Cash Management Account to the Agent's Account, and (ii) at any time that no Event of Default has occurred and is continuing and there are no Revolver A Advances outstanding, Agent shall transfer to the Designated Account on a daily basis all amounts that have been swept from a Cash Management Account to the Agent's Account. (c) So long as no Default or Event of Default has occurred and is continuing, Borrower may amend Schedule 2.7(a) to add or replace a Cash Management Bank or Cash Management Account; provided, however, that (i) such prospective Cash Management Bank shall be satisfactory to Agent and Agent shall have consented in writing in advance to the opening of such Cash Management Account with the prospective Cash Management Bank, and (ii) prior to the time of the opening of such Cash Management Account, Borrower (or a Restricted Subsidiary, as applicable) and such prospective Cash Management Bank shall have executed and delivered to Agent a Cash Management Agreement. Borrower (or a Restricted Subsidiary, as applicable) shall close any of its Cash Management Accounts (and establish replacement cash management accounts in accordance with the foregoing sentence) promptly and in any event within 30 days of notice from Agent that the creditworthiness of any Cash Management Bank is no longer acceptable in Agent's reasonable judgment, or as promptly as practicable and in any event within 60 days of notice from Agent that the operating performance, funds transfer, or availability procedures or performance of the Cash Management Bank with respect to Cash Management Accounts or -56- Agent's liability under any Cash Management Agreement with such Cash Management Bank is no longer acceptable in Agent's reasonable judgment. (d) The Cash Management Accounts shall be cash collateral accounts, with all cash, checks and similar items of payment in such accounts securing payment of the Obligations, and in which Borrower hereby grants a Lien to Agent. 2.8 Crediting Payments. The receipt of any payment item by Agent (whether from transfers to Agent by the Cash Management Banks pursuant to the Cash Management Agreements or otherwise) shall not be considered a payment on account unless such payment item is a wire transfer of immediately available federal funds made to the Agent's Account or unless and until such payment item is honored when presented for payment. Should any payment item not be honored when presented for payment, then Borrower shall be deemed not to have made such payment and interest shall be calculated accordingly. Anything to the contrary contained herein notwithstanding, any payment item shall be deemed received by Agent only if it is received into the Agent's Account on a Business Day on or before 11:00 a.m. (California time). If any payment item is received into the Agent's Account on a non-Business Day or after 11:00 a.m. (California time) on a Business Day, it shall be deemed to have been received by Agent as of the opening of business on the immediately following Business Day. 2.9 Designated Account. Agent is authorized to make the Advances, and Issuing Lender is authorized to issue the Letters of Credit, under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person or, without instructions, if pursuant to Section 2.6(d). Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrower and made by Agent or the Lenders hereunder. Unless otherwise agreed by Agent and Borrower, any Advance, Agent Advance, or Swing Loan requested by Borrower and made by Agent or the Lenders hereunder shall be made to the Designated Account. 2.10 Maintenance of Loan Account; Statements of Obligations. Agent shall maintain an account on its books in the name of Borrower (the "Loan Account") on which Borrower will be charged with all Advances (including Agent Advances and Swing Loans) made by Agent, Swing Lender, or the Lenders to Borrower or for Borrower's account, the Letters of Credit issued by Issuing Lender for Borrower's account, and with all other payment Obligations hereunder or under the other Loan Documents, including, accrued interest, fees and expenses, and Lender Group Expenses. In accordance with Section 2.8, the Loan Account will be credited with all payments received by Agent from Borrower or for Borrower's account, including all amounts received in the Agent's Account from any Cash Management Bank. Agent shall render statements regarding the Loan Account to Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Lender Group Expenses owing, and such statements, absent manifest error, shall -57- be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and the Lender Group unless, within 30 days after receipt thereof by Borrower, Borrower shall deliver to Agent written objection thereto describing the error or errors contained in any such statements. 2.11 Fees. Borrower shall pay to Agent the following fees and charges, which fees and charges shall be non-refundable when paid (irrespective of whether this Agreement is terminated thereafter) and shall be apportioned among the Lenders in accordance with the terms of letter agreements between Agent and individual Lenders: (a) Unused Line Fee. On the first day of each calendar quarter during the term of this Agreement, an unused line fee in an amount equal to 0.375% per annum times the result of (i) the Revolver A Maximum Amount, less (ii) the sum of (A) the average Daily Balance of Revolver A Advances, Revolver B Advances, Revolver C Advances, and Revolver D Advances that were outstanding during the immediately preceding quarter, plus (B) the average Daily Balance of the Letter of Credit Usage during the immediately preceding quarter; provided that if this Agreement is terminated on any date that is not the first day of a calendar quarter, the ratable portion of the foregoing fee that has accrued through the date of termination shall be payable on the date of termination, (b) Fee Letter Fees. As and when due and payable under the terms of the Fee Letter, the fees set forth in the Fee Letter, and (c) Audit, Appraisal, and Valuation Charges. Audit, appraisal, and valuation fees and charges as follows (i) a fee of $850 per day, per auditor, plus out-of-pocket expenses for each financial audit of Borrower performed by personnel employed by Agent, (ii) if implemented, a fee of $850 per day, per applicable individual, plus out-of-pocket expenses for the establishment of electronic collateral reporting systems, (iii) a fee of $1,500 per day per appraiser, plus out-of-pocket expenses, for each appraisal of the Collateral, or any portion thereof, performed by personnel employed by Agent, and (iv) the actual charges paid or incurred by Agent if it elects to employ the services of one or more third Persons to perform financial audits of Borrower or its Subsidiaries, to establish electronic collateral reporting systems, to appraise the Collateral, or any portion thereof, or to assess Borrower's or its Subsidiaries' business valuation. 2.12 Letters of Credit. (a) Subject to the terms and conditions of this Agreement, the Issuing Lender agrees to issue letters of credit for the account of Borrower (each, an "L/C") or to purchase participations or execute indemnities or reimbursement obligations (each such undertaking, an "L/C Undertaking") with respect to letters of credit issued by an Underlying Issuer (as of the Closing Date, the prospective Underlying Issuer is to be Wells Fargo) for the account of Borrower. To request the issuance of an L/C or an L/C Undertaking (or the amendment, renewal, or extension of an outstanding L/C or L/C Undertaking), Borrower -58- shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Lender) to the Issuing Lender and Agent (reasonably in advance of the requested date of issuance, amendment, renewal, or extension) a notice requesting the issuance of an L/C or L/C Undertaking, or identifying the L/C or L/C Undertaking to be amended, renewed, or extended, the date of issuance, amendment, renewal, or extension, the date on which such L/C or L/C Undertaking is to expire, the amount of such L/C or L/C Undertaking, the name and address of the beneficiary thereof (or the beneficiary of the Underlying Letter of Credit, as applicable), and such other information as shall be necessary to prepare, amend, renew, or extend such L/C or L/C Undertaking. If requested by the Issuing Lender, Borrower also shall be an applicant under the application with respect to any Underlying Letter of Credit that is to be the subject of an L/C Undertaking. The Issuing Lender shall have no obligation to issue a Letter of Credit if any of the following would result after giving effect to the requested Letter of Credit: (i) the Letter of Credit Usage would exceed Borrowing Base A less the then extant amount of outstanding Revolving A Advances, or (ii) the Letter of Credit Usage would exceed $5,000,000, or (iii) the Letter of Credit Usage would exceed the Revolver A Maximum Amount less the then extant amount of the sum of the outstanding Revolver A Advances, Revolver B Advances, Revolver C Advances, and Revolver D Advances . Borrower and the Lender Group acknowledge and agree that certain Underlying Letters of Credit may be issued to support letters of credit that already are outstanding as of the Closing Date. Each Letter of Credit (and corresponding Underlying Letter of Credit) shall be in form and substance acceptable to the Issuing Lender (in the exercise of its Permitted Discretion), including the requirement that the amounts payable thereunder must be payable in Dollars. If Issuing Lender is obligated to advance funds under a Letter of Credit, Borrower immediately shall reimburse such L/C Disbursement to Issuing Lender by paying to Agent an amount equal to such L/C Disbursement not later than 11:00 a.m., California time, on the date that such L/C Disbursement is made, if Borrower shall have received written or telephonic notice of such L/C Disbursement prior to 10:00 a.m., California time, on such date, or, if such notice has not been received by Borrower prior to such time on such date, then not later than 11:00 a.m., California time, on the next following Business Day, and, in the absence of such reimbursement, the L/C Disbursement immediately and automatically shall be deemed to be a Revolver A Advance hereunder and, thereafter, shall bear interest at the rate then applicable to Revolver A Advances that are Base Rate Loans under Section 2.6. To the extent an L/C Disbursement is deemed to be a Revolver A Advance hereunder, Borrower's obligation to reimburse such L/C Disbursement shall be discharged and replaced by the resulting Revolver A Advance. Promptly following receipt by Agent of any payment from Borrower pursuant to this paragraph, Agent shall -59- distribute such payment to the Issuing Lender or, to the extent that Lenders have made payments pursuant to Section 2.12(c) to reimburse the Issuing Lender, then to such Lenders and the Issuing Lender as their interests may appear. (b) Promptly following receipt of a notice of L/C Disbursement pursuant to Section 2.12(a), each Lender with a Revolver A Commitment agrees to fund its Pro Rata Share of any Revolver A Advance deemed made pursuant to the foregoing subsection on the same terms and conditions as if Borrower had requested such Revolver A Advance and Agent shall promptly pay to Issuing Lender the amounts so received by it from the Lenders. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Lender or the Lenders with Revolver Commitments, the Issuing Lender shall be deemed to have granted to each Lender with a Revolver Commitment, and each Lender with a Revolver Commitment shall be deemed to have purchased, a participation in each Letter of Credit, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Letter of Credit, and each such Lender agrees to pay to Agent, for the account of the Issuing Lender, such Lender's Pro Rata Share of any payments made by the Issuing Lender under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender with a Revolver Commitment hereby absolutely and unconditionally agrees to pay to Agent, for the account of the Issuing Lender, such Lender's Pro Rata Share of each L/C Disbursement made by the Issuing Lender and not reimbursed by Borrower on the date due as provided in clause (a) of this Section, or of any reimbursement payment required to be refunded to Borrower for any reason. Each Lender with a Revolver Commitment acknowledges and agrees that its obligation to deliver to Agent, for the account of the Issuing Lender, an amount equal to its respective Pro Rata Share of each L/C Disbursement made by the Issuing Lender pursuant to this Section 2.12(b) shall be absolute and unconditional and such remittance shall be made notwithstanding the occurrence or continuation of an Event of Default or Default or the failure to satisfy any condition set forth in Section 3 hereof. If any such Lender fails to make available to Agent the amount of such Lender's Pro Rata Share of each L/C Disbursement made by the Issuing Lender in respect of such Letter of Credit as provided in this Section, such Lender shall be deemed to be a Defaulting Lender and Agent (for the account of the Issuing Lender) shall be entitled to recover such amount on demand from such Lender together with interest thereon at the Defaulting Lender Rate until paid in full. (c) Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless from any loss, cost, expense, or liability, and reasonable attorneys fees incurred by the Lender Group arising out of or in connection with any Letter of Credit; provided, however, that Borrower shall not be obligated hereunder to indemnify for any loss, cost, expense, or liability to the extent that it is caused by the gross negligence or willful misconduct of the Issuing Lender or any other member of the Lender Group. Borrower agrees to be bound by the Underlying Issuer's regulations and interpretations of any Underlying Letter of Credit or by Issuing Lender's interpretations of any L/C issued by Issuing Lender to or for Borrower's account, even though this interpretation may be different -60- from Borrower's own, and Borrower understands and agrees that the Lender Group shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower's instructions or those contained in the Letter of Credit or any modifications, amendments, or supplements thereto. Borrower understands that the L/C Undertakings may require Issuing Lender to indemnify the Underlying Issuer for certain costs or liabilities arising out of claims by Borrower against such Underlying Issuer. Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless with respect to any loss, cost, expense (including reasonable attorneys fees), or liability incurred by the Lender Group under any L/C Undertaking as a result of the Lender Group's indemnification of any Underlying Issuer; provided, however, that Borrower shall not be obligated hereunder to indemnify for any loss, cost, expense, or liability to the extent that it is caused by the gross negligence or willful misconduct of the Underlying Issuer, the Issuing Lender, or any other member of the Lender Group. (d) Borrower hereby authorizes and directs any Underlying Issuer to deliver to the Issuing Lender all instruments, documents, and other writings and property received by such Underlying Issuer pursuant to such Underlying Letter of Credit and to accept and rely upon the Issuing Lender's instructions with respect to all matters arising in connection with such Underlying Letter of Credit and the related application. (e) Any and all charges, commissions, fees, and costs incurred by the Issuing Lender relating to Underlying Letters of Credit shall be Lender Group Expenses for purposes of this Agreement and immediately shall be reimbursable by Borrower to Agent for the account of the Issuing Lender; it being acknowledged and agreed by Borrower that, as of the Closing Date, the usage charge imposed by the prospective Underlying Issuer is .825% per annum times the face amount of each Underlying Letter of Credit, that such issuance charge may be changed from time to time, and that the Underlying Issuer also imposes a schedule of charges for amendments, extensions, drawings, and renewals. (f) If by reason of (i) any change after the Closing Date in any applicable law, treaty, rule, or regulation or any change in the interpretation or application thereof by any Governmental Authority, or (ii) compliance by the Underlying Issuer or the Lender Group with any direction, request, or requirement (irrespective of whether having the force of law) of any Governmental Authority or monetary authority including, Regulation D of the Federal Reserve Board as from time to time in effect (and any successor thereto): (i) any reserve, deposit, or similar requirement is or shall be imposed or modified in respect of any Letter of Credit issued hereunder, or (ii) there shall be imposed on the Underlying Issuer or the Lender Group any other condition regarding any Underlying Letter of Credit or any Letter of Credit issued pursuant hereto, -61- and the result of the foregoing is to increase, directly or indirectly, the cost to the Lender Group of issuing, making, guaranteeing, or maintaining any Letter of Credit or to reduce the amount receivable in respect thereof by the Lender Group, then, and in any such case, Agent may, at any time within a reasonable period after the additional cost is incurred or the amount received is reduced, notify Borrower, and Borrower shall pay on demand such amounts as Agent may specify to be necessary to compensate the Lender Group for such additional cost or reduced receipt, together with interest on such amount from the date of such demand until payment in full thereof at the rate then applicable to Base Rate Loans hereunder. The determination by Agent of any amount due pursuant to this Section, as set forth in a certificate setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on all of the parties hereto. 2.13 LIBOR Option. (a) Interest and Interest Payment Dates. In lieu of having interest charged at the rate based upon the Base Rate, Borrower shall have the option (the "LIBOR Option") to have interest on all or a portion of the Revolver A Advances, Revolver B Advances, and Revolver C Advances be charged at a rate of interest based upon the LIBOR Rate. Interest on LIBOR Rate Loans shall be payable on the earliest of (i) the last day of the Interest Period applicable thereto, (ii) the occurrence of an Event of Default in consequence of which the Required Lenders or Agent on behalf thereof elect to accelerate the maturity of all or any portion of the Obligations, or (iii) termination of this Agreement pursuant to the terms hereof. On the last day of each applicable Interest Period, unless Borrower properly has exercised the LIBOR Option with respect thereto, the interest rate applicable to such LIBOR Rate Loan automatically shall convert to the rate of interest then applicable to Base Rate Loans of the same type hereunder. At any time that an Event of Default has occurred and is continuing, Borrower no longer shall have the option to request that Revolver A Advances, Revolver B Advances, or Revolver C Advances bear interest at the LIBOR Rate and Agent shall have the right to convert the interest rate on all outstanding LIBOR Rate Loans to the rate then applicable to Base Rate Loans hereunder. (b) LIBOR Election. (i) Borrower may, at any time and from time to time, so long as no Event of Default has occurred and is continuing, elect to exercise the LIBOR Option by notifying Agent prior to 11:00 a.m. (California time) at least 3 Business Days prior to the commencement of the proposed Interest Period (the "LIBOR Deadline"). Notice of Borrower's election of the LIBOR Option for a permitted portion of the Revolver A Advances, Revolver B Advances, or Revolver C Advances and an Interest Period pursuant to this Section shall be made by delivery to Agent of a LIBOR Notice received by Agent before the LIBOR Deadline, or by telephonic notice received by Agent before the LIBOR -62- Deadline (to be confirmed by delivery to Agent of a LIBOR Notice received by Agent prior to 5:00 p.m. (California time) on the same day). Promptly upon its receipt of each such LIBOR Notice, Agent shall provide a copy thereof to each of the Lenders having a Revolver Commitment. (ii) Each LIBOR Notice shall be irrevocable and binding on Borrower. In connection with each LIBOR Rate Loan, Borrower shall indemnify, defend, and hold Agent and the Lenders harmless against any loss, cost, or expense incurred by Agent or any Lender as a result of (a) the payment of any principal of any LIBOR Rate Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any LIBOR Rate Loan other than on the last day of the Interest Period applicable thereto, or (c) the failure to borrow, convert, continue or prepay any LIBOR Rate Loan on the date specified in any LIBOR Notice delivered pursuant hereto (such losses, costs, and expenses, collectively, "Funding Losses"). Funding Losses shall, with respect to Agent or any Lender, be deemed to equal the amount determined by Agent or such Lender to be the excess, if any, of (i) the amount of interest that would have accrued on the principal amount of such LIBOR Rate Loan had such event not occurred, at the LIBOR Rate that would have been applicable thereto, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert, or continue, for the period that would have been the Interest Period therefor), minus (ii) the amount of interest that would accrue on such principal amount for such period at the interest rate which Agent or such Lender would be offered were it to be offered, at the commencement of such period, Dollar deposits of a comparable amount and period in the London interbank market. A certificate of Agent or a Lender delivered to Borrower setting forth any amount or amounts that Agent or such Lender is entitled to receive pursuant to this Section 2.13 shall be conclusive absent manifest error. (iii) Borrower shall have not more than 8 LIBOR Rate Loans in effect at any given time. Borrower only may exercise the LIBOR Option for LIBOR Rate Loans of at least $1,000,000 and integral multiples of $500,000 in excess thereof. (c) Prepayments. Borrower may prepay LIBOR Rate Loans at any time; provided, however, that in the event that LIBOR Rate Loans are prepaid on any date that is not the last day of the Interest Period applicable thereto, including as a result of any automatic prepayment through the required application by Agent of proceeds of Borrower's and its Subsidiaries' Collections in accordance with Section 2.4(b) or for any other reason, including early termination of the term of this Agreement or acceleration of all or any portion of the Obligations pursuant to the terms hereof, Borrower shall indemnify, defend, and hold -63- Agent and the Lenders and their Participants harmless against any and all Funding Losses in accordance with clause (b)(ii) above. (d) Special Provisions Applicable to LIBOR Rate. (i) The LIBOR Rate may be adjusted by Agent with respect to any Lender on a prospective basis to take into account any additional or increased costs to such Lender of maintaining or obtaining any eurodollar deposits or increased costs due to changes in applicable law occurring subsequent to the commencement of the then applicable Interest Period, including changes in tax laws (except changes of general applicability in corporate income tax laws) and changes in the reserve requirements imposed by the Board of Governors of the Federal Reserve System (or any successor), excluding the Reserve Percentage, which additional or increased costs would increase the cost of funding loans bearing interest at the LIBOR Rate. In any such event, the affected Lender shall give Borrower and Agent notice of such a determination and adjustment and Agent promptly shall transmit the notice to each other Lender and, upon its receipt of the notice from the affected Lender, Borrower may, by notice to such affected Lender (y) require such Lender to furnish to Borrower a statement setting forth the basis for adjusting such LIBOR Rate and the method for determining the amount of such adjustment, or (z) repay the LIBOR Rate Loans with respect to which such adjustment is made (together with any amounts due under clause (b)(ii) above). (ii) In the event that any change in market conditions or any law, regulation, treaty, or directive, or any change therein or in the interpretation of application thereof, shall at any time after the date hereof, in the reasonable opinion of any Lender, make it unlawful or impractical for such Lender to fund or maintain LIBOR Advances or to continue such funding or maintaining, or to determine or charge interest rates at the LIBOR Rate, such Lender shall give notice of such changed circumstances to Agent and Borrower and Agent promptly shall transmit the notice to each other Lender and (y) in the case of any LIBOR Rate Loans of such Lender that are outstanding, the date specified in such Lender's notice shall be deemed to be the last day of the Interest Period of such LIBOR Rate Loans, and interest upon the LIBOR Rate Loans of such Lender thereafter shall accrue interest at the rate then applicable to Base Rate Loans, and (z) Borrower shall not be entitled to elect the LIBOR Option until such Lender determines that it would no longer be unlawful or impractical to do so. (e) No Requirement of Matched Funding. Anything to the contrary contained herein notwithstanding, neither Agent, nor any Lender, nor any of their Participants, is required actually to acquire eurodollar deposits to fund or otherwise match -64- fund any Obligation as to which interest accrues at the LIBOR Rate. The provisions of this Section shall apply as if each Lender or its Participants had match funded any Obligation as to which interest is accruing at the LIBOR Rate by acquiring eurodollar deposits for each Interest Period in the amount of the LIBOR Rate Loans. 2.14 Capital Requirements. If, after the date hereof, any Lender determines that (i) the adoption of or change in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change in the interpretation or application thereof by any Governmental Authority charged with the administration thereof, or (ii) compliance by such Lender or its parent bank holding company with any guideline, request, or directive of any such entity regarding capital adequacy (whether or not having the force of law), has the effect of reducing the return on such Lender's or such holding company's capital as a consequence of such Lender's Commitments hereunder to a level below that which such Lender or such holding company could have achieved but for such adoption, change, or compliance (taking into consideration such Lender's or such holding company's then existing policies with respect to capital adequacy and assuming the full utilization of such entity's capital) by any amount deemed by such Lender to be material, then such Lender may notify Borrower and Agent thereof. Following receipt of such notice, Borrower agrees to pay such Lender on demand the amount of such reduction of return of capital as and when such reduction is determined, payable within 90 days after presentation by such Lender of a statement in the amount and setting forth in reasonable detail such Lender's calculation thereof and the assumptions upon which such calculation was based (which statement shall be deemed true and correct absent manifest error). In determining such amount, such Lender may use any reasonable averaging and attribution methods. 2.15 Designated Senior Debt. The Lender Group and Borrower agree that the Obligations constitute "Designated Senior Debt" as defined in and for all purposes under the Subordinated Notes Indenture. 3. CONDITIONS; TERM OF AGREEMENT. 3.1 Conditions Precedent to the Initial Extension of Credit. The obligation of the Lender Group (or any member thereof) to make the initial Advance (or otherwise to extend any credit provided for hereunder), is subject to the fulfillment, to the satisfaction of Agent, of each of the conditions precedent set forth below: (a) the Closing Date shall occur on or before October 10, 2003; (b) Agent shall have received a UCC Filing Authorization Letter, duly executed by Borrower and each Guarantor, together with appropriate financing statements on Form UCC-1 duly filed in such office or offices as may be necessary or, in the opinion of Agent, desirable to perfect the Agent's Liens in and to the Collateral, and Agent shall have received searches reflecting the filing of all such financing statements; -65- (c) Agent shall have received each of the following documents, in form and substance satisfactory to Agent, duly executed, and each such document shall be in full force and effect: (i) the Affiliate Subordination Agreement, (ii) the Cash Management Agreements, (iii) the Control Agreements, (iv) the Disbursement Letter, (v) the Fee Letter, (vi) the Guarantor Security Agreement, (vii) the Guaranty, (viii) the Holding Stock Pledge Agreement, together with all certificates representing the shares of Stock pledged thereunder, as well as Stock powers with respect thereto endorsed in blank, (ix) the Intercompany Subordination Agreement, (x) the Intercreditor Agreement, (xi) the Temecula Mortgage, (xii) the Officers' Certificate, (xiii) the Patent Security Agreement, (xiv) the Pay-Off Letter, together with UCC termination statements and other documentation evidencing the termination by Existing Lender of its Liens in and to the properties and assets of Borrower and its Subsidiaries (or an agreement by the Existing Agent to deliver such documentation upon receipt of payment in full of the Indebtedness under the Existing Credit Agreement or, in the case of UCC termination statements, authorization for Agent to file UCC termination statements upon receipt of such payment), (xv) the Stock Pledge Agreement, together with all certificates representing the shares of Stock pledged thereunder, as well as Stock powers with respect thereto endorsed in blank, and (xvi) the Trademark Security Agreement; -66- (d) Agent shall have received a certificate from the Secretary of Borrower attesting to the resolutions of Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which Borrower is a party and authorizing specific officers of Borrower to execute the same; (e) Agent shall have received copies of Borrower's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of Borrower; (f) Agent shall have received a certificate of status with respect to Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of Borrower, which certificate shall indicate that Borrower is in good standing in such jurisdiction; (g) Agent shall have received certificates of status with respect to Borrower, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the state of Illinois and the jurisdiction of organization of Borrower) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that Borrower is in good standing in such jurisdictions; (h) Agent shall have received a certificate from the Secretary of each Guarantor attesting to the resolutions of such Guarantor's Board of Directors authorizing its execution, delivery, and performance of the Loan Documents to which such Guarantor is a party and authorizing specific officers of such Guarantor to execute the same;] (i) Agent shall have received copies of each Guarantor's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of such Guarantor; (j) Agent shall have received a certificate of status with respect to each Guarantor, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Guarantor, which certificate shall indicate that such Guarantor is in good standing in such jurisdiction; (k) Agent shall have received certificates of status with respect to each Guarantor, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of such Guarantor) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that such Guarantor is in good standing in such jurisdictions; -67- (l) Agent shall have received a certificate of insurance, together with the endorsements thereto, as are required by Section 6.8, the form and substance of which shall be satisfactory to Agent; (m) Agent shall have received an opinion of Borrower's counsel in form and substance satisfactory to Agent; (n) Agent shall have received satisfactory evidence (including a certificate of the chief financial officer of Borrower) that all tax returns required to be filed by Borrower and its Subsidiaries have been timely filed and all taxes upon Borrower and its Subsidiaries or their properties, assets, income, and franchises (including Real Property taxes, sales taxes, and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; (o) Borrower shall have the Required Availability after giving effect to the initial extensions of credit hereunder and the payment of all fees and expenses required to be paid by Borrower on the Closing Date under this Agreement or the other Loan Documents; (p) Agent shall have completed its business, legal, and collateral due diligence, including (i) a collateral audit and review of Borrower's and its Subsidiaries books and records and verification of Borrower's representations and warranties to the Lender Group, the results of which shall be satisfactory to Agent, and (ii) an inspection of each of the locations where Borrower's and its Subsidiaries' Inventory is located, the results of which shall be satisfactory to Agent; (q) Agent shall have received completed reference checks with respect to Borrower's senior management, the results of which are satisfactory to Agent in its sole discretion; (r) Agent shall have received an appraisal of the Liquidation Percentage applicable to Borrower's and its Subsidiaries' Inventory and an appraisal of Borrower's and its Subsidiaries' Equipment, the results of which shall be satisfactory to Agent; (s) Agent shall have received Borrower's Closing Date Business Plan; (t) Borrower shall have paid all Lender Group Expenses incurred and billed in connection with the transactions evidenced by this Agreement; (u) Agent shall have received (i) an appraisal of the Real Property Collateral reasonably satisfactory to Agent, and (ii) a mortgagee title insurance policy (or marked commitments to issue the same) for the Real Property Collateral issued by a title -68- insurance company satisfactory to Agent ("Mortgage Policy") in an amount not to exceed the fair market value of the Real Property Collateral assuring Agent that the Temecula Mortgage is a valid and enforceable first priority mortgage Lien on such Real Property Collateral free and clear of all defects and encumbrances except Permitted Liens, and the Mortgage Policy otherwise shall be in form and substance reasonably satisfactory to Agent; (v) Agent shall have received a phase-I environmental report with respect to each parcel composing the Real Property Collateral; the environmental consultants retained for such reports, the scope of the reports, and the results thereof shall be reasonably acceptable to Agent; (w) The Subordinated Convertible Notes shall have been amended or re-issued to extend the maturity date thereof to March 31, 2008, and Agent shall have received copies of such amendments or re-issued notes certified by the chief financial officer of Borrower; (x) The Senior Notes shall have been amended or re-issued to extend the maturity date thereof to March 31, 2008, and Agent shall have received copies of such amendments or re-issued notes certified by the chief financial officer of Borrower; (y) The HRC Notes shall have been amended or re-issued to extend the maturity date thereof to March 31, 2008, and Agent shall have received copies of such amendments or re-issued notes certified by the chief financial officer of Borrower; (z) The agreements governing the Borrower Preferred Stock and the Holding Preferred Stock shall have been amended to extend the period of time within which cash dividends are not paid thereunder in a manner satisfactory to Agent, and Agent shall have received copies of such amendments certified by the chief financial officer of Borrower; (aa) The conditions precedent to the initial extension of credit set forth in Section 3.1 of the Post Loan Agreement shall have been satisfied, and the lenders under the Post Loan Agreement shall have concurrently funded the initial loans thereunder; (bb) Borrower and each of its Subsidiaries shall have received all licenses, approvals or evidence of other actions required by any Governmental Authority in connection with the execution and delivery by Borrower or its Subsidiaries of the Loan Documents or with the consummation of the transactions contemplated thereby; and (cc) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Agent. -69- 3.2 Conditions Subsequent to the Initial Extension of Credit. Borrower shall use its best efforts to cause the execution and delivery to Agent of a Collateral Access Agreement with respect to the Bonded Logistics warehouse in Charlotte, North Carolina within 90 days of the Closing Date. The obligation of the Lender Group (or any member thereof) to continue to make Advances (or otherwise extend credit hereunder) is subject to the fulfillment, on or before the date applicable thereto, of each of the conditions subsequent set forth below (the failure by Borrower to so perform or cause to be performed constituting an Event of Default): (a) within 30 days of the Closing Date, deliver to Agent certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 6.8, the form and substance of which shall be satisfactory to Agent and its counsel; (b) within 30 days of the Closing Date, Agent shall have received a certificate of status with respect to Borrower issued by the appropriate officer of the state of Illinois which certificate shall indicate that Borrower is in good standing in Illinios; and (c) within 90 days of the Closing Date, Agent shall have received Collateral Access Agreements with respect to the Specified Locations. 3.3 Conditions Precedent to all Extensions of Credit. The obligation of the Lender Group (or any member thereof) to make any Advances hereunder at any time (or to extend any other credit hereunder) shall be subject to the following conditions precedent: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof; (c) no injunction, writ, restraining order, or other order of any nature restricting or prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any Governmental Authority against Borrower, Agent, any Lender, or any of their Affiliates; and (d) no Material Adverse Change shall have occurred. 3.4 Term. This Agreement shall continue in full force and effect for a term ending on October 1, 2007 (the "Maturity Date"). The foregoing notwithstanding, the Lender Group, upon the election of the Required Lenders, shall have the right to terminate its -70- obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.5 Effect of Termination. On the date of termination of this Agreement, all Obligations (including contingent reimbursement obligations of Borrower with respect to outstanding Letters of Credit) immediately shall become due and payable without notice or demand (including either (i) providing cash collateral to be held by Agent for the benefit of those Lenders with a Revolver Commitment in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to the Issuing Lender). No termination of this Agreement, however, shall relieve or discharge Borrower or its Subsidiaries of their duties, Obligations, or covenants hereunder and the Agent's Liens in the Collateral shall remain in effect until all Obligations have been paid in full and the Lender Group's obligations to provide additional credit hereunder have been terminated. When this Agreement has been terminated and all of the Obligations have been paid in full and the Lender Group's obligations to provide additional credit under the Loan Documents have been terminated irrevocably, Agent will, at Borrower's sole expense, execute and deliver any UCC termination statements, lien releases, mortgage releases, re-assignments of trademarks, discharges of security interests, and other similar discharge or release documents (and, if applicable, in recordable form) as are requested by Borrower to release, as of record, the Agent's Liens and all notices of security interests and liens previously filed by Agent with respect to the Obligations. 3.6 Early Termination by Borrower. Borrower has the option, at any time upon 90 days prior written notice to Agent, to terminate this Agreement by making payment in full to Agent of the Obligations (including either (i) providing cash collateral to be held by Agent for the benefit of those Lenders with a Revolver Commitment in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to the Issuing Lender), in full, together with the Applicable Prepayment Premium (to be allocated based upon letter agreements between Agent and individual Lenders). If Borrower has sent a notice of termination pursuant to the provisions of this Section, then the Commitments shall terminate and Borrower shall be obligated to repay the Obligations (including either (i) providing cash collateral to be held by Agent for the benefit of those Lenders with a Revolver Commitment in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to the Issuing Lender), in full, together with the Applicable Prepayment Premium, on the date set forth as the date of termination of this Agreement in such notice. In the event of the termination of this Agreement and repayment of the Obligations at any time prior to the Maturity Date, for any other reason, including (a) termination upon the election of the Required Lenders to terminate after the occurrence and during the continuation of an Event of Default, (b) foreclosure and sale of Collateral, (c) sale of the Collateral in any Insolvency Proceeding, or (d) restructure, reorganization, or compromise of the Obligations by the confirmation of a plan of reorganization or any other plan of compromise, restructure, or arrangement in any Insolvency Proceeding, then, in view of the impracticability and extreme difficulty of -71- ascertaining the actual amount of damages to the Lender Group or profits lost by the Lender Group as a result of such early termination, and by mutual agreement of the parties as to a reasonable estimation and calculation of the lost profits or damages of the Lender Group, Borrower shall pay the Applicable Prepayment Premium (to be allocated based upon letter agreements between Agent and individual Lenders) to Agent, measured as of the date of such termination. The foregoing to the contrary notwithstanding, (a) in the event that any termination of this Agreement by Borrower pursuant to the first sentence of this Section 3.6 occurs as a result of a refinancing by a commercial banking unit of Wells Fargo and the outstanding Obligations are paid in full by Borrower out of the proceeds from such refinancing, then the Applicable Prepayment Premium shall be zero, and (b) in the event that any termination of this Agreement by Borrower pursuant to the first sentence of this Section 3.6 occurs as a result of or in connection with an initial public offering of Borrower's Stock or a sale of all or substantially all of Borrower's assets or Stock, in one or a series of related transactions, and the outstanding Obligations are paid in full by Borrower out of the proceeds from any such transaction, then the Applicable Prepayment Premium shall be reduced by 50%. 4. CREATION OF SECURITY INTERESTS. 4.1 Grant of Security Interest. (a) Borrower hereby grants to Agent, for the benefit of the Lender Group, a continuing security interest in all of its right, title, and interest in all currently existing and hereafter acquired or arising Borrower Collateral in order to secure prompt repayment of any and all of the Obligations in accordance with the terms and conditions of the Loan Documents and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. (b) The Agent's Liens in and to the Borrower Collateral shall attach to all Borrower Collateral without further act on the part of Agent or Borrower. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for Permitted Dispositions, Borrower and its Subsidiaries have no authority, express or implied, to dispose of any item or portion of the Collateral. 4.2 Negotiable Collateral. In the event that any Borrower Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, and if and to the extent that Agent determines that perfection or priority of Agent's security interest is dependent on or enhanced by possession, Borrower, immediately upon the request of Agent, shall endorse and deliver physical possession of such Negotiable Collateral to Agent. 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral. At any time after the occurrence and during the continuation of an Event of Default, Agent or Agent's designee may (a) notify Account Debtors of Borrower that Borrower's Accounts, chattel paper, or General Intangibles have been assigned to Agent or that Agent has a -72- security interest therein, or (b) collect Borrower's Accounts, chattel paper, or General Intangibles directly and charge the collection costs and expenses to the Loan Account. Borrower agrees that it will hold in trust for the Lender Group, as the Lender Group's trustee, and for Post and the lenders under the Post Loan Documents, as their trustee, any of its or its Subsidiaries' Collections that it receives and immediately will deliver such Collections to Agent or a Cash Management Bank in their original form as received by Borrower or its Subsidiaries. 4.4 Filing of Financing Statements; Commercial Tort Claims; Delivery of Additional Documentation Required. (a) Borrower authorizes Agent to file any financing statement necessary or desirable to effectuate the transactions contemplated by the Loan Documents, and any continuation statement or amendment with respect thereto, in any appropriate filing office without the signature of Borrower where permitted by applicable law. Borrower hereby ratifies the filing of any financing statement filed without the signature of Borrower prior to the date hereof. (b) If Borrower or the Restricted Subsidiaries acquire any commercial tort claims after the date hereof, Borrower shall promptly (but in any event within 3 Business Days after such acquisition) deliver to Agent a written description of such commercial tort claim and shall deliver a written agreement, in form and substance satisfactory to Agent, pursuant to which Borrower or the Restricted Subsidiary, as applicable, shall pledge and collaterally assign all of its right, title and interest in and to such commercial tort claim to Agent, as security for the Obligations (a "Commercial Tort Claim Assignment"). (c) At any time upon the request of Agent, Borrower shall execute or deliver to Agent, and shall cause the Restricted Subsidiaries to execute or deliver to Agent, any and all financing statements, original financing statements in lieu of continuation statements, fixture filings, security agreements, pledges, assignments, Commercial Tort Claim Assignments, endorsements of certificates of title, and all other documents (collectively, the "Additional Documents") that Agent may request in its Permitted Discretion, in form and substance satisfactory to Agent, to create, perfect, and continue perfected or to better perfect the Agent's Liens in the assets of Borrower and the Restricted Subsidiaries (whether now owned or hereafter arising or acquired, tangible or intangible, real or personal), to create and perfect Liens in favor of Agent in any Real Property acquired after the Closing Date, and in order to fully consummate all of the transactions contemplated hereby and under the other Loan Documents. To the maximum extent permitted by applicable law, Borrower authorizes Agent to execute any such Additional Documents in Borrower's name and authorizes Agent to file such executed Additional Documents in any appropriate filing office. In addition, on such periodic basis as Agent shall require, Borrower shall (i) provide Agent with a report of all new material patentable, copyrightable, or -73- trademarkable materials acquired or generated by Borrower or the Restricted Subsidiaries during the prior period, (ii) cause all material patents, copyrights, and trademarks acquired or generated by Borrower or the Restricted Subsidiaries that are not already the subject of a registration with the appropriate filing office (or an application therefor diligently prosecuted) to be registered with such appropriate filing office in a manner sufficient to impart constructive notice of Borrower's or the applicable Restricted Subsidiary's ownership thereof, and (iii) cause to be prepared, executed, and delivered to Agent supplemental schedules to the applicable Loan Documents to identify such patents, copyrights, and trademarks as being subject to the security interests created thereunder. 4.5 Power of Attorney. Borrower hereby irrevocably makes, constitutes, and appoints Agent (and any of Agent's officers, employees, or agents designated by Agent) as Borrower's true and lawful attorney, with power to (a) if Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of Borrower on any of the documents described in Section 4.4, (b) at any time that an Event of Default has occurred and is continuing, sign Borrower's name on any invoice or bill of lading relating to the Borrower Collateral, drafts against Account Debtors, or notices to Account Debtors, (c) send requests for verification of Borrower's or the Restricted Subsidiaries' Accounts, (d) endorse Borrower's name on any of its payment items (including all of its Collections) that may come into the Lender Group's possession, (e) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under Borrower's policies of insurance and make all determinations and decisions with respect to such policies of insurance, and (f) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting Borrower's or the Restricted Subsidiaries' Accounts, chattel paper, or General Intangibles directly with Account Debtors, for amounts and upon terms that Agent determines to be reasonable, and Agent may cause to be executed and delivered any documents and releases that Agent determines to be necessary. The appointment of Agent as Borrower's attorney, and each and every one of its rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and the Lender Group's obligations to extend credit hereunder are terminated. 4.6 Right to Inspect. Agent and each Lender (through any of their respective officers, employees, or agents) shall have the right, from time to time hereafter to inspect the Books and make copies or abstracts thereof and to check, test, and appraise the Collateral, or any portion thereof, in order to verify Borrower's and its Subsidiaries' financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral; provided that so long as no Triggering Event has occurred, (a) Borrower shall not be required to pay for more than 2 inspections/audits of the Collateral per year and (b) appraisals of the Collateral shall be conducted no more frequently than once per year. 4.7 Control Agreements. Borrower agrees that it will not, and will not permit the Restricted Subsidiaries to, transfer assets out of any of their Deposit Accounts or Securities -74- Accounts; provided, however, that so long as no Event of Default has occurred and is continuing or would result therefrom, Borrower and the Restricted Subsidiaries may use such assets (and the proceeds thereof) to the extent not prohibited by this Agreement or the other Loan Documents and, if the transfer is to another bank or securities intermediary, so long as Borrower (or a Restricted Subsidiary, as applicable), Agent, and the substitute bank or securities intermediary have entered into a Control Agreement. Borrower agrees that it will and will cause the Restricted Subsidiaries to take any or all reasonable steps that Agent requests in order for Agent to obtain control in accordance with Sections 9-104, 9-105, 9-106, and 9-107 of the Code with respect to any of its or their Securities Accounts, Deposit Accounts, electronic chattel paper, Investment Property, and letter-of-credit rights. No arrangement contemplated hereby or by any Control Agreement in respect of any Securities Accounts or other Investment Property shall be modified by Borrower without the prior written consent of Agent. Upon the occurrence and during the continuance of a Default or Event of Default, Agent may notify any bank or securities intermediary to liquidate the applicable Deposit Account or Securities Account or any related Investment Property maintained or held thereby and remit the proceeds thereof to the Agent's Account. 5. REPRESENTATIONS AND WARRANTIES. In order to induce the Lender Group to enter into this Agreement, Borrower makes the following representations and warranties to the Lender Group which shall be true, correct, and complete, in all material respects, as of the date hereof, and shall be true, correct, and complete, in all material respects, as of the Closing Date, and at and as of the date of the making of each Advance (or other extension of credit) made thereafter, as though made on and as of the date of such Advance (or other extension of credit) (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 5.1 No Encumbrances. Borrower and the Restricted Subsidiaries have good and indefeasible title to their personal property assets and good and marketable title to their Real Property, in each case, free and clear of Liens except for Permitted Liens. 5.2 Eligible Accounts. The Eligible Accounts are bona fide existing payment obligations of Account Debtors created by the sale and delivery of Inventory or the rendition of services to such Account Debtors in the ordinary course of Borrower's business, owed to Borrower without any known defenses, disputes, offsets, counterclaims, or rights of return or cancellation. As to each Account that is identified by Borrower as an Eligible Account in a borrowing base report submitted to Agent, such Account is not excluded as ineligible by virtue of one or more of the excluding criteria set forth in the definition of Eligible Accounts. 5.3 Eligible Inventory. All Eligible Inventory is of good and merchantable quality, free from known defects. As to each item of Inventory that is identified by Borrower as Eligible Inventory in a borrowing base report submitted to Agent, such Inventory is not -75- excluded as ineligible by virtue of one or more of the excluding criteria set forth in the definition of Eligible Inventory. 5.4 Equipment. All of the Equipment of Borrower and the Restricted Subsidiaries is used or held for use in their business and is fit for such purposes, ordinary wear and tear excepted. 5.5 Location of Inventory and Equipment. The Inventory and Equipment of Borrower and the Restricted Subsidiaries are not stored with a bailee, warehouseman, or similar party and are located only at, or in-transit between, the locations identified on Schedule 5.5 (as such Schedule may be updated pursuant to Section 6.9). 5.6 Inventory Records. Borrower keeps correct and accurate records itemizing and describing the type, quality, and quantity of its and the Restricted Subsidiaries' Inventory and the book value thereof. 5.7 State of Incorporation; Location of Chief Executive Office; FEIN; Organizational ID Number; Commercial Tort Claims. (a) The jurisdiction of organization of Borrower and each of its Subsidiaries is set forth on Schedule 5.7(a). (b) The chief executive office of Borrower and each of its Subsidiaries is located at the address indicated on Schedule 5.7(b) (as such Schedule may be updated pursuant to Section 6.9). (c) Borrower's and each of its Subsidiaries' FEIN and organizational identification number, if any, are identified on Schedule 5.7(c). (d) As of the Closing Date, Borrower and the Restricted Subsidiaries do not hold any commercial tort claims, except as set forth on Schedule 5.7(d). 5.8 Due Organization and Qualification; Subsidiaries. (a) Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its organization and qualified to do business in any state where the failure to be so qualified reasonably could be expected to have a Material Adverse Change; provided that until such time as the condition subsequent set forth in Section 3.2(b) is satisfied, it is hereby acknowledged that Borrower is not qualified to do business in the state of Illinois. (b) Set forth on Schedule 5.8(b), is a complete and accurate description of the authorized capital Stock of Borrower, by class, and, as of the Closing Date, a description of the number of shares of each such class that are issued and outstanding. Other than as described on Schedule 5.8(b), there are no subscriptions, options, warrants, or -76- calls relating to any shares of Borrower's capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. Borrower is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital Stock or any security convertible into or exchangeable for any of its capital Stock. (c) Set forth on Schedule 5.8(c), is a complete and accurate list of Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of their organization, (ii) the number of shares of each class of common and preferred Stock authorized for each of the Restricted Subsidiaries and HRC, and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by Borrower. All of the outstanding capital Stock of each such Subsidiary has been validly issued and is fully paid and non-assessable. (d) Except as set forth on Schedule 5.8(c), there are no subscriptions, options, warrants, or calls relating to any shares of Borrower's Subsidiaries' capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. Neither Borrower nor any of its Subsidiaries is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of Borrower's Subsidiaries' capital Stock or any security convertible into or exchangeable for any such capital Stock. 5.9 Due Authorization; No Conflict. (a) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party have been duly authorized by all necessary action on the part of Borrower. (b) The execution, delivery, and performance by Borrower of this Agreement and the other Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to Borrower, the Governing Documents of Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Permitted Liens, or (iv) require any approval of Borrower's interestholders or any approval or consent of any Person under any material contractual obligation of Borrower, other than consents or approvals that have been obtained and that are still in force and effect. (c) Other than the filing of financing statements and the recordation of the Mortgages, the execution, delivery, and performance by Borrower of this Agreement and the other Loan Documents to which Borrower is a party do not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental -77- Authority, other than consents or approvals that have been obtained and that are still in force and effect. (d) This Agreement and the other Loan Documents to which Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by Borrower will be the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Agent's Liens are validly created, perfected, and first priority (except as contemplated by the Intercreditor Agreement) Liens, subject only to Permitted Liens. (f) The execution, delivery, and performance by each Guarantor of the Loan Documents to which it is a party have been duly authorized by all necessary action on the part of such Guarantor. (g) The execution, delivery, and performance by each Guarantor of the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to such Guarantor, the Governing Documents of such Guarantor, or any order, judgment, or decree of any court or other Governmental Authority binding on such Guarantor, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of such Guarantor, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of such Guarantor, other than Permitted Liens, or (iv) require any approval of such Guarantor's interestholders or any approval or consent of any Person under any material contractual obligation of such Guarantor, other than consents or approvals that have been obtained and that are still in force and effect. (h) Other than the filing of financing statements and the recordation of the Mortgages, the execution, delivery, and performance by each Guarantor of the Loan Documents to which such Guarantor is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority, other than consents or approvals that have been obtained and that are still in force and effect. (i) The Loan Documents to which each Guarantor is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Guarantor will be the legally valid and binding obligations of such Guarantor, enforceable against such Guarantor in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. -78- 5.10 Litigation. Other than those matters disclosed on Schedule 5.10, there are no actions, suits, or proceedings pending or, to the best knowledge of Borrower, threatened against Borrower, or any of its Subsidiaries, as applicable, except for (a) matters that are fully covered by insurance (subject to customary deductibles), and (b) matters arising after the Closing Date that, if decided adversely to Borrower, or any of its Subsidiaries, as applicable, reasonably could not be expected to result in a Material Adverse Change. 5.11 No Material Adverse Change. All financial statements relating to Borrower and its Subsidiaries that have been delivered by Borrower to the Lender Group have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and present fairly in all material respects, Borrower's and its Subsidiaries' financial condition as of the date thereof and results of operations for the period then ended. There has not been a Material Adverse Change since the date of the latest financial statements submitted to the Lender Group on or before the Closing Date. 5.12 Fraudulent Transfer. (a) Borrower and the Restricted Subsidiaries, taken as a whole, are Solvent. (b) No transfer of property is being made by Borrower or its Subsidiaries and no obligation is being incurred by Borrower or its Subsidiaries in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrower or its Subsidiaries. 5.13 Employee Benefits. None of Borrower, any of the Restricted Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan. 5.14 Environmental Condition. Except as set forth on Schedule 5.14, (a) to Borrower's knowledge, none of Borrower's or the Restricted Subsidiaries' assets has ever been used by Borrower, the Restricted Subsidiaries, or by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials, where such production, storage, handling, treatment, release or transport was in violation of applicable Environmental Law, except for any such violation that reasonably could not be expected to result in a Material Adverse Change, (b) to Borrower's knowledge, none of Borrower's or the Restricted Subsidiaries' properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, (c) neither Borrower nor any of the Restricted Subsidiaries has received notice that a Lien arising under any Environmental Law has attached to any revenues or to any Real Property owned or operated by Borrower or the Restricted Subsidiaries, and (d) neither Borrower nor the Restricted Subsidiaries has received any unresolved summons, citation, notice, or directive from the Environmental Protection -79- Agency or any other federal or state governmental agency concerning any action or omission by Borrower or its Subsidiaries resulting in the releasing or disposing of Hazardous Materials into the environment that allegedly is in violation of applicable Environmental Law. 5.15 Brokerage Fees. Neither Borrower nor any of the Restricted Subsidiaries has utilized the services of any broker or finder in connection with Borrower's obtaining financing from the Lender Group under this Agreement and no brokerage commission or finders fee is payable by Borrower or the Restricted Subsidiaries in connection herewith. 5.16 Intellectual Property. Borrower and the Restricted Subsidiaries own, or hold licenses in, all trademarks, trade names, copyrights, patents, patent rights, and licenses that are necessary to the conduct of their business as currently conducted. Attached hereto as Schedule 5.16 (as updated from time to time) is a true, correct, and complete listing of all material patents, patent applications, trademarks, trademark applications, copyrights, and copyright registrations as to which Borrower or one of the Restricted Subsidiaries is the owner or is an exclusive licensee. 5.17 Leases. Borrower and the Restricted Subsidiaries enjoy peaceful and undisturbed possession under all leases material to their business and to which they are parties or under which they are operating. All of such leases are valid and subsisting and no material default by Borrower or the Restricted Subsidiaries exists under any of them. 5.18 Deposit Accounts and Securities Accounts. Set forth on Schedule 5.18 are all of Borrower's and the Restricted Subsidiaries' Deposit Accounts and Securities Accounts, including, with respect to each bank or securities intermediary (i) the name and address of such Person, and (ii) the account numbers of the Deposit Accounts or Securities Accounts maintained with such Person. 5.19 Complete Disclosure. All factual information (taken as a whole) furnished by or on behalf of Borrower or its Subsidiaries in writing to Agent or any Lender (including all information contained in the Schedules hereto or in the other Loan Documents, but excluding any Projections) for purposes of or in connection with this Agreement, the other Loan Documents, or any transaction contemplated herein or therein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of Borrower or its Subsidiaries in writing to Agent or any Lender will be, true and accurate, in all material respects, on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. On the Closing Date, the Closing Date Projections represent, and as of the date on which any other Projections are delivered to Agent, such additional Projections represent Borrower's good faith best estimate of its and its Subsidiaries future performance for the periods covered thereby. -80- 5.20 Indebtedness. Set forth on Schedule 5.20 is a true and complete list of all Indebtedness of Borrower and its Subsidiaries outstanding immediately prior to the Closing Date that is to remain outstanding after the Closing Date and such Schedule accurately reflects the aggregate principal amount of such Indebtedness and the principal terms thereof. 5.21 Subordinated Notes Indenture. The Obligations are "Senior Debt" (as defined in the Subordinated Notes Indenture) and, therefore, the repayment of the Subordinated Notes is subordinated to the prior payment in full in cash of the Obligations to the extent and in the manner provided in Article 10 of the Subordinated Notes Indenture. The Indebtedness owing to the Lender Group under the Loan Documents is "Permitted Debt" (as defined in the Subordinated Notes Indenture). The defined term "Credit Facility" (as defined in the Subordinated Notes Indenture) includes the credit facility evidenced by this Agreement and the other Loan Documents. 5.22 CFCs. As of the Closing Date, none of Borrower's Restricted Subsidiaries that are CFCs could execute and deliver guaranties of the Obligations or grant Liens in their assets to secure the Obligations without creating a tax obligation under Section 956 of the IRC. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, until termination of all of the Commitments and payment in full of the Obligations, Borrower shall and shall cause each of the Restricted Subsidiaries to do all of the following: 6.1 Accounting System. Maintain a system of accounting that enables Borrower to produce financial statements in accordance with GAAP and maintain records pertaining to the Collateral that contain information as from time to time reasonably may be requested by Agent. Borrower also shall keep an inventory reporting system that shows all additions, sales, claims, returns, and allowances with respect to its and its Subsidiaries' Inventory. 6.2 Collateral Reporting. Provide Agent (and if so requested by Agent, with copies for each Lender) with the following documents at the following times in form satisfactory to Agent: -81- ================================================================================ Weekly (If a (a) a sales journal, collection journal, and credit Triggering Event register since the last such schedule, a report regarding occurs, Agent, in credit memoranda that have been issued since the last such its sole report, and a calculation of Borrowing Base A as of such discretion, may date, and require that the reports (b) notice of all claims, offsets, or disputes asserted by referenced in (a), Account Debtors with respect to Borrower's and the (b) and (c) be Restricted Subsidiaries' Accounts, delivered more frequently than (c) Inventory reports specifying the cost of Borrower's and weekly) the Restricted Subsidiaries' Inventory, by category, (d) a detailed aging, by total, of the Accounts of Borrower, (e) a detailed report regarding all transfers of cash from Borrower to the Mexican Subsidiaries and the amount of cash on hand of each Mexican Subsidiary. - -------------------------------------------------------------------------------- Monthly (not (f) a detailed calculation of Borrowing Base A (including later than the detail regarding those Accounts of Borrower that are not 10th day of each Eligible Accounts), month) (g) a detailed aging, by total, of the Accounts of Borrower, together with a reconciliation to the detailed calculation of Borrowing Base A previously provided to Agent, (h) a summary aging, by vendor, of Borrower's and the Restricted Subsidiaries' accounts payable and any book overdraft, (i) a detailed report regarding Borrower and the Restricted Subsidiaries' cash and Cash Equivalents including an indication of which amounts constitute Qualified Cash, and (j) a calculation of Dilution for the month most recently ended. - -------------------------------------------------------------------------------- Quarterly (k) a detailed list of Borrower's and the Restricted Subsidiaries' customers, and (l) a report regarding Borrower's and the Restricted Subsidiaries' accrued, but unpaid, ad valorem taxes. - -------------------------------------------------------------------------------- Upon request by (m) copies of invoices in connection with Borrower's and Agent the Restricted Subsidiaries' Accounts, credit memos, remittance advices, deposit slips, shipping and delivery documents in connection with Borrower's and the Restricted Subsidiaries' Accounts and, for Inventory ================================================================================ -82- ================================================================================ and Equipment acquired by Borrower or the Restricted Subsidiaries, purchase orders and invoices, and (n) such other reports as to the Collateral or the financial condition of Borrower and the Restricted Subsidiaries, as Agent may request. ================================================================================ In addition, Borrower agrees to cooperate fully with Agent to facilitate and implement a system of electronic collateral reporting in order to provide electronic reporting of each of the items set forth above. 6.3 Financial Statements, Reports, Certificates. Deliver to Agent, with copies to each Lender: (a) as soon as available, but in any event within 30 days (45 days in the case of a month that is the end of one of Borrower's fiscal quarters) after the end of each month during each of Borrower's fiscal years, (i) a company prepared consolidated balance sheet, income statement, and statement of cash flow covering Borrower's and the Restricted Subsidiaries' operations during such period, (ii) a certificate signed by the chief financial officer of Borrower to the effect that: (A) the financial statements delivered hereunder have been prepared in accordance with GAAP (except for the lack of footnotes and being subject to year-end audit adjustments) and fairly present in all material respects the consolidated financial condition of Borrower and the Restricted Subsidiaries, and (B) there does not exist any condition or event that constitutes a Default or Event of Default (or, to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrower has taken, is taking, or proposes to take with respect thereto), and (iii) for each month that is the date on which a financial covenant in Section 7.18 is to be tested, a Compliance Certificate demonstrating, in reasonable detail, compliance at the end of such period with the applicable financial covenants contained in Section 7.18, (b) as soon as available, but in any event within 90 days after the end of each of Borrower's fiscal years, consolidated and consolidating financial statements -83- of Borrower and its Subsidiaries for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Agent and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP (such audited financial statements to include a balance sheet, income statement, and statement of cash flow and, if prepared, such accountants' letter to management), (c) as soon as available, but in any event prior to the start of each of Borrower's fiscal years, copies of Borrower's Projections, in form and substance (including as to scope and underlying assumptions) satisfactory to Agent, in its sole discretion, for the forthcoming fiscal year, month by month, certified by the chief financial officer of Borrower as being such officer's good faith best estimate of the financial performance of Borrower during the period covered thereby, (d) if and when filed by Borrower, (i) Form 10-Q quarterly reports, Form 10-K annual reports, and Form 8-K current reports, (ii) any other filings made by Borrower with the SEC, (iii) copies of Borrower's federal income tax returns, and any amendments thereto, filed with the Internal Revenue Service, and (iv) any other information that is provided by Borrower to its shareholders generally, (e) if and when filed by Borrower or its Subsidiaries and as requested by Agent, satisfactory evidence of payment of applicable excise taxes in each jurisdiction in which (i) Borrower or its Subsidiaries conducts business or is required to pay any such excise tax, (ii) where Borrower's or its Subsidiaries' failure to pay any such applicable excise tax would result in a Lien on the properties or assets of Borrower or its Subsidiaries, or (iii) where Borrower's or its Subsidiaries' failure to pay any such applicable excise tax reasonably could be expected to result in a Material Adverse Change, (f) as soon as Borrower has knowledge of any event or condition that constitutes a Default or an Event of Default, notice thereof and a statement of the curative action that Borrower proposes to take with respect thereto, (g) promptly after the commencement thereof, but in any event within 5 days after the service of process with respect thereto on Borrower or any of its Subsidiaries, notice of all actions, suits, or proceedings brought by or against Borrower or any of its Subsidiaries before any Governmental Authority which, if determined adversely to Borrower or such Subsidiary, reasonably could be expected to result in a Material Adverse Change, -84- (h) promptly after receipt thereof, any notices, complaints, orders, or other communications from the U.S. Food and Drug Administration with respect to any material violation of or non-compliance with regulations applicable to Borrower or its Subsidiaries or permits or licenses held by Borrower or its Subsidiaries, and (i) upon the request of Agent, any other report reasonably requested relating to the financial condition of Borrower or its Subsidiaries. In addition to the financial statements referred to above, Borrower agrees to deliver financial statements prepared on both a consolidated and consolidating basis and agrees that no Subsidiary of Borrower will have a fiscal year different from that of Borrower. Borrower agrees to cooperate with Agent to allow Agent to consult with its independent certified public accountants if Agent reasonably requests the right to do so and that, in such connection, its independent certified public accountants are authorized to communicate with Agent and to release to Agent whatever financial information concerning Borrower or its Subsidiaries Agent reasonably may request, provided , in all cases, that Borrower shall have received notice of any such proposed consultation and have the right to be present at such consultation. 6.4 Guarantor Reports. Cause each Guarantor to deliver its annual financial statements at the time when Borrower provides its audited financial statements to Agent, but only to the extent such Guarantor's financial statements are not consolidated with Borrower's financial statements, and copies of all federal income tax returns as soon as the same are available and in any event no later than 30 days after the same are required to be filed by law. 6.5 Returns. Cause returns and allowances, as between Borrower and the Restricted Subsidiaries and their Account Debtors, to be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement; provided that Borrower may change such customary practices with the written consent of Agent, which shall not be unreasonably withheld or delayed (it being understood that any deviation from such customary practices without the consent of Agent shall be subject to Agent's right to establish reserves under Section 2.1(e)). 6.6 Maintenance of Properties. Maintain and preserve all of its properties which are necessary or useful in the proper conduct to its business in good working order and condition, ordinary wear and tear excepted, and comply at all times with the provisions of all leases to which it is a party as lessee so as to prevent any loss or forfeiture thereof or thereunder. 6.7 Taxes. Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrower, its Subsidiaries, or any of their respective assets to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. Borrower will and will cause its Subsidiaries to make timely -85- payment or deposit of all tax payments and withholding taxes required of it and them by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Agent with proof satisfactory to Agent indicating that Borrower and its Subsidiaries have made such payments or deposits. 6.8 Insurance. (a) At Borrower's expense, maintain insurance respecting its and its Subsidiaries' assets wherever located, covering loss or damage by fire, theft, explosion, and all other hazards and risks as ordinarily are insured against by other Persons engaged in the same or similar businesses. Borrower also shall maintain business interruption, public liability, and product liability insurance, as well as insurance against larceny, embezzlement, and criminal misappropriation. All such policies of insurance involving Borrower or the Restricted Subsidiaries shall be in such amounts and with such insurance companies as are reasonably satisfactory to Agent. Borrower shall deliver copies of all such policies to Agent with a satisfactory lender's loss payable endorsement naming Agent as loss payee or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Agent in the event of cancellation of the policy for any reason whatsoever. (b) Borrower shall give Agent prompt notice of any loss covered by such insurance. Agent shall have the exclusive right to adjust any losses claimed under any such insurance policies in excess of $250,000 (or in any amount after the occurrence and during the continuation of an Event of Default), without any liability to Borrower whatsoever in respect of such adjustments. Any monies received as payment for any loss in an amount that is less than $250,000 under any insurance policy mentioned above (other than liability insurance policies) or as payment of any award or compensation for condemnation or taking by eminent domain, shall be paid over to Agent to be disbursed to Borrower under staged payment terms reasonably satisfactory to Agent for application to the cost of repairs, replacements, or restorations, unless an Event of Default shall have occurred and be continuing in which event, at the option of the Required Lenders, such payment may be applied to the repayment of the Obligations. Any monies received as payment for any loss in an amount that is equal to or greater than $250,000 under any insurance policy mentioned above (other than liability insurance policies) or as payment of any award or compensation for condemnation or taking by eminent domain, shall be paid over to Agent to be applied at the option of the Required Lenders either to the prepayment of the Obligations or shall be disbursed to Borrower under staged payment terms reasonably satisfactory to Agent for application to the cost of repairs, replacements, or restorations. Any such repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items of property destroyed prior to such damage or destruction. -86- (c) Borrower will not and will not suffer or permit the Restricted Subsidiaries to take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 6.8, unless Agent is included thereon as named insured with the loss payable to Agent under a lender's loss payable endorsement or its equivalent. Borrower immediately shall notify Agent whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and copies of such policies promptly shall be provided to Agent. 6.9 Location of Inventory and Equipment. Keep Borrower's and the Restricted Subsidiaries' Inventory and Equipment only at the locations identified on Schedule 5.5 and their chief executive offices only at the locations identified on Schedule 5.7(b); provided, however, that Borrower may amend Schedule 5.5 and Schedule 5.7 so long as such amendment occurs by written notice to Agent not less than 30 days prior to the date on which such Inventory or Equipment is moved to such new location or such chief executive office is relocated, so long as such new location is within the continental United States, and so long as, at the time of such written notification, Borrower provides Agent a Collateral Access Agreement with respect thereto. 6.10 Compliance with Laws. Comply with the requirements of all applicable laws, rules, regulations, and orders of any Governmental Authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change. 6.11 Leases. Pay when due all rents and other amounts payable under any material leases to which Borrower or any of the Restricted Subsidiaries is a party or by which Borrower's or any such Restricted Subsidiaries' properties and assets are bound, unless such payments are the subject of a Permitted Protest. 6.12 Existence. At all times preserve and keep in full force and effect Borrower's and the Restricted Subsidiaries valid existence and good standing and any rights and franchises material to their businesses. 6.13 Environmental. (a) Keep any property either owned or operated by Borrower or the Restricted Subsidiaries free of any Environmental Liens or post bonds or other financial assurances sufficient to satisfy the obligations or liability evidenced by such Environmental Liens, (b) comply, in all material respects, with Environmental Laws and provide to Agent documentation of such compliance which Agent reasonably requests, (c) promptly notify Agent of any release of a Hazardous Material in any reportable quantity from or onto property owned or operated by Borrower or the Restricted Subsidiaries and take any Remedial Actions required under any applicable Environmental Law to abate such release, -87- and (d) promptly, but in any event within 5 days of its receipt thereof, provide Agent with written notice of any of the following: (i) notice that an Environmental Lien has been filed against any of the real or personal property of Borrower or the Restricted Subsidiaries, (ii) commencement of any Environmental Action or notice that an Environmental Action will be filed against Borrower or the Restricted Subsidiaries, and (iii) notice of a violation, citation, or other administrative order which reasonably could be expected to result in a Material Adverse Change. 6.14 Disclosure Updates. Promptly and in no event later than 5 Business Days after obtaining knowledge thereof, notify Agent if any written information, exhibit, or report furnished to the Lender Group contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which made. The foregoing to the contrary notwithstanding, any notification pursuant to the foregoing provision will not cure or remedy the effect of the prior untrue statement of a material fact or omission of any material fact nor shall any such notification have the affect of amending or modifying this Agreement or any of the Schedules hereto. 6.15 Formation of Subsidiaries. At the time that Borrower or any Guarantor forms any direct or indirect Subsidiary or acquires any direct or indirect domestic Subsidiary after the Closing Date (excluding Unrestricted Subsidiaries), Borrower or such Guarantor shall (a) cause such new Subsidiary to provide to Agent a joinder to the Guaranty and the Guarantor Security Agreement, together with such other security documents (including Mortgages with respect to any Real Property of such new Subsidiary), as well as appropriate UCC-1 financing statements (and with respect to all property subject to a Mortgage, fixture filings), all in form and substance satisfactory to Agent (including being sufficient to grant Agent a first priority Lien (subject to Permitted Liens) in and to the assets of such newly formed or acquired Subsidiary), (b) provide to Agent a pledge agreement and appropriate certificates and powers or UCC-1 financing statements, hypothecating all of the direct or beneficial ownership interest in such new Subsidiary, in form and substance satisfactory to Agent, and (c) provide to Agent all other documentation, including one or more opinions of counsel satisfactory to Agent, which in its opinion is appropriate with respect to the execution and delivery of the applicable documentation referred to above (including policies of title insurance or other documentation with respect to all property subject to a Mortgage). Any document, agreement, or instrument executed or issued pursuant to this Section 6.15 shall be a Loan Document. 6.16 Amendment of Preferred Stock. Cause the agreements governing the Borrower Preferred Stock and the Holding Preferred Stock to be amended on an annual basis, beginning in the first quarter of 2004, to extend the period of time within which cash dividends are not paid thereunder for an additional year. -88- 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, until termination of all of the Commitments and payment in full of the Obligations, Borrower will not and will not permit any of the Restricted Subsidiaries to do any of the following: 7.1 Indebtedness. Create, incur, assume, suffer to exist, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement and the other Loan Documents, together with Indebtedness owed to Underlying Issuers with respect to Underlying Letters of Credit, (b) Indebtedness set forth on Schedule 5.20, (c) Permitted Purchase Money Indebtedness, (d) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b) and (c) of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or extensions do not, in Agent's judgment, materially impair the prospects of repayment of the Obligations by Borrower or materially impair Borrower's creditworthiness (this requirement being deemed satisfied if the terms and conditions of any such refinancing, renewal, or extension are the same as or more favorable than the terms in the Indebtedness being refinanced, renewed or extended), (ii) such refinancings, renewals, or extensions do not result in an increase in the then extant principal amount of, or interest rate with respect to, the Indebtedness so refinanced, renewed, or extended, (iii) such refinancings, renewals, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, nor are they on terms or conditions that, taken as a whole, are materially more burdensome or restrictive to Borrower, (iv) if the Indebtedness that is refinanced, renewed, or extended was subordinated in right of payment to the Obligations, then the terms and conditions of the refinancing, renewal, or extension Indebtedness must include subordination terms and conditions that are at least as favorable to the Lender Group as those that were applicable to the refinanced, renewed, or extended Indebtedness, and (v) the Indebtedness that is refinanced, renewed, or extended is not recourse to any Person that is liable on account of the Obligations other than those Persons which were obligated with respect to the Indebtedness that was refinanced, renewed, or extended, (e) endorsement of instruments or other payment items for deposit, (f) Indebtedness composing Permitted Investments, (g) Indebtedness of Borrower evidenced by the Subordinated Notes, -89- (h) Indebtedness of Borrower evidenced by the Subordinated Convertible Notes, (i) Indebtedness of Borrower evidenced by the Senior Notes, (j) Indebtedness of HRC evidenced by the HRC Notes, (k) Indebtedness of Borrower and the Guarantors to the lenders under the Post Loan Documents in an aggregate principal amount not to exceed $32,000,000, and (l) other unsecured Indebtedness not to exceed $1,500,000 outstanding at any time. Notwithstanding the foregoing, Borrower agrees that the Unrestricted Subsidiaries shall not provide any guarantees of the obligations under the Post Loan Agreement. 7.2 Liens. Create, incur, assume, or suffer to exist, directly or indirectly, any Lien on or with respect to any of its assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced, renewed, or extended under Section 7.1(d) and so long as the replacement Liens only encumber those assets that secured the refinanced, renewed, or extended Indebtedness). 7.3 Restrictions on Fundamental Changes. (a) Enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its Stock. (b) Liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution). (c) Convey, sell, lease, license, assign, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or substantially all of its assets. 7.4 Disposal of Assets. Other than Permitted Dispositions, convey, sell, lease, license, assign, transfer, or otherwise dispose of any of Borrower's or the Restricted Subsidiaries' assets. 7.5 Change Name. Change Borrower's or any of the Restricted Subsidiaries' names, FEINs, organizational identification number, state of organization or organizational identity; provided, however, that Borrower or any of the Restricted Subsidiaries may change their names upon at least 30 days prior written notice to Agent of such change and so long as, at the time of such written notification, Borrower or the Restricted Subsidiary provides any financing statements necessary to perfect and continue perfected the Agent's Liens. -90- 7.6 Nature of Business. Make any change in the principal nature of its or their business. 7.7 Prepayments and Amendments. Except in connection with a refinancing permitted by Section 7.1(d), (a) prepay, redeem, defease, purchase, or otherwise acquire any Indebtedness of Borrower or the Restricted Subsidiaries, other than the Obligations in accordance with this Agreement; provided that the Indebtedness under the Post Loan Agreement (i) may be prepaid to the extent of any mandatory prepayment obligations described in the Post Loan Agreement as in effect as of the date of this Agreement and (ii) may revolve in accordance with the terms of the Post Loan Agreement as in effect as of the date of this Agreement, or (b) directly or indirectly, amend, modify, alter, increase, or change in any respect that may be adverse to the Lender Group any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under Section 7.1(b), (c), (g), (h), (i), (j), or (k). 7.8 Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control. 7.9 Consignments. Consign any of its or their Inventory or sell any of its or their Inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale. 7.10 Distributions. Make any distribution or declare or pay any dividends (in cash or other property, other than common Stock or with respect to dividends on Borrower's 111/2% Senior PIK Preferred Stock, such preferred Stock) on, or purchase, acquire, redeem, or retire any of Borrower's Stock, of any class, whether now or hereafter outstanding. 7.11 Accounting Methods. Modify or change its fiscal year or its method of accounting (other than as may be required to conform to GAAP) or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrower's or the Subsidiaries' accounting records without said accounting firm or service bureau agreeing to provide Agent information regarding Borrower's and the Subsidiaries' financial condition. 7.12 Investments. Except for Permitted Investments, directly or indirectly, make or acquire any Investment or incur any liabilities (including contingent obligations) for or in connection with any Investment; provided, however, that Borrower and the Restricted Subsidiaries shall not have Permitted Investments (other than in the Cash Management Accounts) in Deposit Accounts or Securities Accounts in an aggregate amount in excess of $1,000 at any one time unless Borrower or the Restricted Subsidiary, as applicable, and the applicable securities intermediary or bank have entered into Control Agreements governing -91- such Permitted Investments in order to perfect (and further establish) the Agent's Liens in such Permitted Investments. Subject to the foregoing proviso, Borrower shall not and shall not permit the Restricted Subsidiaries to establish or maintain any Deposit Account or Securities Account unless Agent shall have received a Control Agreement in respect of such Deposit Account or Securities Account. 7.13 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms, that are fully disclosed to Agent, and that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-Affiliate. 7.14 Suspension. Suspend or go out of a substantial portion of its or their business. 7.15 [Intentionally Omitted]. 7.16 Use of Proceeds. Use the proceeds of the Advances for any purpose other than (a) on the Closing Date, (i) to repay, in full, the outstanding principal, accrued interest, and accrued fees and expenses owing under or pursuant to the Existing Credit Agreement, and (ii) to pay transactional fees, costs, and expenses incurred in connection with this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby, and (b) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted purposes. 7.17 Inventory and Equipment with Bailees. Except as provided on Schedule 5.5, store the Inventory or Equipment of Borrower or the Restricted Subsidiaries at any time now or hereafter with a bailee, warehouseman, or similar party without Agent's prior written consent. 7.18 Financial Covenants. (a) Fail to maintain or achieve: (i) Minimum EBITDA. EBITDA, measured on a quarter-end basis, of at least the required amount set forth in the following table for the applicable period set forth opposite thereto: - -------------------------------------------------------------------------------- Applicable Amount Applicable Period - -------------------------------------------------------------------------------- $ 5,000,000 For the 1 quarter period ending September 30, 2003 - -------------------------------------------------------------------------------- $ 10,000,000 For the 2 quarter period ending December 31, 2003 - -------------------------------------------------------------------------------- -92- - -------------------------------------------------------------------------------- $ 16,500,000 For the 3 quarter period ending March 31, 2004 - -------------------------------------------------------------------------------- $ 23,000,000 For the 4 quarter period ending June 30, 2004 - -------------------------------------------------------------------------------- $ 24,500,000 For the 4 quarter period ending September 30, 2004 - -------------------------------------------------------------------------------- $ 25,000,000 For the 4 quarter period ending December 31, 2004 and each 4 quarter period ending at the end of a calendar quarter thereafter - -------------------------------------------------------------------------------- (b) Make: (i) Capital Expenditures. Capital Expenditures in any fiscal year in excess of the amount set forth in the following table for the applicable period: - ------------------------------------------------------------------------ Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year 2003 2004 2005 2006 2007 - ------------------------------------------------------------------------ $ 6,500,000 $ 9,000,000 $ 10,000,000 $ 11,000,000 $ 11,000,000 - ------------------------------------------------------------------------ ; provided that the foregoing notwithstanding, Borrower may elect to make Capital Expenditures during its 2003 fiscal year that exceed $6,500,000 up to a maximum of $7,500,000, but in such event the amount permitted above for its 2004 fiscal year shall be reduced by an amount equal to the actual amount of Borrower's Capital Expenditures during fiscal year 2003 minus $6,500,000; provided, further, that any unused portion of the amount of Capital Expenditures permitted during any fiscal year may be carried over and added to the maximum amount allowed for the next succeeding fiscal year (but not to any subsequent fiscal year). 7.19 Payments on Affiliate Notes. Make any payments of principal or cash payments of interest to the holders of the Subordinated Convertible Notes, the Senior Notes, or the HRC Notes. 7.20 Limitation on Indebtedness of Unrestricted Subsidiaries. Permit the Unrestricted Subsidiaries to create, incur, assume, or suffer to exist any Indebtedness if, after giving pro forma effect to the incurrence of any such Indebtedness as of the last day of the -93- then most recently ended fiscal quarter for which Borrower has delivered to Agent financial statements with respect to the Unrestricted Subsidiaries, the aggregate principal amount of the Indebtedness of the Unrestricted Subsidiaries would exceed the result of 5 times the Unrestricted Subsidiaries TFQ EBITDA, determined as of such date. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (each, an "Event of Default") under this Agreement: 8.1 If Borrower fails to pay when due and payable, or when declared due and payable, all or any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due the Lender Group, reimbursement of Lender Group Expenses, or other amounts constituting Obligations); 8.2 If Borrower fails to perform, keep, or observe any term, provision, condition, covenant, or agreement beyond any specified cure or grace period applicable thereto contained in this Agreement or in any of the other Loan Documents; 8.3 If any material portion of Borrower's or any of the Restricted Subsidiaries' assets is attached, seized, subjected to a writ or distress warrant, levied upon, or comes into the possession of any third Person; 8.4 If an Insolvency Proceeding is commenced by Borrower or any of the Restricted Subsidiaries; 8.5 If an Insolvency Proceeding is commenced against Borrower, or any of the Restricted Subsidiaries, and any of the following events occur: (a) Borrower or such Restricted Subsidiary consents to the institution of such Insolvency Proceeding against it, (b) the petition commencing the Insolvency Proceeding is not timely controverted; provided, however, that, during the pendency of such period, each member of the Lender Group shall be relieved of its obligations to extend credit hereunder, (c) the petition commencing the Insolvency Proceeding is not dismissed within 60 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, each member of the Lender Group shall be relieved of its obligations to extend credit hereunder, (d) an interim trustee is appointed to take possession of all or any substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, Borrower or any of the Restricted Subsidiaries, or (e) an order for relief shall have been entered therein; 8.6 If Borrower or any of the Restricted Subsidiaries is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; -94- 8.7 If a notice of Lien, levy, or assessment is filed of record with respect to any of Borrower's or any of the Restricted Subsidiaries' assets by the United States, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon any of Borrower's or any of the Restricted Subsidiaries' assets and the same is not paid before such payment is delinquent; 8.8 If one or more judgments or other claims involving an aggregate amount of $500,000, or more, becomes a Lien or encumbrance upon any material portion of Borrower's or any Restricted Subsidiary's assets and the same is not released, discharged, bonded against, or stayed pending appeal before the earlier of 30 days after the date it first arises or 5 days prior to the date on which such asset is subject to being forfeited by Borrower or such Restricted Subsidiary; 8.9 (a) If there is a default in one or more agreements to which Borrower is a party with one or more third Persons relative to Borrower's Indebtedness involving an aggregate amount of $750,000, or more, and such default (i) occurs at the final maturity of the obligations thereunder, or (ii) results in a right by such third Person(s), irrespective of whether exercised, to accelerate the maturity of Borrower's obligations thereunder, or (b) If there is a default in any other agreement to which Borrower is a party with one or more third Persons and such default results in a right by such third Person(s), irrespective of whether exercised, to terminate such agreement and such termination could reasonably be expected to result in a Material Adverse Change; 8.10 If Borrower or any of the Restricted Subsidiaries makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; 8.11 If any warranty, representation, statement, or Record made to the Lender Group by Borrower, the Restricted Subsidiaries, or any officer, employee, agent, or director of Borrower or any of the Restricted Subsidiaries is inaccurate in any material respect as of the date made or deemed made; 8.12 If the obligation of any Guarantor under the Guaranty is limited or terminated by operation of law or by such Guarantor thereunder; 8.13 If this Agreement or any other Loan Document that purports to create a Lien, shall, for any reason, fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority Lien on or security interest in the Collateral covered hereby or thereby; or -95- 8.14 Any provision of any Loan Document shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by Borrower or the Restricted Subsidiaries, or a proceeding shall be commenced by Borrower or the Restricted Subsidiaries, or by any Governmental Authority having jurisdiction over Borrower or the Restricted Subsidiaries, seeking to establish the invalidity or unenforceability thereof, or Borrower or the Restricted Subsidiaries shall deny that Borrower or the Restricted Subsidiaries has any liability or obligation purported to be created under any Loan Document. 9. THE LENDER GROUP'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. Upon the occurrence, and during the continuation, of an Event of Default, the Required Lenders (at their election but without notice of their election and without demand) may authorize and instruct Agent to do any one or more of the following on behalf of the Lender Group (and Agent, acting upon the instructions of the Required Lenders, shall, subject to the terms of the Intercreditor Agreement, do the same on behalf of the Lender Group), all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, under any of the Loan Documents, or under any other agreement between Borrower and the Lender Group; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of the Lender Group, but without affecting any of the Agent's Liens in the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Borrower's Account Debtors for amounts and upon terms which Agent considers advisable, and in such cases, Agent will credit Borrower's Loan Account with only the net amounts received by Agent in payment of such disputed Accounts after deducting all Lender Group Expenses incurred or expended in connection therewith; (e) Cause Borrower to hold all of its returned Inventory in trust for the Lender Group and segregate all such Inventory from all other assets of Borrower or in Borrower's possession; (f) Without notice to or demand upon Borrower, make such payments and do such acts as Agent considers necessary or reasonable to protect its security interests in the Collateral. Borrower agrees to assemble the Collateral if Agent so requires, and to make the Collateral available to Agent at a place that Agent may designate which is reasonably convenient to both parties. Borrower authorizes Agent to enter the premises -96- where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any Lien that in Agent's determination appears to conflict with the Agent's Liens in and to the Collateral and to pay all expenses incurred in connection therewith and to charge Borrower's Loan Account therefor. With respect to any of Borrower's owned or leased premises, Borrower hereby grants Agent a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of the Lender Group's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to Borrower (such notice being expressly waived), and without constituting an acceptance of any collateral in full or partial satisfaction of an obligation (within the meaning of the Code), set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by the Lender Group (including any amounts received in the Cash Management Accounts), or (ii) Indebtedness at any time owing to or for the credit or the account of Borrower held by the Lender Group; (h) Hold, as cash collateral, any and all balances and deposits of Borrower held by the Lender Group, and any amounts received in the Cash Management Accounts, to secure the full and final repayment of all of the Obligations; (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Borrower Collateral. Borrower hereby grants to Agent a license or other right to use, without charge, Borrower's labels, patents, copyrights, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Borrower Collateral, in completing production of, advertising for sale, and selling any Borrower Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to the Lender Group's benefit; (j) Sell the Borrower Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Agent determines is commercially reasonable. It is not necessary that the Borrower Collateral be present at any such sale; (k) Agent shall give notice of the disposition of the Borrower Collateral as follows: (i) Agent shall give Borrower a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Borrower Collateral, the time on or after which the private sale or other disposition is to be made; and (ii) The notice shall be personally delivered or mailed, postage prepaid, to Borrower as provided in Section 12, at least 10 days before the -97- earliest time of disposition set forth in the notice; no notice needs to be given prior to the disposition of any portion of the Borrower Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market; (l) Agent, on behalf of the Lender Group, may credit bid and purchase at any public sale; (m) Agent may seek the appointment of a receiver or keeper to take possession of all or any portion of the Borrower Collateral or to operate same and, to the maximum extent permitted by law, may seek the appointment of such a receiver without the requirement of prior notice or a hearing; and (n) The Lender Group shall have all other rights and remedies available at law or in equity or pursuant to any other Loan Document. ; provided, however, that upon the occurrence of any Event of Default described in Section 8.4 or Section 8.5, in addition to the remedies set forth above, without any notice to Borrower or any other Person or any act by the Lender Group, the Commitments shall automatically terminate and the Obligations then outstanding, together with all accrued and unpaid interest thereon and all fees and all other amounts due under this Agreement and the other Loan Documents, shall automatically and immediately become due and payable, without presentment, demand, protest, or notice of any kind, all of which are expressly waived by Borrower. 9.2 Remedies Cumulative. The rights and remedies of the Lender Group under this Agreement, the other Loan Documents, and all other agreements shall be cumulative. The Lender Group shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by the Lender Group of one right or remedy shall be deemed an election, and no waiver by the Lender Group of any Event of Default shall be deemed a continuing waiver. No delay by the Lender Group shall constitute a waiver, election, or acquiescence by it. 10. TAXES AND EXPENSES. If Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, Agent, in its sole discretion and without prior notice to Borrower, may do any or all of the following: (a) make payment of the same or any part thereof, (b) set up such reserves in Borrower's Loan Account as Agent deems necessary to protect the Lender Group from the exposure created by such failure, or (c) in the case of the failure to comply with Section 6.8 hereof, obtain and maintain insurance policies of the type described in Section 6.8 and take any action with -98- respect to such policies as Agent deems prudent. Any such amounts paid by Agent shall constitute Lender Group Expenses and any such payments shall not constitute an agreement by the Lender Group to make similar payments in the future or a waiver by the Lender Group of any Event of Default under this Agreement. Agent need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1 Demand; Protest; etc. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of documents, instruments, chattel paper, and guarantees at any time held by the Lender Group on which Borrower may in any way be liable. 11.2 The Lender Group's Liability for Borrower Collateral. Borrower hereby agrees that: (a) so long as Agent complies with its obligations, if any, under the Code, the Lender Group shall not in any way or manner be liable or responsible for: (i) the safekeeping of the Borrower Collateral, (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause, (iii) any diminution in the value thereof, or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person, and (b) all risk of loss, damage, or destruction of the Borrower Collateral shall be borne by Borrower. 11.3 Indemnification. Borrower shall pay, indemnify, defend, and hold the Agent-Related Persons, the Lender-Related Persons, and each Participant (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them (a) in connection with or as a result of or related to the execution, delivery, enforcement, performance, or administration (including any restructuring or workout with respect hereto) of this Agreement, any of the other Loan Documents, or the transactions contemplated hereby or thereby or the monitoring of Borrower's and its Subsidiaries' compliance with the terms of the Loan Documents, and (b) with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event, or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). The foregoing to the contrary notwithstanding, Borrower shall have no obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such -99- Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which Borrower was required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by Borrower with respect thereto. WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LIABILITIES WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON. 12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by Borrower or Agent to the other relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, electronic mail (at such email addresses as Borrower or Agent, as applicable, may designate to each other in accordance herewith), or telefacsimile to Borrower or Agent, as the case may be, at its address set forth below: If to Borrower: HUDSON RESPIRATORY CARE, INC. 27711 Diaz Road Temecula, California 92589 Attn: Chief Financial Officer Fax No. (909) 699-8462 with copies to: BINGHAM MCCUTCHEN 355 South Grand Avenue Los Angeles, California 90071-3106 Attn: Roger Lustberg, Esq. Fax No. (213) 680-6499 If to Agent: WELLS FARGO FOOTHILL, INC. 2450 Colorado Avenue Suite 3000 West Santa Monica, California 90404 Attn: Business Finance Manager Fax No. (310) 453-7413 with copies to: PAUL, HASTINGS, JANOFSKY & WALKER LLP 515 South Flower Street, 25th Floor Los Angeles, California 90071 Attn: John Francis Hilson, Esq. Fax No. (213) 627-0705 -100- Attn: John Francis Hilson, Esq. Fax No. (213) 627-0705 Agent and Borrower may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other party. All notices or demands sent in accordance with this Section 12, other than notices by Agent in connection with enforcement rights against the Borrower Collateral under the provisions of the Code, shall be deemed received on the earlier of the date of actual receipt or 3 Business Days after the deposit thereof in the mail. Borrower acknowledges and agrees that notices sent by the Lender Group in connection with the exercise of enforcement rights against Borrower Collateral under the provisions of the Code shall be deemed sent when deposited in the mail or personally delivered, or, where permitted by law, transmitted by telefacsimile or any other method set forth above. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. (a) THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. (b) THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY BORROWER COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE SUCH BORROWER COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWER AND THE LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13(b). (c) BORROWER AND THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR -101- CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS. 14.1 Assignments and Participations. (a) Any Lender may assign and delegate to one or more assignees (each an "Assignee") that are Eligible Transferees all, or any ratable part of all, of the Obligations, the Commitments and the other rights and obligations of such Lender hereunder and under the other Loan Documents, in a minimum amount of $5,000,000; provided, however, that Borrower and Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses, and related information with respect to the Assignee, have been given to Borrower and Agent by such Lender and the Assignee, (ii) such Lender and its Assignee have delivered to Borrower and Agent an Assignment and Acceptance, and (iii) the assignor Lender or Assignee has paid to Agent for Agent's separate account a processing fee in the amount of $5,000. Anything contained herein to the contrary notwithstanding, the payment of any fees shall not be required and the Assignee need not be an Eligible Transferee if such assignment is in connection with any merger, consolidation, sale, transfer, or other disposition of all or any substantial portion of the business or loan portfolio of the assigning Lender. (b) From and after the date that Agent notifies the assignor Lender (with a copy to Borrower) that it has received an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (except with respect to Section 11.3 hereof) and be released from any future obligations under this Agreement (and in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement and the other Loan Documents, such Lender shall cease to be a party hereto and thereto), and such assignment -102- shall effect a novation between Borrower and the Assignee; provided, however, that nothing contained herein shall release any assigning Lender from obligations that survive the termination of this Agreement, including such assigning Lender's obligations under Article 16 and Section 17.8 of this Agreement. (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (1) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document furnished pursuant hereto, (2) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or the performance or observance by Borrower of any of its obligations under this Agreement or any other Loan Document furnished pursuant hereto, (3) such Assignee confirms that it has received a copy of this Agreement, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance, (4) such Assignee will, independently and without reliance upon Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement, (5) such Assignee appoints and authorizes Agent to take such actions and to exercise such powers under this Agreement as are delegated to Agent, by the terms hereof, together with such powers as are reasonably incidental thereto, and (6) such Assignee agrees that it will perform all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) Immediately upon Agent's receipt of the required processing fee payment and the fully executed Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Lender pro tanto. (e) Any Lender may at any time, with the written consent of Agent, sell to one or more commercial banks, financial institutions, or other Persons not Affiliates of such Lender (a "Participant") participating interests in its Obligations, the Commitment, and the other rights and interests of that Lender (the "Originating Lender") hereunder and under the other Loan Documents (provided that no written consent of Agent shall be required in connection with any sale of any such participating interests by a Lender to an Eligible Transferee); provided, however, that (i) the Originating Lender shall remain a "Lender" for all purposes of this Agreement and the other Loan Documents and the Participant receiving the participating interest in the Obligations, the Commitments, and the other rights and -103- interests of the Originating Lender hereunder shall not constitute a "Lender" hereunder or under the other Loan Documents and the Originating Lender's obligations under this Agreement shall remain unchanged, (ii) the Originating Lender shall remain solely responsible for the performance of such obligations, (iii) Borrower, Agent, and the Lenders shall continue to deal solely and directly with the Originating Lender in connection with the Originating Lender's rights and obligations under this Agreement and the other Loan Documents, (iv) no Lender shall transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating, (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating, (C) release all or substantially all of the Collateral or guaranties (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating, (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant through such Lender, or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums, and (v) all amounts payable by Borrower hereunder shall be determined as if such Lender had not sold such participation, except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. The rights of any Participant only shall be derivative through the Originating Lender with whom such Participant participates and no Participant shall have any rights under this Agreement or the other Loan Documents or any direct rights as to the other Lenders, Agent, Borrower, the Collections of Borrower or its Subsidiaries, the Collateral, or otherwise in respect of the Obligations. No Participant shall have the right to participate directly in the making of decisions by the Lenders among themselves. (f) In connection with any such assignment or participation or proposed assignment or participation, a Lender may, subject to the provisions of Section 17.8, disclose all documents and information which it now or hereafter may have relating to Borrower and its Subsidiaries and their respective businesses. (g) Any other provision in this Agreement notwithstanding, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR Section203.24, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. -104- 14.2 Successors. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Borrower may not assign this Agreement or any rights or duties hereunder without the Lenders' prior written consent and any prohibited assignment shall be absolutely void ab initio. No consent to assignment by the Lenders shall release Borrower from its Obligations. A Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 14.1 hereof and, except as expressly required pursuant to Section 14.1 hereof, no consent or approval by Borrower is required in connection with any such assignment. 15. AMENDMENTS; WAIVERS. 15.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by Agent at the written request of the Required Lenders) and Borrower and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all of the Lenders affected thereby and Borrower, do any of the following: (a) increase or extend any Commitment of any Lender, (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees, or other amounts due hereunder or under any other Loan Document, (c) reduce the principal of, or the rate of interest on, any loan or other extension of credit hereunder, or reduce any fees or other amounts payable hereunder or under any other Loan Document, (d) change the percentage of the Commitments that is required to take any action hereunder, (e) amend or modify this Section or any provision of the Agreement providing for consent or other action by all Lenders, (f) release Collateral other than as permitted by Section 16.12, (g) change the definition of "Required Lenders" or "Pro Rata Share", (h) contractually subordinate any of the Agent's Liens, -105- (i) release Borrower or any Guarantor from any obligation for the payment of money under or pursuant to this Agreement or any other Loan Document, (j) change the definitions of Borrowing Base A, Borrowing Base B, Borrowing Base C, Eligible Accounts, Eligible Inventory, Revolver A Maximum Amount, Revolver B Maximum Amount, Revolver C Maximum Amount, Revolver D Maximum Amount or change Section 2.1(e), or (k) amend any of the provisions of Section 16. and, provided further, however, that no amendment, waiver or consent shall, unless in writing and signed by Agent, Issuing Lender, or Swing Lender, as applicable, affect the rights or duties of Agent, Issuing Lender, or Swing Lender, as applicable, under this Agreement or any other Loan Document. The foregoing notwithstanding, any amendment, modification, waiver, consent, termination, or release of, or with respect to, any provision of this Agreement or any other Loan Document that relates only to the relationship of the Lender Group among themselves, and that does not affect the rights or obligations of Borrower, shall not require consent by or the agreement of Borrower. 15.2 Replacement of Holdout Lender. (a) If any action to be taken by the Lender Group or Agent hereunder requires the unanimous consent, authorization, or agreement of all Lenders, and a Lender ("Holdout Lender") fails to give its consent, authorization, or agreement, then Agent, upon at least 5 Business Days prior irrevocable notice to the Holdout Lender, may permanently replace the Holdout Lender with one or more substitute Lenders (each, a "Replacement Lender"), and the Holdout Lender shall have no right to refuse to be replaced hereunder. Such notice to replace the Holdout Lender shall specify an effective date for such replacement, which date shall not be later than 15 Business Days after the date such notice is given. (b) Prior to the effective date of such replacement, the Holdout Lender and each Replacement Lender shall execute and deliver an Assignment and Acceptance, subject only to the Holdout Lender being repaid its share of the outstanding Obligations (including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever. If the Holdout Lender shall refuse or fail to execute and deliver any such Assignment and Acceptance prior to the effective date of such replacement, the Holdout Lender shall be deemed to have executed and delivered such Assignment and Acceptance. The replacement of any Holdout Lender shall be made in accordance with the terms of Section 14.1. Until such time as the Replacement Lenders shall have acquired all of the Obligations, the Commitments, and the other rights and obligations of the Holdout Lender hereunder and under the other Loan Documents, the Holdout Lender shall remain obligated to make the Holdout Lender's Pro Rata Share of -106- Advances and to purchase a participation in each Letter of Credit, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Letter of Credit. 15.3 No Waivers; Cumulative Remedies. No failure by Agent or any Lender to exercise any right, remedy, or option under this Agreement or any other Loan Document, or delay by Agent or any Lender in exercising the same, will operate as a waiver thereof. No waiver by Agent or any Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by Agent or any Lender on any occasion shall affect or diminish Agent's and each Lender's rights thereafter to require strict performance by Borrower of any provision of this Agreement. Agent's and each Lender's rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy that Agent or any Lender may have. 16. AGENT; THE LENDER GROUP. 16.1 Appointment and Authorization of Agent. Each Lender hereby designates and appoints WFF as its representative under this Agreement and the other Loan Documents and each Lender hereby irrevocably authorizes Agent to execute and deliver each of the other Loan Documents on its behalf and to take such other action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to Agent by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Agent agrees to act as such on the express conditions contained in this Section 16. The provisions of this Section 16 (other than the proviso to Section 16.11(e))are solely for the benefit of Agent, and the Lenders, and Borrower and its Subsidiaries shall have no rights as a third party beneficiary of any of the provisions contained herein. Any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document notwithstanding, Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Agent; it being expressly understood and agreed that the use of the word "Agent" is for convenience only, that WFF is merely the representative of the Lenders, and only has the contractual duties set forth herein. Except as expressly otherwise provided in this Agreement, Agent shall have and may use its sole discretion with respect to exercising or refraining from exercising any discretionary rights or taking or refraining from taking any actions that Agent expressly is entitled to take or assert under or pursuant to this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, or of any other provision of the Loan Documents that provides rights or powers to Agent, Lenders agree that Agent shall have the right to exercise the following powers as long as this Agreement remains in effect: (a) maintain, in accordance with its customary business practices, ledgers and records reflecting the status of the Obligations, the Collateral, the Collections of Borrower and its Subsidiaries, and related matters, (b) execute or file any and all financing or similar -107- statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to the Loan Documents, (c) make Advances, for itself or on behalf of Lenders as provided in the Loan Documents, (d) exclusively receive, apply, and distribute the Collections of Borrower and its Subsidiaries as provided in the Loan Documents, (e) open and maintain such bank accounts and cash management arrangements as Agent deems necessary and appropriate in accordance with the Loan Documents for the foregoing purposes with respect to the Collateral and the Collections of Borrower and its Subsidiaries, (f) perform, exercise, and enforce any and all other rights and remedies of the Lender Group with respect to Borrower, the Obligations, the Collateral, the Collections of Borrower and its Subsidiaries, or otherwise related to any of same as provided in the Loan Documents, and (g) incur and pay such Lender Group Expenses as Agent may deem necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to the Loan Documents. 16.2 Delegation of Duties. Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects as long as such selection was made without gross negligence or willful misconduct. 16.3 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by Borrower or any Subsidiary or Affiliate of Borrower, or any officer or director thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the Books or properties of Borrower or the books or records or properties of any of Borrower's Subsidiaries or Affiliates. 16.4 Reliance by Agent. Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent, or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to -108- Borrower or counsel to any Lender), independent accountants and other experts selected by Agent. Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless Agent shall first receive such advice or concurrence of the Lenders as it deems appropriate and until such instructions are received, Agent shall act, or refrain from acting, as it deems advisable. If Agent so requests, it shall first be indemnified to its reasonable satisfaction by the Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the requisite Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. 16.5 Notice of Default or Event of Default. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest, fees, and expenses required to be paid to Agent for the account of the Lenders and, except with respect to Events of Default of which Agent has actual knowledge, unless Agent shall have received written notice from a Lender or Borrower referring to this Agreement, describing such Default or Event of Default, and stating that such notice is a "notice of default." Agent promptly will notify the Lenders of its receipt of any such notice or of any Event of Default of which Agent has actual knowledge. If any Lender obtains actual knowledge of any Event of Default, such Lender promptly shall notify the other Lenders and Agent of such Event of Default. Each Lender shall be solely responsible for giving any notices to its Participants, if any. Subject to Section 16.4, Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Lenders in accordance with Section 9; provided, however, that unless and until Agent has received any such request, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable. 16.6 Credit Decision. Each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by Agent hereinafter taken, including any review of the affairs of Borrower and its Subsidiaries or Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person party to a Loan Document, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrower. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other -109- Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person party to a Loan Document. Except for notices, reports, and other documents expressly herein required to be furnished to the Lenders by Agent, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrower and any other Person party to a Loan Document that may come into the possession of any of the Agent-Related Persons. 16.7 Costs and Expenses; Indemnification. Agent may incur and pay Lender Group Expenses to the extent Agent reasonably deems necessary or appropriate for the performance and fulfillment of its functions, powers, and obligations pursuant to the Loan Documents, including court costs, attorneys fees and expenses, fees and expenses of financial accountants, advisors, consultants, and appraisers, costs of collection by outside collection agencies, auctioneer fees and expenses, and costs of security guards or insurance premiums paid to maintain the Collateral, whether or not Borrower is obligated to reimburse Agent or Lenders for such expenses pursuant to the Loan Agreement or otherwise. Agent is authorized and directed to deduct and retain sufficient amounts from the Collections of Borrower and its Subsidiaries received by Agent to reimburse Agent for such out-of-pocket costs and expenses prior to the distribution of any amounts to Lenders. In the event Agent is not reimbursed for such costs and expenses from the Collections of Borrower and its Subsidiaries received by Agent, each Lender hereby agrees that it is and shall be obligated to pay to or reimburse Agent for the amount of such Lender's Pro Rata Share thereof. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrower and without limiting the obligation of Borrower to do so), according to their Pro Rata Shares, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to any Agent-Related Person of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct nor shall any Lender be liable for the obligations of any Defaulting Lender in failing to make an Advance or other extension of credit hereunder. Without limitation of the foregoing, each Lender shall reimburse Agent upon demand for such Lender's Pro Rata Share of any costs or out-of-pocket expenses (including attorneys, accountants, advisors, and consultants fees and expenses) incurred by Agent in connection with the preparation, execution, delivery, administration, modification, amendment, or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that Agent is not reimbursed for such expenses by or on behalf of Borrower. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of Agent. 16.8 Agent in Individual Capacity. WFF and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in, and -110- generally engage in any kind of banking, trust, financial advisory, underwriting, or other business with Borrower and its Subsidiaries and Affiliates and any other Person party to any Loan Documents as though WFF were not Agent hereunder, and, in each case, without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, WFF or its Affiliates may receive information regarding Borrower or its Affiliates and any other Person party to any Loan Documents that is subject to confidentiality obligations in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver Agent will use its reasonable best efforts to obtain), Agent shall not be under any obligation to provide such information to them. The terms "Lender" and "Lenders" include WFF in its individual capacity. 16.9 Successor Agent. Agent may resign as Agent upon 45 days notice to the Lenders. If Agent resigns under this Agreement, the Required Lenders shall appoint a successor Agent for the Lenders. If no successor Agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with the Lenders, a successor Agent. If Agent has materially breached or failed to perform any material provision of this Agreement or of applicable law, the Required Lenders may agree in writing to remove and replace Agent with a successor Agent from among the Lenders. In any such event, upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers, and duties of the retiring Agent and the term "Agent" shall mean such successor Agent and the retiring Agent's appointment, powers, and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 16 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor Agent has accepted appointment as Agent by the date which is 45 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Lenders appoint a successor Agent as provided for above. 16.10 Lender in Individual Capacity. Any Lender and its respective Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrower and its Subsidiaries and Affiliates and any other Person party to any Loan Documents as though such Lender were not a Lender hereunder without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, such Lender and its respective Affiliates may receive information regarding Borrower or its Affiliates and any other Person party to any Loan Documents that is subject to confidentiality obligations in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver such Lender will use its -111- reasonable best efforts to obtain), such Lender not shall be under any obligation to provide such information to them. With respect to the Swing Loans and Agent Advances, Swing Lender shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the sub-agent of Agent. 16.11 Withholding Taxes. (a) If any Lender is a "foreign person" within the meaning of the IRC and such Lender claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the IRC, such Lender agrees with and in favor of Agent and Borrower, to deliver to Agent and Borrower: (i) if such Lender claims an exemption from withholding tax pursuant to its portfolio interest exception, (A) a statement of the Lender, signed under penalty of perjury, that it is not a (I) a "bank" as described in Section 881(c)(3)(A) of the IRC, (II) a 10% shareholder of Borrower (within the meaning of Section 871(h)(3)(B) of the IRC), or (III) a controlled foreign corporation related to Borrower within the meaning of Section 864(d)(4) of the IRC, and (B) a properly completed and executed IRS Form W-8BEN, before the first payment of any interest under this Agreement and at any other time reasonably requested by Agent or Borrower; (ii) if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed and executed IRS Form W-8BEN before the first payment of any interest under this Agreement and at any other time reasonably requested by Agent or Borrower; (iii) if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed and executed copies of IRS Form W-8ECI before the first payment of any interest is due under this Agreement and at any other time reasonably requested by Agent or Borrower; (iv) such other form or forms as may be required under the IRC or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Lender agrees promptly to notify Agent and Borrower of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form W-8BEN and such -112- Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Borrower to such Lender, such Lender agrees to notify Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of Borrower to such Lender. To the extent of such percentage amount, Agent will treat such Lender's IRS Form W-8BEN as no longer valid. (c) If any Lender is entitled to a reduction in the applicable withholding tax, Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to Agent, then Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (d) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify and hold Agent harmless for all amounts paid, directly or indirectly, by Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to Agent under this Section, together with all costs and expenses (including attorneys fees and expenses). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of Agent. (e) All payments made by Borrower hereunder or under any note will be made without setoff, counterclaim, or other defense, except as required by applicable law other than for Taxes (as defined below). All such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction (other than the United States) or by any political subdivision or taxing authority thereof or therein (other than of the United States) with respect to such payments (but excluding, any tax imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein (i) measured by or based on the net income or net profits of a Lender, or (ii) to the extent that such tax results from a change in the circumstances of the Lender, including a change in the residence, place of organization, or principal place of business of the Lender, or a change in the branch or lending office of the Lender participating in the transactions set forth herein) and all interest, penalties or similar liabilities with respect thereto (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any note, including any amount paid pursuant to this Section 16.11(e) -113- after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein; provided, however, that Borrower shall not be required to increase any such amounts payable to Agent or any Lender (i) that is not organized under the laws of the United States, if such Person fails to comply with the other requirements of this Section 16.11, or (ii) if the increase in such amount payable results from Agent's or such Lender's own willful misconduct or gross negligence. Borrower will furnish to Agent as promptly as possible after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by Borrower. 16.12 Collateral Matters. (a) The Lenders hereby irrevocably authorize Agent, at its option and in its sole discretion, to release any Lien on any Collateral (i) upon the termination of the Commitments and payment in full by Borrower of all Obligations, (ii) constituting property being sold or disposed of if a release is required or desirable in connection therewith and if Borrower certifies to Agent that the sale or disposition is permitted under Section 7.4 of this Agreement or the other Loan Documents (and Agent may rely conclusively on any such certificate, without further inquiry), (iii) constituting property in which Borrower or its Subsidiaries owned no interest at the time the Agent's Lien was granted nor at any time thereafter, or (iv) constituting property leased to Borrower or its Subsidiaries under a lease that has expired or is terminated in a transaction permitted under this Agreement. Except as provided above, Agent will not execute and deliver a release of any Lien on any Collateral without the prior written authorization of (y) if the release is of all or substantially all of the Collateral, all of the Lenders, or (z) otherwise, the Required Lenders. Upon request by Agent or Borrower at any time, the Lenders will confirm in writing Agent's authority to release any such Liens on particular types or items of Collateral pursuant to this Section 16.12; provided, however, that (1) Agent shall not be required to execute any document necessary to evidence such release on terms that, in Agent's opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release of such Lien without recourse, representation, or warranty, and (2) such release shall not in any manner discharge, affect, or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of Borrower in respect of) all interests retained by Borrower, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral. (b) Agent shall have no obligation whatsoever to any of the Lenders to assure that the Collateral exists or is owned by Borrower or is cared for, protected, or insured or has been encumbered, or that the Agent's Liens have been properly or sufficiently or lawfully created, perfected, protected, or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent pursuant to any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or any act, omission, or event related thereto, subject to the -114- terms and conditions contained herein, Agent may act in any manner it may deem appropriate, in its sole discretion given Agent's own interest in the Collateral in its capacity as one of the Lenders and that Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing, except as otherwise provided herein. 16.13 Restrictions on Actions by Lenders; Sharing of Payments. (a) Each of the Lenders agrees that it shall not, without the express written consent of Agent, and that it shall, to the extent it is lawfully entitled to do so, upon the written request of Agent, set off against the Obligations, any amounts owing by such Lender to Borrower or any deposit accounts of Borrower now or hereafter maintained with such Lender. Each of the Lenders further agrees that it shall not, unless specifically requested to do so in writing by Agent, take or cause to be taken any action, including, the commencement of any legal or equitable proceedings, to foreclose any Lien on, or otherwise enforce any security interest in, any of the Collateral. (b) If, at any time or times any Lender shall receive (i) by payment, foreclosure, setoff, or otherwise, any proceeds of Collateral or any payments with respect to the Obligations, except for any such proceeds or payments received by such Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent in excess of such Lender's ratable portion of all such distributions by Agent, such Lender promptly shall (1) turn the same over to Agent, in kind, and with such endorsements as may be required to negotiate the same to Agent, or in immediately available funds, as applicable, for the account of all of the Lenders and for application to the Obligations in accordance with the applicable provisions of this Agreement, or (2) purchase, without recourse or warranty, an undivided interest and participation in the Obligations owed to the other Lenders so that such excess payment received shall be applied ratably as among the Lenders in accordance with their Pro Rata Shares; provided, however, that to the extent that such excess payment received by the purchasing party is thereafter recovered from it, those purchases of participations shall be rescinded in whole or in part, as applicable, and the applicable portion of the purchase price paid therefor shall be returned to such purchasing party, but without interest except to the extent that such purchasing party is required to pay interest in connection with the recovery of the excess payment. 16.14 Agency for Perfection. Agent hereby appoints each other Lender as its agent (and each Lender hereby accepts such appointment) for the purpose of perfecting the Agent's Liens in assets which, in accordance with Article 9 of the Code can be perfected only by possession or control. Should any Lender obtain possession or control of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent's request therefor shall deliver possession or control of such Collateral to Agent or in accordance with Agent's instructions. 16.15 Payments by Agent to the Lenders. All payments to be made by Agent to the Lenders shall be made by bank wire transfer of immediately available funds pursuant to -115- such wire transfer instructions as each party may designate for itself by written notice to Agent. Concurrently with each such payment, Agent shall identify whether such payment (or any portion thereof) represents principal, premium, or interest of the Obligations. 16.16 Concerning the Collateral and Related Loan Documents. Each member of the Lender Group authorizes and directs Agent to enter into this Agreement and the other Loan Documents. Each member of the Lender Group agrees that any action taken by Agent in accordance with the terms of this Agreement or the other Loan Documents relating to the Collateral and the exercise by Agent of its powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders. 16.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information. By becoming a party to this Agreement, each Lender: (a) is deemed to have requested that Agent furnish such Lender, promptly after it becomes available, a copy of each field audit or examination report (each a "Report" and collectively, "Reports") prepared by Agent, and Agent shall so furnish each Lender with such Reports, (b) expressly agrees and acknowledges that Agent does not (i) make any representation or warranty as to the accuracy of any Report, and (ii) shall not be liable for any information contained in any Report, (c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent or other party performing any audit or examination will inspect only specific information regarding Borrower and will rely significantly upon the Books, as well as on representations of Borrower's personnel, (d) agrees to keep all Reports and other material, non-public information regarding Borrower and its Subsidiaries and their operations, assets, and existing and contemplated business plans in a confidential manner in accordance with Section 17.8, and (e) without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold Agent and any other Lender preparing a Report harmless from any action the indemnifying Lender may take or fail to take or any conclusion the indemnifying Lender may reach or draw from any Report in connection with any loans or other credit accommodations that the indemnifying Lender has made or may make to Borrower, or the indemnifying Lender's participation in, or the indemnifying Lender's purchase of, a loan or loans of Borrower, and (ii) to pay and protect, and indemnify, defend and hold Agent, and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses, and -116- other amounts (including, attorneys fees and costs) incurred by Agent and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender. In addition to the foregoing: (x) any Lender may from time to time request of Agent in writing that Agent provide to such Lender a copy of any report or document provided by Borrower to Agent that has not been contemporaneously provided by Borrower to such Lender, and, upon receipt of such request, Agent promptly shall provide a copy of same to such Lender, (y) to the extent that Agent is entitled, under any provision of the Loan Documents, to request additional reports or information from Borrower, any Lender may, from time to time, reasonably request Agent to exercise such right as specified in such Lender's notice to Agent, whereupon Agent promptly shall request of Borrower the additional reports or information reasonably specified by such Lender, and, upon receipt thereof from Borrower, Agent promptly shall provide a copy of same to such Lender, and (z) any time that Agent renders to Borrower a statement regarding the Loan Account, Agent shall send a copy of such statement to each Lender. 16.18 Several Obligations; No Liability. Notwithstanding that certain of the Loan Documents now or hereafter may have been or will be executed only by or in favor of Agent in its capacity as such, and not by or in favor of the Lenders, any and all obligations on the part of Agent (if any) to make any credit available hereunder shall constitute the several (and not joint) obligations of the respective Lenders on a ratable basis, according to their respective Commitments, to make an amount of such credit not to exceed, in principal amount, at any one time outstanding, the amount of their respective Commitments. Nothing contained herein shall confer upon any Lender any interest in, or subject any Lender to any liability for, or in respect of, the business, assets, profits, losses, or liabilities of any other Lender. Each Lender shall be solely responsible for notifying its Participants of any matters relating to the Loan Documents to the extent any such notice may be required, and no Lender shall have any obligation, duty, or liability to any Participant of any other Lender. Except as provided in Section 16.7, no member of the Lender Group shall have any liability for the acts of any other member of the Lender Group. No Lender shall be responsible to Borrower or any other Person for any failure by any other Lender to fulfill its obligations to make credit available hereunder, nor to advance for it or on its behalf in connection with its Commitment, nor to take any other action on its behalf hereunder or in connection with the financing contemplated herein. 16.19 Legal Representation of Agent. In connection with the negotiation, drafting, and execution of this Agreement and the other Loan Documents, or in connection with future legal representation relating to loan administration, amendments, modifications, waivers, or enforcement of remedies, Paul, Hastings, Janofsky & Walker LLP ("Paul Hastings") only has represented and only shall represent WFF in its capacity as Agent and as a Lender. Each other Lender hereby acknowledges that Paul Hastings does not represent it in connection with any such matters. -117- 17. GENERAL PROVISIONS. 17.1 Effectiveness. This Agreement shall be binding and deemed effective when executed by Borrower, Agent, and each Lender whose signature is provided for on the signature pages hereof. 17.2 Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each Section applies equally to this entire Agreement. 17.3 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed against the Lender Group or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish fairly the purposes and intentions of all parties hereto. 17.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 17.5 Amendments in Writing. This Agreement only can be amended by a writing signed by Agent (on behalf of the requisite Lenders) and Borrower. 17.6 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis. 17.7 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by Borrower or any Guarantor or the transfer to the Lender Group of any property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, or other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if the Lender Group is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender Group is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender Group related thereto, the -118- liability of Borrower and Guarantors automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 17.8 Confidentiality. The Agent and the Lenders each individually (and not jointly or jointly and severally) agree that material, non-public information regarding Borrower and its Subsidiaries, their operations, assets, and existing and contemplated business plans shall be treated by Agent and the Lenders in a confidential manner, and shall not be disclosed by Agent and the Lenders to Persons who are not parties to this Agreement, except: (a) to attorneys for and other advisors, accountants, auditors, and consultants to any member of the Lender Group, (b) to Subsidiaries and Affiliates of any member of the Lender Group, provided that any such Subsidiary or Affiliate shall have agreed to receive such information hereunder subject to the terms of this Section 17.8, (c) as may be required by statute, decision, or judicial or administrative order, rule, or regulation, (d) as may be agreed to in advance by Borrower or its Subsidiaries or as requested or required by any Governmental Authority pursuant to any subpoena or other legal process, (e) as to any such information that is or becomes generally available to the public (other than as a result of prohibited disclosure by Agent or the Lenders), (f) in connection with any assignment, prospective assignment, sale, prospective sale, participation or prospective participations, or pledge or prospective pledge of any Lender's interest under this Agreement, provided that any such assignee, prospective assignee, purchaser, prospective purchaser, participant, prospective participant, pledgee, or prospective pledgee shall have agreed in writing to receive such information hereunder subject to the terms of this Section, (g) in connection with any litigation or other adversary proceeding involving parties hereto which such litigation or adversary proceeding involves claims related to the rights or duties of such parties under this Agreement or the other Loan Documents, and (h) to Post and the lenders under the Post Loan Agreement. The provisions of this Section 17.8 shall survive for 2 years after the payment in full of the Obligations. Anything contained herein or in any other Loan Document to the contrary notwithstanding, the obligations of confidentiality contained herein and therein, as they relate to the transactions contemplated hereby, shall not apply to the federal tax structure or federal tax treatment of such transactions, and each party hereto (and any employee, representative, or agent of any party hereto) may disclose to any and all Persons, without limitation of any kind, the federal tax structure and federal tax treatment of such transactions (including all written materials related to such tax structure and tax treatment). The preceding sentence is intended to cause the transactions contemplated hereby to not be treated as having been offered under conditions of confidentiality for purposes of Section 1.6011-4(b)(3) (or any successor provision) of the Treasury Regulations promulgated under Section 6011 of the IRC, and shall be construed in a manner consistent with such purpose. In addition, each party hereto acknowledges that it has no proprietary or exclusive rights to the tax structure of the transactions contemplated hereby or any tax matter or tax idea related thereto. Agent and the Lenders may deliver to Post and the lenders under the Post Loan Agreement any field audits, examination reports or appraisals with respect to Borrower. -119- 17.9 Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. [Signature pages to follow.] -120- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. HUDSON RESPIRATORY CARE INC., a California corporation By: ------------------------------------ Title: WELLS FARGO FOOTHILL, INC., a California corporation, as Agent and as a Lender By: ------------------------------------ Title: -121- Schedule A-1 ------------ Agent's Account An account at a bank designated by Agent from time to time as the account into which Borrower shall make all payments to Agent for the benefit of the Lender Group and into which the Lender Group shall make all payments to Agent under this Agreement and the other Loan Documents; unless and until Agent notifies Borrower and the Lender Group to the contrary, Agent's Account shall be that certain deposit account bearing account number 323-266193 and maintained by Agent with JPMorgan Chase Bank, 4 New York Plaza, 15th Floor, New York, New York 10004, ABA #021000021. -6- Schedule C-1 ------------ Commitments
========================================================================================= Lender Revolver A Revolver B Revolver C Revolver D Total Commitment Commitment Commitment Commitment Commitment (subline of (subline of (subline of Revolver A) Revolver A) Revolver A) ========================================================================================= Wells Fargo Foothill, Inc. $ 30,000,000 $ 2,400,000 $ 5,600,000 $ 6,000,000 $ 30,000,000 ========================================================================================= ========================================================================================= ========================================================================================= All Lenders $ 30,000,000 $ 2,400,000 $ 5,600,000 $ 6,000,000 $ 30,000,000 =========================================================================================
-1- Schedule D-1 ------------ Designated Account Account number _________ of Borrower maintained with Borrower's Designated Account Bank, or such other deposit account of Borrower (located within the United States) that has been designed as such, in writing, by Borrower to Agent. "Designated Account Bank" means ____________, whose office is located at _________, and whose ABA number is _______________. -1-
EX-10.2 5 dex102.txt STOCK PLEDGE AGREEMENT- HOLDING/WELLS FARGO Exhibit 10.2 STOCK PLEDGE AGREEMENT ---------------------- (HOLDING) --------- This STOCK PLEDGE AGREEMENT (this "Agreement"), dated as of October 7, 2003, is entered into by and between RIVER HOLDING CORP., a California corporation ("Pledgor"), and WELLS FARGO FOOTHILL, INC., a California corporation, as the arranger and administrative agent for the Lenders (in such capacity, together with its successors, if any, in such capacity, "Agent"), with reference to the following: WHEREAS, Hudson Respiratory Care Inc., a California corporation (the "Borrower"), the Lenders (such Lenders, together with Agent, individually and collectively, the "Lender Group"), and Agent have entered into that certain Loan and Security Agreement, dated as of even date herewith (as amended, restated, modified, supplemented, refinanced, renewed, or extended from time to time, the "Loan Agreement"), pursuant to which the Lender Group has agreed to make certain financial accommodations to Borrower; WHEREAS, contemporaneously herewith, Pledgor has executed and delivered that certain General Continuing Guaranty (the "Guaranty") and that certain Security Agreement (Guarantors) (the "Security Agreement") in favor of Agent respecting certain obligations of the Borrower to the Lender Group in connection with the Loan Agreement; WHEREAS, Pledgor beneficially owns the specified Equity Interests identified as Pledged Interests in the Persons identified as Issuers listed under the name of Pledgor on Schedule A attached hereto (or any addendum thereto); and WHEREAS, to induce the Lender Group to make the financial accommodations provided to the Borrower pursuant to the Loan Agreement, Pledgor desires to pledge, grant, transfer, and assign to Agent, for the benefit of the Lender Group, a security interest in the Pledged Collateral (as hereinafter defined) to secure the Secured Obligations (as hereinafter defined), as provided herein. NOW, THEREFORE, in consideration of the mutual promises, covenants, representations, and warranties set forth herein and for other good and valuable consideration, the parties hereto agree as follows: 1. Definitions And Construction. (a) Definitions. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. The following terms, as used in this Agreement, shall have the following meanings: "Agent" shall have the meaning set forth in the preamble to this Agreement, together with its successors or assigns. "Agreement" has the meaning set forth in the preamble to this Agreement. - 1 - "Chief Executive Office" shall mean the Chief Executive Office listed on Schedule B. "Equity Interests" shall mean all shares, units, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company, or equivalent entity, whether voting or nonvoting, including general partner partnership interests, limited partner partnership interests, common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and any successor statute. "Excluded Collateral" shall have the meaning ascribed to such term in the Loan Agreement. "Future Rights" shall mean, with respect to each Issuer, (i) all Equity Interests (other than Pledged Interests) of such Issuer, and all securities convertible or exchangeable into, and all warrants, options, or other rights to purchase, Equity Interests of such Issuer; (ii) to the extent of Pledgor's interest therein, all shares of, all securities convertible or exchangeable into, and all warrants, options, or other rights to purchase Equity Interests of any Person in which Pledgor, after the date of this Agreement, acquires a direct equity interest, irrespective of whether such Person is or becomes a Subsidiary of Pledgor; and (iii) the certificates or instruments representing such additional Equity Interests, convertible or exchangeable securities, warrants, and other rights and all dividends, cash, options, warrants, rights, instruments, and other property or proceeds from time to time received, receivable, or otherwise distributed in respect of or in exchange for any or all of such Equity Interests. "Guaranty" shall have the meaning set forth in the recitals to this Agreement. "Holder" and "Holders" shall have the meanings set forth in Section 3 of this Agreement. "Issuers" shall mean each of the Persons identified as an Issuer on Schedule A attached hereto (or any addendum thereto), and any successors thereto, whether by merger or otherwise. "Lender Group" shall have the meaning set forth in the recitals to this Agreement. "Lenders" means, individually and collectively, each of the financial institutions identified on the signature pages of the Loan Agreement, and any other person made a party thereto in accordance with the provisions of Section 14 thereof (together with their respective successors and assigns). - 2 - "Loan Agreement" shall have the meaning set forth in the recitals to this Agreement. "Pledged Collateral" shall mean the Pledged Interests, the Future Rights, and the Proceeds, collectively but excluding the Excluded Collateral. "Pledged Interests" shall mean with respect to each Issuer, all of the Equity Interests identified as Pledged Interests of such Issuer on Schedule A attached hereto (or any addendum thereto). "Pledgor" has the meaning set forth in the preamble to this Agreement. "Proceeds" shall mean all proceeds (including proceeds of proceeds) of the Pledged Interests and Future Rights including all: (a) rights, benefits, distributions, premiums, profits, dividends, interest, cash, instruments, documents of title, accounts, contract rights, inventory, equipment, general intangibles, deposit accounts, chattel paper, and other property from time to time received, receivable, or otherwise distributed in respect of or in exchange for, or as a replacement of or a substitution for, any of the Pledged Interests, Future Rights, or proceeds thereof (including any cash, Equity Interests, or other securities or instruments issued after any recapitalization, readjustment, reclassification, merger or consolidation with respect to any Issuer and any security entitlements, as defined in the Code, with respect thereto); (b) "proceeds," as such term is defined in the Code; (c) proceeds of any insurance, indemnity, warranty, or guaranty (including guaranties of delivery) payable from time to time with respect to any of the Pledged Interests, Future Rights, or proceeds thereof; (d) payments (in any form whatsoever) made or due and payable to Pledgor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Pledged Interests, Future Rights, or proceeds thereof; and (e) other amounts from time to time paid or payable under or in connection with any of the Pledged Interests, Future Rights, or proceeds thereof. "SEC" shall mean the United States Securities and Exchange Commission and any successor thereto. "Security Agreement" shall have the meaning set forth in the recitals to this Agreement. "Secured Obligations" shall mean, with respect to Pledgor, all liabilities, obligations, or undertakings owing by Pledgor to the Lender Group of any kind or description arising out of or outstanding under, advanced or issued pursuant to, or evidenced by the Loan Agreement, the Guaranty, the Security Agreement, this Agreement, or any of the other Loan Documents, irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, voluntary or involuntary, whether now existing or hereafter arising, and including all interest (including interest that accrues after the filing of a case under the Bankruptcy - 3 - Code) and any and all costs, fees (including attorneys fees), and expenses which Pledgor is required to pay pursuant to any of the foregoing, by law, or otherwise. "Securities Act" shall have the meaning set forth in Section 9(c) of this Agreement. (b) Construction. (i) Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular and to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and other similar terms in this Agreement refer to this Agreement as a whole and not exclusively to any particular provision of this Agreement. Article, section, subsection, exhibit, and schedule references are to this Agreement unless otherwise specified. All of the exhibits or schedules attached to this Agreement shall be deemed incorporated herein by reference. Any reference to any of the following documents includes any and all alterations, amendments, restatements, extensions, modifications, renewals, or supplements thereto or thereof, as applicable: this Agreement, the Loan Agreement, the Guaranty, the Security Agreement, or any of the other Loan Documents. (ii) Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Agent or Pledgor, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by each of the parties signatory hereto and their respective counsel and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of the parties hereto. (iii) In the event of any direct conflict between the express terms and provisions of this Agreement and of the Loan Agreement or the Security Agreement, the terms and provisions of the Loan Agreement or the Security Agreement, as applicable, shall control. 2. Pledge. Pledgor hereby pledges, grants, transfers, and assigns to Agent, for the benefit of the Lender Group, a security interest in all of Pledgor's right, title, and interest in and to the Pledged Collateral in order to secure prompt repayment of any and all of the Secured Obligations in accordance with the terms and conditions of the Loan Documents to which Pledgor is a party, and in order to secure prompt performance by Pledgor of its covenants and duties under each Loan Document to which it is a party. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, Pledgor has no authority, express or implied, to dispose of any item or portion of the Pledged Collateral. 3. Delivery and Registration of Pledged Collateral. (a) All certificates or instruments representing or evidencing the Pledged Collateral shall be promptly delivered by Pledgor to Agent or Agent's designee pursuant hereto at a location designated by Agent and shall be held by or on behalf of Agent pursuant hereto, and - 4 - shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to Agent. (b) Upon the occurrence and during the continuance of an Event of Default, Agent shall have the right, at any time in its discretion and without notice to Pledgor, to transfer to or to register on the books of the Issuers (or of any other Person maintaining records with respect to the Pledged Collateral) in the name of Agent or any of its nominees any or all of the Pledged Collateral. In addition, Agent shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations. (c) If, at any time and from time to time, any Pledged Collateral (including any certificate or instrument representing or evidencing any Pledged Collateral) is in the possession of a Person other than Agent (or an agent of Agent) or Pledgor (a "Holder"), then Pledgor shall promptly, at Agent's option, either cause such Pledged Collateral to be delivered into Agent's possession, or execute and deliver to such Holder a written notification/instruction, and take all other steps necessary to perfect the security interest of Agent in such Pledged Collateral, including obtaining from such Holder a written acknowledgment that such Holder holds such Pledged Collateral for Agent, all pursuant to the Code or other applicable law governing the perfection of Agent's security interest in the Pledged Collateral in the possession of such Holder. Each such notification/instruction and acknowledgment shall be in form and substance reasonably satisfactory to Agent. (d) Any and all Pledged Collateral (including dividends, interest, and other cash distributions) at any time received or held by Pledgor shall be so received or held in trust for Agent, shall be segregated from other funds and property of Pledgor and shall be forthwith delivered to Agent in the same form as so received or held, with any necessary endorsements; provided that cash dividends or distributions received by Pledgor, if and to the extent they are not prohibited by the Loan Agreement, may be retained by Pledgor in accordance with Section 4 and used in the ordinary course of Pledgor's business, or as otherwise expressly permitted under the Loan Documents. (e) If at any time and from time to time any Pledged Collateral consists of an uncertificated security or a security in book entry form, then Pledgor shall promptly cause such Pledged Collateral to be registered or entered, as the case may be, in the name of Agent, for the benefit of the Lender Group, or otherwise cause the security interest held by Agent, for the benefit of the Lender Group, to be perfected in accordance with applicable law. (f) Agent acknowledges that the exercise of the powers or rights granted in this Section 3 may at some times be subject to the provisions of the Intercreditor Agreement. 4. Voting Rights and Dividends. (a) So long as no Event of Default shall have occurred and be continuing, Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to - 5 - the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of the Loan Documents. (b) Upon the occurrence and during the continuance of an Event of Default, at the election of Agent in its Permitted Discretion, upon the receipt by Pledgor of written notice of such election by Agent, all rights of Pledgor to exercise the voting and other consensual rights or receive and retain cash dividends or distributions that it would otherwise be entitled to exercise or receive and retain, as applicable pursuant to Section 4(a), shall cease, and all such rights shall thereupon become vested in Agent, who shall thereupon have the sole right to exercise such voting or other consensual rights and to receive and retain such cash dividends and distributions. Upon the receipt of such written notice, Pledgor shall execute and deliver (or cause to be executed and delivered) to Agent all such proxies and other instruments as Agent may reasonably request for the purpose of enabling Agent to exercise the voting and other rights which it is entitled to exercise and to receive the dividends and distributions that it is entitled to receive and retain pursuant to the preceding sentence. (c) Agent acknowledges that the exercise of the powers or rights granted in this Section 4 may at some times be subject to the provisions of the Intercreditor Agreement. 5. Representations and Warranties. Pledgor represents, warrants, and covenants as follows: (a) Pledgor has taken all steps it deems necessary or appropriate to be informed on a continuing basis of changes or potential changes affecting the Pledged Collateral (including rights of conversion and exchange, rights to subscribe, payment of dividends, reorganizations or recapitalization, tender offers and voting rights), and Pledgor agrees that no member of the Lender Group shall have any responsibility or liability for informing Pledgor of any such changes or potential changes or for taking any action or omitting to take any action with respect thereto; (b) All information herein or contained in or delivered pursuant to the Loan Documents supplied to Agent or any other member of the Lender Group by and prepared by Pledgor or any Subsidiary of Pledgor in writing with respect to the Pledged Collateral is, or in the case of information hereafter supplied will be, accurate and complete in all material respects; (c) Pledgor is and will be the sole legal and beneficial owner of the Pledged Collateral (including the Pledged Interests and all other Pledged Collateral acquired by Pledgor after the date hereof) free and clear of any adverse claim, Lien, or other right, title, or interest of any party, other than the Liens held by Agent for the benefit of the Lender Group and Permitted Liens; (d) This Agreement, and the delivery to Agent of certificates, if any, representing Pledged Collateral (or the delivery to all Holders of such certificates, if any, representing Pledged Collateral of the notification/instruction referred to in Section 3 of this Agreement and the acknowledgement of such Holders referred to in Section 3), creates a valid, perfected, and first priority security interest in one hundred percent (100%) of the Pledged - 6 - Interests which are in certificated form in favor of Agent securing payment of the Secured Obligations, and all actions necessary to achieve such perfection have been duly taken; (e) Schedule A to this Agreement is true and correct and complete in all material respects as of the date hereof; without limiting the generality of the foregoing, as of the date hereof: (i) except as set forth in Schedule A, all the Pledged Interests are in certificated form, and, except to the extent registered in the name of Agent or its nominee pursuant to the provisions of this Agreement, are registered in the name of Pledgor; and (ii) the Pledged Interests as to each of the Issuers constitute at least the percentage of all the fully diluted issued and outstanding Equity Interests of such Issuer as set forth in Schedule A to this Agreement; (f) the Pledged Interests that are interests in general partnerships, limited partnerships or limited liability companies (i) are not dealt in or traded on securities exchanges or in securities markets, (ii) do not have terms expressly providing that they are securities governed by Article 8 of the Code, and (iii) are not investment company securities, and are not, therefore, "securities" governed by Article 8 of the Code; (g) There are no presently existing Future Rights owned by Pledgor as of the date hereof; (h) The Pledged Interests have been duly authorized and validly issued and are fully paid and nonassessable; and (i) Neither the pledge of the Pledged Collateral pursuant to this Agreement nor the extensions of credit represented by the Secured Obligations violates Regulation T, U or X of the Board of Governors of the Federal Reserve System. 6. Further Assurances. (a) Pledgor agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action that may be necessary or reasonably desirable, or that Agent, on behalf of the Lender Group, may request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Agent, on behalf of the Lender Group, to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) at the request of Agent, mark conspicuously each of its records pertaining to the Pledged Collateral with a legend, in form and substance reasonably satisfactory to Agent, indicating that such Pledged Collateral is subject to the security interest granted hereby; (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or reasonably desirable, or as Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby; (iii) allow inspection of the Pledged Collateral by Agent or Persons designated by Agent; and (iv) appear in and defend any action or proceeding that may affect Pledgor's title to or Agent's security interest in the Pledged Collateral. (b) Pledgor hereby authorizes Agent, on behalf of the Lender Group, to file one or more financing or continuation statements, and amendments thereto, relative to all or any - 7 - part of the Pledged Collateral without Pledgor's signature where permitted by law. A carbon, photographic, or other reproduction of this Agreement or any financing statement covering the Pledged Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. (c) Pledgor will furnish to Agent, upon the request of Agent: (i) a certificate executed by an authorized officer of Pledgor, and dated as of the date of delivery to Agent, itemizing in such detail as Agent may request, the Pledged Collateral which, as of the date of such certificate, has been delivered to Agent by Pledgor pursuant to the provisions of this Agreement; and (ii) such statements and schedules further identifying and describing the Pledged Collateral and such other reports in connection with the Pledged Collateral as Agent may request. 7. Covenants of Pledgor. Pledgor shall: (a) Perform each and every covenant in the Loan Documents applicable to Pledgor; (b) At all times keep at least one complete set of its records concerning substantially all of the Pledged Collateral at its Chief Executive Office as set forth in Schedule B hereto, and not change the location of its Chief Executive Office or such records without giving Agent at least thirty (30) days prior written notice thereof; (c) To the extent it may lawfully do so, use its best efforts to prevent the Issuers from issuing Future Rights or Proceeds, except for cash dividends and other distributions, if any, that are not prohibited by the terms of the Loan Agreement to be paid by any Issuer to Pledgor; (d) Upon receipt by Pledgor of any material notice, report, or other communication from any of the Issuers or any Holder relating to all or any part of the Pledged Collateral, deliver such notice, report or other communication to Agent promptly, but in no event later than five (5) days following the receipt thereof by Pledgor; and (e) Not permit any of the Issuers to: (i) authorize the amendment of or amend the Governing Documents of such Issuer that is a general partnership, limited partnership or limited liability company to provide that the Equity Interests of such Issuer is governed by Article 8 of the Code, or (ii) authorize the issuance of or issue certificates evidencing the Equity Interests of such Issuer that is a general partnership, limited partnership or limited liability company. 8. Agent as Pledgor's Attorney-in-Fact. (a) Pledgor hereby irrevocably appoints Agent, on behalf of the Lender Group, as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Agent or otherwise, from time to time at Agent's discretion, to take any action and to execute any instrument that Agent, on behalf of the Lender Group, may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including: (i) upon - 8 - the occurrence and during the continuance of an Event of Default, to receive, endorse, and collect all instruments made payable to Pledgor representing any dividend, interest payment or other distribution in respect of the Pledged Collateral or any part thereof to the extent permitted hereunder and to give full discharge for the same and to execute and file governmental notifications and reporting forms; (ii) to issue any notifications/instructions Agent deems necessary pursuant to Section 3 of this Agreement; or (iii) to arrange for the transfer of the Pledged Collateral on the books of any of the Issuers or any other Person to the name of Agent or to the name of Agent's nominee. (b) In addition to the designation of Agent as Pledgor's attorney-in-fact in subsection (a), Pledgor hereby irrevocably appoints Agent, on behalf of the Lender Group, as Pledgor's agent and attorney-in-fact to make, execute and deliver any and all documents and writings which may be necessary or appropriate for approval of, or be required by, any regulatory authority located in any city, county, state or country where Pledgor or any of the Issuers engage in business, in order to transfer or to more effectively transfer any of the Pledged Interests or otherwise enforce the rights granted hereunder to the Lender Group. 9. Remedies upon Default. Upon the occurrence and during the continuance of an Event of Default, subject to the terms of the Intercreditor Agreement: (a) Agent, on behalf of the Lender Group, may exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Code (irrespective of whether the Code applies to the affected items of Pledged Collateral), and Agent, on behalf of the Lender Group, may also without notice (except as specified below) sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Agent may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. To the maximum extent permitted by applicable law, Agent may be the purchaser of any or all of the Pledged Collateral at any such sale and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply all or any part of the Secured Obligations as a credit on account of the purchase price of any Pledged Collateral payable at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by law) all rights of redemption, stay, or appraisal that it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten (10) calendar days notice to Pledgor of the time and place of any public sale or the time after which a private sale is to be made shall constitute reasonable notification. Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Subject to subsection (b), to the maximum extent permitted by law, Pledgor hereby waives any claims against Agent arising because the price at which any Pledged - 9 - Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale, even if Agent accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. (b) Pledgor hereby agrees that any sale or other disposition of the Pledged Collateral conducted in conformity with reasonable commercial practices of banks, insurance companies, or other financial institutions in the City of Los Angeles, State of California in disposing of property similar to the Pledged Collateral shall be deemed to be commercially reasonable. (c) Pledgor hereby acknowledges that the sale by Agent of any Pledged Collateral pursuant to the terms hereof in compliance with the Securities Act of 1933 as now in effect or as hereafter amended, or any similar statute hereafter adopted with similar purpose or effect (the "Securities Act"), as well as applicable "Blue Sky" or other state securities laws may require strict limitations as to the manner in which Agent or any subsequent transferee of the Pledged Collateral may dispose thereof. In light of this, Pledgor acknowledges and agrees that in order to protect Agent's interest it may be necessary to sell the Pledged Collateral at a price less than the maximum price attainable if a sale were delayed or were made in another manner, such as a public offering under the Securities Act. Pledgor has no objection to sale in such a manner and agrees that Agent shall have no obligation to obtain the maximum possible price for the Pledged Collateral as long as any sale is made in a commercially reasonable manner. Without limiting the generality of the foregoing, Pledgor agrees that, upon the occurrence and during the continuation of an Event of Default, Agent may, subject to applicable law, from time to time attempt to sell all or any part of the Pledged Collateral by a private placement, restricting the bidders and prospective purchasers to those who will represent and agree that they are purchasing for investment only and not for distribution. In so doing, Agent may solicit offers to buy the Pledged Collateral or any part thereof for cash, from a limited number of investors deemed by Agent, in its reasonable judgment, to be institutional investors or other responsible parties who might be interested in purchasing the Pledged Collateral. If Agent shall solicit such offers, then Pledgor acknowledges that the acceptance by Agent of one of the offers shall not be deemed per se to not be a commercially reasonable method of disposition of the Pledged Collateral. (d) If Agent shall determine to exercise its right to sell all or any portion of the Pledged Collateral pursuant to this Section, Pledgor agrees that, upon request of Agent, Pledgor will, at no expense to any member of the Lender Group: (i) execute and deliver, and, use commercially reasonably efforts to, cause the Issuers and the directors and officers thereof to execute and deliver, all such instruments and documents, and to do or use commercially reasonably efforts to cause to be done all such other acts and things, as may be necessary or, in the opinion of Agent, advisable to register such Collateral under the provisions of the Securities Act, and use commercially reasonable efforts to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectuses which, in the opinion of -10- Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (ii) use commercially reasonable efforts to qualify the Collateral under the state securities laws or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Collateral, as requested by Agent; (iii) use commercially reasonably efforts to cause the Issuers to make available to their respective security holders, as soon as practicable, an earnings statement which will satisfy the provisions of Section 11(a) of the Securities Act; (iv) execute and deliver, or use commercially reasonably efforts to cause the officers and directors of the Issuers to execute and deliver, to any person, entity or governmental authority as Agent may choose, any and all documents and writings which, in Agent's reasonable judgment, may be necessary or appropriate for approval, or be required by, any regulatory authority located in any city, county, state or country where Pledgor or the Issuers engage in business, in order to transfer or to more effectively transfer the Pledged Interests or otherwise enforce Agent's rights hereunder; and (v) do or cause to be done all such other acts and things as may be commercially reasonable to make such sale of the Collateral or any part thereof valid and binding and in compliance with applicable law. Pledgor acknowledges that there is no adequate remedy at law for failure by it to comply with the provisions of this Section and that such failure would not be adequately compensable in damages, and therefore agrees that its agreements contained in this Section may be specifically enforced. (e) PLEDGOR EXPRESSLY WAIVES TO THE MAXIMUM EXTENT PERMITTED BY LAW: (i) ANY CONSTITUTIONAL OR OTHER RIGHT TO A JUDICIAL HEARING PRIOR TO THE TIME AGENT DISPOSES OF ALL OR ANY PART OF THE PLEDGED COLLATERAL AS PROVIDED IN THIS SECTION; (ii) ALL RIGHTS OF REDEMPTION, STAY, OR APPRAISAL THAT IT NOW HAS OR MAY AT ANY TIME IN THE FUTURE HAVE UNDER ANY RULE OF LAW OR STATUTE NOW EXISTING OR HEREAFTER ENACTED; AND (iii) EXCEPT AS SET FORTH IN SUBSECTION (a) OF THIS SECTION, ANY REQUIREMENT OF NOTICE, DEMAND, OR ADVERTISEMENT FOR SALE. 10. Application of Proceeds. Upon the occurrence and during the continuance of an Event of Default, any cash held by Agent as Pledged Collateral and all cash proceeds received by Agent in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral pursuant to the exercise by Agent of its remedies as a secured creditor as provided in Section 9 shall be applied from time to time by Agent as provided in the Loan Agreement. -11- 11. Duties of Agent. The powers conferred on Agent hereunder are solely to protect its interests in the Pledged Collateral and shall not impose on it any duty to exercise such powers. Except as provided in Section 9207 of the Code, Agent shall have no duty with respect to the Pledged Collateral or any responsibility for taking any necessary steps to preserve rights against any Persons with respect to any Pledged Collateral. 12. Choice of Law and Venue. THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION OF AGENT, IN ANY OTHER COURT IN WHICH AGENT SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. PLEDGOR AND AGENT WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 12. 13. Amendments; Etc. No amendment or waiver of any provision of this Agreement nor consent to any departure by Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by Agent and Pledgor, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of Agent to exercise, and no delay in exercising any right under this Agreement, any other Loan Document, or otherwise with respect to any of the Secured Obligations, shall operate as a waiver thereof; nor shall any single or partial exercise of any right under this Agreement, any other Loan Document, or otherwise with respect to any of the Secured Obligations preclude any other or further exercise thereof or the exercise of any other right. The remedies provided for in this Agreement or otherwise with respect to any of the Secured Obligations are cumulative and not exclusive of any remedies provided by law. Notwithstanding the foregoing, Pledgor may amend Schedule A to include Subsidiaries formed or acquired as permitted by Section 6.15 of the Loan Agreement by providing a copy thereof to Agent along with a notice complying with the applicable provisions herein with respect thereto. 14. Notices. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and shall be delivered in the manner set forth in the Loan Agreement. 15. Continuing Security Interest. This Agreement shall create a continuing security interest in the Pledged Collateral and shall: (i) remain in full force and effect until the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement; (ii) be binding upon Pledgor and its successors and assigns; and (iii) inure -12- to the benefit of Agent and its successors, transferees, and assigns. Upon the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, the security interests granted herein shall automatically terminate and all rights to the Pledged Collateral shall revert to Pledgor. Upon any such termination, Agent will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination. Such documents shall be prepared by Pledgor. 16. Security Interest Absolute. To the maximum extent permitted by law, all rights of Agent, all security interests hereunder, and all obligations of Pledgor hereunder, shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of any of the Secured Obligations or any other agreement or instrument relating thereto, including any of the Loan Documents; (b) any change in the time, manner, or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from any of the Loan Documents, or any other agreement or instrument relating thereto; (c) any exchange, release, or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty for all or any of the Secured Obligations; or (d) any other circumstances that might otherwise constitute a defense available to, or a discharge of, Pledgor. To the maximum extent permitted by law, Pledgor hereby waives any right to require Agent to: (A) proceed against or exhaust any security held by Pledgor; or (B) pursue any other remedy in Agent's power whatsoever. 17. Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement or be given any substantive effect. 18. Severability. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 19. Counterparts; Telefacsimile Execution. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the -13- failure to deliver an original executed counterpart shall not affect the validity, enforceability, or binding effect hereof. 20. Waiver of Marshaling. Pledgor and Agent acknowledge and agree that in exercising any rights under or with respect to the Pledged Collateral: (i) Agent is under no obligation to marshal any Pledged Collateral; (ii) may, in its absolute discretion, realize upon the Pledged Collateral in any order and in any manner it so elects; and (iii) may, in its absolute discretion, apply the proceeds of any or all of the Pledged Collateral to the Secured Obligations in any order and in any manner it so elects. Pledgor and Agent waive any right to require the marshaling of any of the Pledged Collateral. 21. Waiver of Jury Trial. PLEDGOR AND AGENT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. PLEDGOR AND AGENT REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. [Signature page to follow.] -14- IN WITNESS WHEREOF, Pledgor and Agent have caused this Agreement to be duly executed and delivered as of the date first written above. RIVER HOLDING CORP., a Delaware corporation By: ------------------------------------ Title: WELLS FARGO FOOTHILL, INC. a California corporation, as Agent By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-1 SCHEDULE A ---------- TO STOCK PLEDGE AGREEMENT ---------------------- Pledgor: River Holding Corp. Pledged Interests -----------------
Pledgor's Number of Certificate Percentage Percentage Jurisdiction of Certificated / Issuer Shares Class Number(s) Ownership Pledged Organization Uncertificated - ------------------ --------- --------- ----------------- ------------ ---------- --------------- -------------- Hudson Respiratory 13, 14, 15, 16, Care Inc. 9,154,293 Common 17, 22, 23, 24, 25, 27, 85.92% 100% California Certificated Hudson Respiratory Care Inc. 525,938 Senior 1, 2, 3, 4, 6, 7, Preferred 8, 9, 10, 11, 12 100% 100% California Certificated Hudson Respiratory Care Inc. 3,000 Junior Preferred 1 100% 100% California Certificated
A-1 SCHEDULE B ---------- TO STOCK PLEDGE AGREEMENT ---------------------- Pledgor:River Holding Corp. Address of Chief Executive Office: 27711 Diaz Road Temecula, California 92590 B-1
EX-10.3 6 dex103.txt STOCK PLEDGE AGREEMENT- HUDSON RCI/IH HOLDING/WELLS FARGO Exhibit 10.3 STOCK PLEDGE AGREEMENT ---------------------- This STOCK PLEDGE AGREEMENT (this "Agreement"), dated as of October 7, 2003, is entered into by and among HUDSON RESPIRATORY CARE INC., a California corporation ("Borrower"), IH HOLDING LLC, a Delaware limited liability company ("Guarantor", together with the Borrower, collectively the "Pledgor"), and WELLS FARGO FOOTHILL, INC., a California corporation, as the arranger and administrative agent for the Lenders (in such capacity, together with its successors, if any, in such capacity, "Agent"), with reference to the following: WHEREAS, Borrower, the Lenders (such Lenders, together with Agent, individually and collectively, the "Lender Group"), and Agent have entered into that certain Loan and Security Agreement, dated as of even date herewith (as amended, restated, modified, supplemented, refinanced, renewed, or extended from time to time, the "Loan Agreement"), pursuant to which the Lender Group has agreed to make certain financial accommodations to Pledgor; WHEREAS, contemporaneously herewith, Guarantor has executed and delivered that certain General Continuing Guaranty (the "Guaranty") and that certain Security Agreement (Guarantors) (the "Security Agreement") in favor of Agent respecting certain obligations of the Borrower to the Lender Group in connection with the Loan Agreement WHEREAS, Pledgor beneficially owns the specified Equity Interests identified as Pledged Interests in the Persons identified as Issuers listed under the name of Pledgor on Schedule A attached hereto (or any addendum thereto); and WHEREAS, to induce the Lender Group to make the financial accommodations provided to the Pledgor pursuant to the Loan Agreement, Pledgor desires to pledge, grant, transfer, and assign to Agent, for the benefit of the Lender Group, a security interest in the Pledged Collateral (as hereinafter defined) to secure the Secured Obligations (as hereinafter defined), as provided herein. NOW, THEREFORE, in consideration of the mutual promises, covenants, representations, and warranties set forth herein and for other good and valuable consideration, the parties hereto agree as follows: 1. Definitions And Construction. (a) Definitions. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. The following terms, as used in this Agreement, shall have the following meanings: "Agent" shall have the meaning set forth in the preamble to this Agreement, together with its successors or assigns. "Agreement" has the meaning set forth in the preamble to this Agreement. -1- "Chief Executive Office" shall mean the Chief Executive Office listed on Schedule B. "Equity Interests" shall mean all shares, units, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company, or equivalent entity, whether voting or nonvoting, including general partner partnership interests, limited partner partnership interests, common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and any successor statute. "Excluded Collateral" shall have the meaning ascribed to such term in the Loan Agreement. "Future Rights" shall mean, with respect to each Issuer, (i) all Equity Interests (other than Pledged Interests) of such Issuer, and all securities convertible or exchangeable into, and all warrants, options, or other rights to purchase, Equity Interests of such Issuer; (ii) to the extent of Pledgor's interest therein, all shares of, all securities convertible or exchangeable into, and all warrants, options, or other rights to purchase Equity Interests of any Person in which Pledgor, after the date of this Agreement, acquires a direct equity interest, irrespective of whether such Person is or becomes a Subsidiary of Pledgor; and (iii) the certificates or instruments representing such additional Equity Interests, convertible or exchangeable securities, warrants, and other rights and all dividends, cash, options, warrants, rights, instruments, and other property or proceeds from time to time received, receivable, or otherwise distributed in respect of or in exchange for any or all of such Equity Interests. "Guarantor" shall have the meaning set forth in the preamble to this Agreement. "Guaranty" shall have the meaning set forth in the recitals to this Agreement. "Holder" and "Holders" shall have the meanings set forth in Section 3 of this Agreement. "HRC Certificates" means the certificates evidencing the capital stock of HRC Holding Inc., a Delaware corporation. "Issuers" shall mean each of the Persons identified as an Issuer on Schedule A attached hereto (or any addendum thereto), and any successors thereto, whether by merger or otherwise. -2- "Lender Group" shall have the meaning set forth in the recitals to this Agreement. "Lenders" means, individually and collectively, each of the financial institutions identified on the signature pages of the Loan Agreement, and any other person made a party thereto in accordance with the provisions of Section 14 thereof (together with their respective successors and assigns). "Loan Agreement" shall have the meaning set forth in the recitals to this Agreement. "Pledged Collateral" shall mean the Pledged Interests, the Future Rights, and the Proceeds, collectively but excluding the Excluded Collateral. "Pledged Interests" shall mean with respect to each Issuer, all of the Equity Interests identified as Pledged Interests of such Issuer on Schedule A attached hereto (or any addendum thereto). "Pledgor" has the meaning set forth in the preamble to this Agreement. "Proceeds" shall mean all proceeds (including proceeds of proceeds) of the Pledged Interests and Future Rights including all: (a) rights, benefits, distributions, premiums, profits, dividends, interest, cash, instruments, documents of title, accounts, contract rights, inventory, equipment, general intangibles, deposit accounts, chattel paper, and other property from time to time received, receivable, or otherwise distributed in respect of or in exchange for, or as a replacement of or a substitution for, any of the Pledged Interests, Future Rights, or proceeds thereof (including any cash, Equity Interests, or other securities or instruments issued after any recapitalization, readjustment, reclassification, merger or consolidation with respect to any Issuer and any security entitlements, as defined in the Code, with respect thereto); (b) "proceeds," as such term is defined in the Code; (c) proceeds of any insurance, indemnity, warranty, or guaranty (including guaranties of delivery) payable from time to time with respect to any of the Pledged Interests, Future Rights, or proceeds thereof; (d) payments (in any form whatsoever) made or due and payable to Pledgor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Pledged Interests, Future Rights, or proceeds thereof; and (e) other amounts from time to time paid or payable under or in connection with any of the Pledged Interests, Future Rights, or proceeds thereof. "SEC" shall mean the United States Securities and Exchange Commission and any successor thereto. "Secured Obligations" shall mean, with respect to Pledgor, all liabilities, obligations, or undertakings owing by Pledgor to the Lender Group of any kind or description arising out of or outstanding under, advanced or issued pursuant to, or evidenced by the Loan Agreement, the Guaranty, the Security Agreement, this Agreement, or any of the other Loan Documents, irrespective of whether for the payment - 3 - of money, whether direct or indirect, absolute or contingent, due or to become due, voluntary or involuntary, whether now existing or hereafter arising, and including all interest (including interest that accrues after the filing of a case under the Bankruptcy Code) and any and all costs, fees (including attorneys fees), and expenses which Pledgor is required to pay pursuant to any of the foregoing, by law, or otherwise. "Securities Act" shall have the meaning set forth in Section 9(c) of this Agreement. "Security Agreement" shall have the meaning set forth in the recitals to this Agreement. (b) Construction. (i) Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular and to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and other similar terms in this Agreement refer to this Agreement as a whole and not exclusively to any particular provision of this Agreement. Article, section, subsection, exhibit, and schedule references are to this Agreement unless otherwise specified. All of the exhibits or schedules attached to this Agreement shall be deemed incorporated herein by reference. Any reference to any of the following documents includes any and all alterations, amendments, restatements, extensions, modifications, renewals, or supplements thereto or thereof, as applicable: this Agreement, the Loan Agreement, or any of the other Loan Documents. (ii) Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Agent or Pledgor, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by each of the parties signatory hereto and their respective counsel and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of the parties hereto. (iii) In the event of any direct conflict between the express terms and provisions of this Agreement and of the Loan Agreement or the Security Agreement, the terms and provisions of the Loan Agreement or the Security Agreement, as applicable, shall control. 2. Pledge. Pledgor hereby pledges, grants, transfers, and assigns to Agent, for the benefit of the Lender Group, a security interest in all of Pledgor's right, title, and interest in and to the Pledged Collateral in order to secure prompt repayment of any and all of the Secured Obligations in accordance with the terms and conditions of the Loan Documents to which Pledgor is a party, and in order to secure prompt performance by Pledgor of its covenants and duties under each Loan Document to which it is a party. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for Permitted Dispositions, - 4 - Pledgor has no authority, express or implied, to dispose of any item or portion of the Pledged Collateral. 3. Delivery and Registration of Pledged Collateral. (a) All certificates or instruments representing or evidencing the Pledged Collateral shall be promptly delivered by Pledgor to Agent or Agent's designee pursuant hereto at a location designated by Agent and shall be held by or on behalf of Agent pursuant hereto, and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to Agent. (b) Upon the occurrence and during the continuance of an Event of Default, Agent shall have the right, at any time in its discretion and without notice to Pledgor, to transfer to or to register on the books of the Issuers (or of any other Person maintaining records with respect to the Pledged Collateral) in the name of Agent or any of its nominees any or all of the Pledged Collateral. In addition, Agent shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations. (c) If, at any time and from time to time, any Pledged Collateral (including any certificate or instrument representing or evidencing any Pledged Collateral) is in the possession of a Person other than Agent (or an agent of Agent) or Pledgor (a "Holder"), then Pledgor shall promptly, at Agent's option, either cause such Pledged Collateral to be delivered into Agent's possession, or execute and deliver to such Holder a written notification/instruction, and take all other steps necessary to perfect the security interest of Agent in such Pledged Collateral, including obtaining from such Holder a written acknowledgment that such Holder holds such Pledged Collateral for Agent, all pursuant to the Code or other applicable law governing the perfection of Agent's security interest in the Pledged Collateral in the possession of such Holder. Each such notification/instruction and acknowledgment shall be in form and substance reasonably satisfactory to Agent. (d) Any and all Pledged Collateral (including dividends, interest, and other cash distributions) at any time received or held by Pledgor shall be so received or held in trust for Agent, shall be segregated from other funds and property of Pledgor and shall be forthwith delivered to Agent in the same form as so received or held, with any necessary endorsements; provided that cash dividends or distributions received by Pledgor, if and to the extent they are not prohibited by the Loan Agreement, may be retained by Pledgor in accordance with Section 4 and used in the ordinary course of Pledgor's business, or as otherwise expressly permitted under the Loan Documents. (e) If at any time and from time to time any Pledged Collateral consists of an uncertificated security or a security in book entry form, then Pledgor shall promptly cause such Pledged Collateral to be registered or entered, as the case may be, in the name of Agent, for the benefit of the Lender Group, or otherwise cause the security interest held by Agent, for the benefit of the Lender Group, to be perfected in accordance with applicable law. - 5 - (f) Agent acknowledges that the exercise of the powers or rights granted in this Section 3 may at some times be subject to the provisions of the Intercreditor Agreement. 4. Voting Rights and Dividends. (a) So long as no Event of Default shall have occurred and be continuing, Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of the Loan Documents. (b) Upon the occurrence and during the continuance of an Event of Default, at the election of Agent in its Permitted Discretion, upon the receipt by Pledgor of written notice of such election by Agent, all rights of Pledgor to exercise the voting and other consensual rights or receive and retain cash dividends or distributions that it would otherwise be entitled to exercise or receive and retain, as applicable pursuant to Section 4(a), shall cease, and all such rights shall thereupon become vested in Agent, who shall thereupon have the sole right to exercise such voting or other consensual rights and to receive and retain such cash dividends and distributions. Upon the receipt of such written notice, Pledgor shall execute and deliver (or cause to be executed and delivered) to Agent all such proxies and other instruments as Agent may reasonably request for the purpose of enabling Agent to exercise the voting and other rights which it is entitled to exercise and to receive the dividends and distributions that it is entitled to receive and retain pursuant to the preceding sentence. (c) Agent acknowledges that the exercise of the powers granted in this Section 4 may at some times be subject to the provisions of the Intercreditor Agreement. 5. Representations and Warranties. Pledgor represents, warrants, and covenants as follows: (a) Pledgor has taken all steps it deems necessary or appropriate to be informed on a continuing basis of changes or potential changes affecting the Pledged Collateral (including rights of conversion and exchange, rights to subscribe, payment of dividends, reorganizations or recapitalization, tender offers and voting rights), and Pledgor agrees that no member of the Lender Group shall have any responsibility or liability for informing Pledgor of any such changes or potential changes or for taking any action or omitting to take any action with respect thereto; (b) All information herein or contained in or delivered pursuant to the Loan Documents supplied to Agent or any other member of the Lender Group by and prepared by Pledgor or any Subsidiary of Pledgor in writing with respect to the Pledged Collateral is, or in the case of information hereafter supplied will be, accurate and complete in all material respects; (c) Pledgor is and will be the sole legal and beneficial owner of the Pledged Collateral (including the Pledged Interests and all other Pledged Collateral acquired by Pledgor after the date hereof) free and clear of any adverse claim, Lien, or other right, title, or interest of any party, other than the Liens held by Agent for the benefit of the Lender Group and Permitted Liens; - 6 - (d) This Agreement, and the delivery to Agent of certificates, if any, representing Pledged Collateral (or the delivery to all Holders of such certificates, if any, representing Pledged Collateral of the notification/instruction referred to in Section 3 of this Agreement and the acknowledgement of such Holders referred to in Section 3), creates a valid, perfected, and first priority security interest (except that the security interest in the HRC Certificates shall be a second priority security interest) in one hundred percent (100%) of the Pledged Interests which are in certificated form in favor of Agent securing payment of the Secured Obligations, and all actions necessary to achieve such perfection have been duly taken; (e) Schedule A to this Agreement is true and correct and complete in all material respects as of the date hereof; without limiting the generality of the foregoing, as of the date hereof: (i) except as set forth in Schedule A, all the Pledged Interests are in certificated form, and, except to the extent registered in the name of Agent or its nominee pursuant to the provisions of this Agreement, are registered in the name of Pledgor; and (ii) the Pledged Interests as to each of the Issuers constitute at least the percentage of all the fully diluted issued and outstanding Equity Interests of such Issuer as set forth in Schedule A to this Agreement; (f) the Pledged Interests that are interests in general partnerships, limited partnerships or limited liability companies (i) are not dealt in or traded on securities exchanges or in securities markets, (ii) do not have terms expressly providing that they are securities governed by Article 8 of the Code, and (iii) are not investment company securities, and are not, therefore, "securities" governed by Article 8 of the Code; (g) There are no presently existing Future Rights owned by Pledgor as of the date hereof; (h) The Pledged Interests have been duly authorized and validly issued and, with respect to the HRC Certificates, are fully paid and nonassessable; and (i) Neither the pledge of the Pledged Collateral pursuant to this Agreement nor the extensions of credit represented by the Secured Obligations violates Regulation T, U or X of the Board of Governors of the Federal Reserve System. 6. Further Assurances. (a) Pledgor agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action that may be necessary or reasonably desirable, or that Agent, on behalf of the Lender Group, may request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Agent, on behalf of the Lender Group, to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) at the request of Agent, mark conspicuously each of its records pertaining to the Pledged Collateral with a legend, in form and substance reasonably satisfactory to Agent, indicating that such Pledged Collateral is subject to the security interest granted hereby; (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or reasonably desirable, or as Agent - 7 - may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby; (iii) allow inspection of the Pledged Collateral by Agent or Persons designated by Agent; and (iv) appear in and defend any action or proceeding that may affect Pledgor's title to or Agent's security interest in the Pledged Collateral. (b) Pledgor hereby authorizes Agent, on behalf of the Lender Group, to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Pledged Collateral without Pledgor's signature where permitted by law. A carbon, photographic, or other reproduction of this Agreement or any financing statement covering the Pledged Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. (c) Pledgor will furnish to Agent, upon the request of Agent: (i) a certificate executed by an authorized officer of Pledgor, and dated as of the date of delivery to Agent, itemizing in such detail as Agent may request, the Pledged Collateral which, as of the date of such certificate, has been delivered to Agent by Pledgor pursuant to the provisions of this Agreement; and (ii) such statements and schedules further identifying and describing the Pledged Collateral and such other reports in connection with the Pledged Collateral as Agent may request. 7. Covenants of Pledgor. Pledgor shall: (a) Perform each and every covenant in the Loan Documents applicable to Pledgor; (b) At all times keep at least one complete set of its records concerning substantially all of the Pledged Collateral at its Chief Executive Office as set forth in Schedule B hereto, and not change the location of its Chief Executive Office or such records without giving Agent at least thirty (30) days prior written notice thereof; (c) To the extent it may lawfully do so, use its best efforts to prevent the Issuers from issuing Future Rights or Proceeds, except for cash dividends and other distributions, if any, that are not prohibited by the terms of the Loan Agreement to be paid by any Issuer to Pledgor; (d) Upon receipt by Pledgor of any material notice, report, or other communication from any of the Issuers or any Holder relating to all or any part of the Pledged Collateral, deliver such notice, report or other communication to Agent promptly, but in no event later than five (5) days following the receipt thereof by Pledgor; and (e) Not permit any of the Issuers to: (i) authorize the amendment of or amend the Governing Documents of such Issuer that is a general partnership, limited partnership or limited liability company to provide that the Equity Interests of such Issuer is governed by Article 8 of the Code, or (ii) authorize the issuance of or issue certificates evidencing the Equity Interests of such Issuer that is a general partnership, limited partnership or limited liability company. - 8 - 8. Agent as Pledgor's Attorney-in-Fact. (a) Pledgor hereby irrevocably appoints Agent, on behalf of the Lender Group, as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Agent or otherwise, from time to time at Agent's discretion, to take any action and to execute any instrument that Agent, on behalf of the Lender Group, may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including: (i) upon the occurrence and during the continuance of an Event of Default, to receive, endorse, and collect all instruments made payable to Pledgor representing any dividend, interest payment or other distribution in respect of the Pledged Collateral or any part thereof to the extent permitted hereunder and to give full discharge for the same and to execute and file governmental notifications and reporting forms; (ii) to issue any notifications/instructions Agent deems necessary pursuant to Section 3 of this Agreement; or (iii) to arrange for the transfer of the Pledged Collateral on the books of any of the Issuers or any other Person to the name of Agent or to the name of Agent's nominee. (b) In addition to the designation of Agent as Pledgor's attorney-in-fact in subsection (a), Pledgor hereby irrevocably appoints Agent, on behalf of the Lender Group, as Pledgor's agent and attorney-in-fact to make, execute and deliver any and all documents and writings which may be necessary or appropriate for approval of, or be required by, any regulatory authority located in any city, county, state or country where Pledgor or any of the Issuers engage in business, in order to transfer or to more effectively transfer any of the Pledged Interests or otherwise enforce the rights granted hereunder to the Lender Group. 9. Remedies upon Default. Upon the occurrence and during the continuance of an Event of Default, subject to the terms of the Intercreditor Agreement: (a) Agent, on behalf of the Lender Group, may exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Code (irrespective of whether the Code applies to the affected items of Pledged Collateral), and Agent, on behalf of the Lender Group, may also without notice (except as specified below) sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Agent may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. To the maximum extent permitted by applicable law, Agent may be the purchaser of any or all of the Pledged Collateral at any such sale and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply all or any part of the Secured Obligations as a credit on account of the purchase price of any Pledged Collateral payable at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by law) all rights of redemption, stay, or appraisal that it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten (10) calendar - 9 - days notice to Pledgor of the time and place of any public sale or the time after which a private sale is to be made shall constitute reasonable notification. Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Subject to subsection (b), to the maximum extent permitted by law, Pledgor hereby waives any claims against Agent arising because the price at which any Pledged Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale, even if Agent accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. (b) Pledgor hereby agrees that any sale or other disposition of the Pledged Collateral conducted in conformity with reasonable commercial practices of banks, insurance companies, or other financial institutions in the City of Los Angeles, State of California in disposing of property similar to the Pledged Collateral shall be deemed to be commercially reasonable. (c) Pledgor hereby acknowledges that the sale by Agent of any Pledged Collateral pursuant to the terms hereof in compliance with the Securities Act of 1933 as now in effect or as hereafter amended, or any similar statute hereafter adopted with similar purpose or effect (the "Securities Act"), as well as applicable "Blue Sky" or other state securities laws may require strict limitations as to the manner in which Agent or any subsequent transferee of the Pledged Collateral may dispose thereof. In light of this, Pledgor acknowledges and agrees that in order to protect Agent's interest it may be necessary to sell the Pledged Collateral at a price less than the maximum price attainable if a sale were delayed or were made in another manner, such as a public offering under the Securities Act. Pledgor has no objection to sale in such a manner and agrees that Agent shall have no obligation to obtain the maximum possible price for the Pledged Collateral as long as any sale is made in a commercially reasonable manner. Without limiting the generality of the foregoing, Pledgor agrees that, upon the occurrence and during the continuation of an Event of Default, Agent may, subject to applicable law, from time to time attempt to sell all or any part of the Pledged Collateral by a private placement, restricting the bidders and prospective purchasers to those who will represent and agree that they are purchasing for investment only and not for distribution. In so doing, Agent may solicit offers to buy the Pledged Collateral or any part thereof for cash, from a limited number of investors deemed by Agent, in its reasonable judgment, to be institutional investors or other responsible parties who might be interested in purchasing the Pledged Collateral. If Agent shall solicit such offers, then Pledgor acknowledges that the acceptance by Agent of one of the offers shall not be deemed per se to not be a commercially reasonable method of disposition of the Pledged Collateral. (d) If Agent shall determine to exercise its right to sell all or any portion of the Pledged Collateral pursuant to this Section, Pledgor agrees that, upon request of Agent, Pledgor will, at no expense to any member of the Lender Group: (i) execute and deliver, and, use commercially reasonably efforts to, cause the Issuers and the directors and officers thereof to execute and deliver, all such -10- instruments and documents, and to do or use commercially reasonably efforts to cause to be done all such other acts and things, as may be necessary or, in the opinion of Agent, advisable to register such Collateral under the provisions of the Securities Act, and use commercially reasonable efforts to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectuses which, in the opinion of Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (ii) use commercially reasonable efforts to qualify the Collateral under the state securities laws or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Collateral, as requested by Agent; (iii) use commercially reasonably efforts to cause the Issuers to make available to their respective security holders, as soon as practicable, an earnings statement which will satisfy the provisions of Section 11(a) of the Securities Act; (iv) execute and deliver, or use commercially reasonably efforts to cause the officers and directors of the Issuers to execute and deliver, to any person, entity or governmental authority as Agent may choose, any and all documents and writings which, in Agent's reasonable judgment, may be necessary or appropriate for approval, or be required by, any regulatory authority located in any city, county, state or country where Pledgor or the Issuers engage in business, in order to transfer or to more effectively transfer the Pledged Interests or otherwise enforce Agent's rights hereunder; and (v) do or cause to be done all such other acts and things as may be commercially reasonable to make such sale of the Collateral or any part thereof valid and binding and in compliance with applicable law. Pledgor acknowledges that there is no adequate remedy at law for failure by it to comply with the provisions of this Section and that such failure would not be adequately compensable in damages, and therefore agrees that its agreements contained in this Section may be specifically enforced. (e) PLEDGOR EXPRESSLY WAIVES TO THE MAXIMUM EXTENT PERMITTED BY LAW: (i) ANY CONSTITUTIONAL OR OTHER RIGHT TO A JUDICIAL HEARING PRIOR TO THE TIME AGENT DISPOSES OF ALL OR ANY PART OF THE PLEDGED COLLATERAL AS PROVIDED IN THIS SECTION; (ii) ALL RIGHTS OF REDEMPTION, STAY, OR APPRAISAL THAT IT NOW HAS OR MAY AT ANY TIME IN THE FUTURE HAVE UNDER ANY RULE OF LAW OR STATUTE NOW EXISTING OR HEREAFTER ENACTED; AND (iii) EXCEPT AS SET FORTH IN SUBSECTION (a) OF THIS SECTION, ANY REQUIREMENT OF NOTICE, DEMAND, OR ADVERTISEMENT FOR SALE. 10. Application of Proceeds. Upon the occurrence and during the continuance of an Event of Default, any cash held by Agent as Pledged Collateral and all cash proceeds -11- received by Agent in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral pursuant to the exercise by Agent of its remedies as a secured creditor as provided in Section 9 shall be applied from time to time by Agent as provided in the Loan Agreement. 11. Duties of Agent. The powers conferred on Agent hereunder are solely to protect its interests in the Pledged Collateral and shall not impose on it any duty to exercise such powers. Except as provided in Section 9207 of the Code, Agent shall have no duty with respect to the Pledged Collateral or any responsibility for taking any necessary steps to preserve rights against any Persons with respect to any Pledged Collateral. 12. Choice of Law and Venue. THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION OF AGENT, IN ANY OTHER COURT IN WHICH AGENT SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. PLEDGOR AND AGENT WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 12. 13. Amendments; Etc. No amendment or waiver of any provision of this Agreement nor consent to any departure by Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by Agent and Pledgor, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of Agent to exercise, and no delay in exercising any right under this Agreement, any other Loan Document, or otherwise with respect to any of the Secured Obligations, shall operate as a waiver thereof; nor shall any single or partial exercise of any right under this Agreement, any other Loan Document, or otherwise with respect to any of the Secured Obligations preclude any other or further exercise thereof or the exercise of any other right. The remedies provided for in this Agreement or otherwise with respect to any of the Secured Obligations are cumulative and not exclusive of any remedies provided by law. Notwithstanding the foregoing, Pledgor may amend Schedule A to include Subsidiaries formed or acquired as permitted by Section 6.15 of the Loan Agreement by providing a copy thereof to Agent along with a notice complying with the applicable provisions herein with respect thereto. 14. Notices. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and shall be delivered in the manner set forth in the Loan Agreement. -12- 15. Continuing Security Interest. This Agreement shall create a continuing security interest in the Pledged Collateral and shall: (i) remain in full force and effect until the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement; (ii) be binding upon Pledgor and its successors and assigns; and (iii) inure to the benefit of Agent and its successors, transferees, and assigns. Upon the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, the security interests granted herein shall automatically terminate and all rights to the Pledged Collateral shall revert to Pledgor. Upon any such termination, Agent will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination. Such documents shall be prepared by Pledgor. 16. Security Interest Absolute. To the maximum extent permitted by law, all rights of Agent, all security interests hereunder, and all obligations of Pledgor hereunder, shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of any of the Secured Obligations or any other agreement or instrument relating thereto, including any of the Loan Documents; (b) any change in the time, manner, or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from any of the Loan Documents, or any other agreement or instrument relating thereto; (c) any exchange, release, or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty for all or any of the Secured Obligations; or (d) any other circumstances that might otherwise constitute a defense available to, or a discharge of, Pledgor. To the maximum extent permitted by law, Pledgor hereby waives any right to require Agent to: (A) proceed against or exhaust any security held by Pledgor; or (B) pursue any other remedy in Agent's power whatsoever. 17. Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement or be given any substantive effect. 18. Severability. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. -13- 19. Counterparts; Telefacsimile Execution. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, or binding effect hereof. 20. Waiver of Marshaling. Pledgor and Agent acknowledge and agree that in exercising any rights under or with respect to the Pledged Collateral: (i) Agent is under no obligation to marshal any Pledged Collateral; (ii) may, in its absolute discretion, realize upon the Pledged Collateral in any order and in any manner it so elects; and (iii) may, in its absolute discretion, apply the proceeds of any or all of the Pledged Collateral to the Secured Obligations in any order and in any manner it so elects. Pledgor and Agent waive any right to require the marshaling of any of the Pledged Collateral. 21. Waiver of Jury Trial. PLEDGOR AND AGENT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. PLEDGOR AND AGENT REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. [Signature page to follow.] -14- IN WITNESS WHEREOF, Pledgor and Agent have caused this Agreement to be duly executed and delivered as of the date first written above. HUDSON RESPIRATORY CARE INC., a California corporation By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- IH HOLDING LLC, a Delaware limited liability company By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- WELLS FARGO FOOTHILL, INC. a California corporation, as Agent By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-1 SCHEDULE A ---------- TO STOCK PLEDGE AGREEMENT ----------------------
Pledgor: Hudson Respiratory Care Inc. Pledged Interests ----------------- Pledgor's Number of Certificate Percentage Percentage Jurisdiction of Certificated / Issuer Shares Class Number(s) Ownership Pledged Organization Uncertificated - ------------------------------- --------- ---------- ----------- ---------- ---------- --------------- -------------- HRC Holding Inc. 100 Common 1 100% 100% Delaware Certificated membership IH Holding LLC n/a interests -- 100% 0 Delaware Uncertificated Industrias Hudson, S.A. de C.V. 990 Common 16, 17 99% 66-2/3% Mexico Certificated Hudson Respiratory Care membership Tecate, S.de R.L. de C.V. n/a interests 1 99.9% 66-2/3% Mexico Certificated
Pledgor: IH Holding LLC Pledged Interests ----------------- Pledgor's Number of Certificate Percentage Percentage Jurisdiction of Certificated / Issuer Shares Class Number(s) Ownership Pledged Organization Uncertificated - ------------------------------- --------- ---------- ----------- ---------- ---------- --------------- -------------- Industrias Hudson, S.A. de C.V. 10 Common 18 1% 0 Mexico Certificated Hudson Respiratory Care membership Tecate, S. de R.L. de C.V. n/a interests 2 0.1% 0 Mexico Certificated
A-1 SCHEDULE B ---------- TO STOCK PLEDGE AGREEMENT ---------------------- Pledgor: Hudson Respiratory Care Inc. Address of Chief Executive Office: 27711 Diaz Road Temecula, California 92590 B-1
EX-10.4 7 dex104.txt SECURITY AGREEMENT- HUDSON RCI/WELLS FARGO Exhibit 10.4 SECURITY AGREEMENT (GUARANTORS) This SECURITY AGREEMENT (this "Agreement"), is entered into as of October 7, 2003, is executed and delivered by and among each of the undersigned Affiliates of HUDSON RESPIRATORY CARE INC., a California corporation ("Borrower") (each such Affiliate individually a "Guarantor", and individually and collectively, jointly and severally, the "Guarantors") and WELLS FARGO FOOTHILL, INC., a California corporation, as the arranger and administrative agent for the Lenders (in such capacity, together with its successors and assigns, if any, in such capacity, "Agent"), in light of the following: WHEREAS, Borrower, the Lenders (such Lenders, together with Agent, individually and collectively, jointly and severally, the "Lender Group"), and Agent are entering into that certain Loan and Security Agreement of even date herewith (as amended, restated, modified, renewed or extended from time to time, the "Loan Agreement"); WHEREAS, each Guarantor has executed that certain General Continuing Guaranty, of even date herewith, in favor of Agent (the "Guaranty"), respecting the Obligations of Borrower owing to the Lender Group under the Loan Agreement; WHEREAS, each Guarantor desires to secure its obligations under the Loan Documents to which it is party (including the Guaranty) by granting to Agent, for the benefit of the Lender Group, security interests in the Collateral as set forth herein; and WHEREAS, each Guarantor is an Affiliate of Borrower, and will benefit by virtue of the financial accommodations from the Lender Group to Borrower. NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and each intending to be bound hereby, Agent and each Guarantor agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1. Definitions. All capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. As used in this Agreement, the following terms shall have the following definitions: "Account" means any "account" (as that term is defined in the Code), and any and all supporting obligations in respect thereof. "Additional Documents" has the meaning set forth in Section 2.4(c) of this Agreement. "Agent" has the meaning set forth in the preamble to this Agreement. "Agent's Liens" means the Liens granted by a Guarantor to Agent under this Agreement or the other Loan Documents to which such Guarantor is a party. "Agreement" means this Security Agreement and any extensions, riders, supplements, notes, amendments, or modifications to or in connection with this Security Agreement. "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C. Section 101, et seq.), as amended, and any successor statute. "Borrower" has the meaning set forth in the preamble to this Agreement. "Code" means the California Uniform Commercial Code as in effect from time to time. "Collateral" means, with respect to each Guarantor, all of such Guarantor's now owned or hereafter acquired right, title, and interest in and to each of the following: all of its Accounts; all of its Commercial Tort Claims; all of its Books; all of its Deposit Accounts; Real Property; all of its Equipment; all of its General Intangibles; all of its Inventory; all of its Investment Property (including all securities and Securities Accounts); all of its Negotiable Collateral; any money or other assets of such Guarantor which now or hereafter come into the possession, custody, or control of Agent; and the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, Commercial Tort Claims, Books, Deposit Accounts, Real Property, Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, money, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof, but excluding the Excluded Collateral. "Commercial Tort Claim Assignment" has the meaning set forth in Section 2.4(b) of this Agreement. "Commercial Tort Claims" means a commercial tort claim (as that term is defined in the Code). "Control Agreement" means a control agreement, in form and substance satisfactory to Agent, executed and delivered by Borrower or a Guarantor, Agent, and the applicable securities intermediary (with respect to a Securities Account) or bank (with respect to a Deposit Account) in form and substance satisfactory to Agent. "Equipment" means "equipment" (as that term is defined in the Code), and includes machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), tools, parts, and goods (other than consumer goods, farm products, or Inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "Excluded Collateral" shall have the meaning ascribed to such term in the Loan Agreement. -2- "Guarantor" and "Guarantors" have the meanings ascribed to such terms in the preamble to this Agreement. "Guarantor's Books" means the applicable Guarantor's now owned or hereafter acquired books and records (including all of its Records indicating, summarizing, or evidencing its assets (including the Collateral) or liabilities, all of its Records relating to its business operations or financial condition, and all of its goods or General Intangibles related to such information). "General Intangibles" means "general intangibles" (as that term is defined in the Code). "Guaranty" has the meaning set forth in the recitals to this Agreement. "Inventory" means "inventory" (as that term is defined in the Code). "Investment Property" means "investment property" (as that term is defined in the Code), and any and all supporting obligations in respect thereof. "Lender Group" has the meaning set forth in the recitals to this Agreement. "Lenders" means, individually and collectively, each of the lenders identified on the signature pages of the Loan Agreement, and any other person made a party thereto in accordance with the provisions of Section 14 thereof (together with their respective successors and assigns). "Loan Agreement" has the meaning set forth in the recitals to this Agreement. "Negotiable Collateral" means letters of credit, letter of credit rights, instruments, promissory notes, drafts, documents, and chattel paper (including electronic chattel paper and tangible chattel paper), and any and all supporting obligations in respect thereof. "Secured Obligations" means the Guarantied Obligations, as defined in the Guaranty. "Voidable Transfer" has the meaning set forth in Section 11.8 to this Agreement. 1.2. Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. -3- 1.3. Construction. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Section, subsection, clause, schedule, and exhibit references are to this Agreement unless otherwise specified. Any reference in this Agreement or in any of the other Loan Documents to this Agreement or any of the other Loan Documents shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, and supplements, thereto and thereof, as applicable. In the event of a direct conflict between the terms and provisions of this Agreement and the Loan Agreement, it is the intention of the parties hereto that both such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of the Loan Agreement shall control and govern; provided, however, that the inclusion herein of additional obligations on the part of each Guarantor and supplemental rights and remedies in favor of Agent, in each case in respect of the Collateral, shall not be deemed a conflict with the Loan Agreement. 1.4. Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 2. CREATION OF SECURITY INTEREST. 2.1. Grant of Security Interest. Each Guarantor hereby grants to Agent, for the benefit of the Lender Group, a continuing security interest in all of its right, title, and interest in all currently existing and hereafter acquired or arising Collateral to secure prompt repayment of any and all of the Secured Obligations in accordance with the terms and conditions of the Loan Documents and to secure prompt performance by each Guarantor of each such Guarantor's covenants and duties under the Loan Documents. Agent's Liens in and to the Collateral shall attach to all Collateral without further act on the part of Agent or any Guarantor. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for Permitted Dispositions, no Guarantor has any authority, express or implied, to dispose of any item or portion of the Collateral. 2.2. Negotiable Collateral. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, and if and to the extent that Agent determines that perfection or priority of Agent's security interest is dependent on or enhanced by possession, the applicable Guarantor, promptly upon the request of Agent, shall endorse and deliver physical possession of such Negotiable Collateral to Agent. 2.3. Collection of Accounts, General Intangibles, Negotiable Collateral. At any time after the occurrence and during the continuation of an Event of Default, Agent or Agent's designee may (a) notify Account Debtors of any Guarantor that such Guarantor's Accounts, chattel paper, or General Intangibles have been assigned to Agent or that -4- Agent has a security interest therein, or (b) collect such Guarantor's Accounts, chattel paper, or General Intangibles directly and charge the collection costs and expenses to the Loan Account. Each Guarantor agrees that it will hold in trust for Agent, as Agent's trustee, any Collections that it receives and promptly will deliver such Collections to Agent or a Cash Management Bank in their original form as received by the applicable Guarantor. 2.4. Filing of Financing Statements; Commercial Tort Claims; Delivery of Additional Documentation Required. (a) Each Guarantor authorizes Agent to file any financing statement necessary or desirable to effectuate the transactions contemplated herein and by the other Loan Documents, and any continuation statement or amendment with respect thereto, in any appropriate filing office without the signature of such Guarantor where permitted by applicable law. Each Guarantor hereby ratifies the filing of any financing statement filed without the signature of such Guarantor prior to the date hereof. (b) If any Guarantor acquires any Commercial Tort Claim after the date hereof, such Guarantor shall promptly (but in any event within 10 days after a financial officer of Guarantor having knowledge thereof) deliver to Agent a written description of such Commercial Tort Claim and shall, upon request of Agent, promptly deliver a written agreement, in form and substance satisfactory to Agent, pursuant to which such Guarantor to the extent not prohibited by law, grants a security interest in such Commercial Tort Claim to Agent, as security for the Obligations (a "Commercial Tort Claim Assignment"). (c) At any time upon the request of Agent each Guarantor shall execute and deliver to Agent, any and all financing statements, original financing statements in lieu of continuation statements, fixture filings, security agreements, pledges, assignments, Commercial Tort Claim Assignments, endorsements of certificates of title, and all other documents (collectively, the "Additional Documents") that Agent may request in its Permitted Discretion, in form and substance satisfactory to Agent, to create, perfect, and continue perfected or to better perfect the Agent's Liens in the assets of such Guarantor (whether now owned or hereafter arising or acquired, tangible or intangible, real or personal), to create and perfect Liens in favor of Agent in any owned Real Property acquired by any Guarantor after the Closing Date, and in order to fully consummate all of the transactions contemplated hereby and under the other Loan Documents. To the maximum extent permitted by applicable law, if any Guarantor has not executed any Additional Document Agent is entitled to obtain hereunder after Agent has made an appropriate request therefor, each Guarantor authorizes Agent to execute any such Additional Documents in such Guarantor's name and authorizes Agent to file such executed Additional Documents in any appropriate filing office. In addition, on such periodic basis as Agent shall require, each Guarantor shall (i) provide Agent with a report of all new patents, trademarks, or copyrights (or applications therefor) acquired or generated by such Guarantor during the prior period, (ii) cause all material patents, copyrights and trademarks acquired or generated by such Guarantor that are not already the subject of a registration with the appropriate filing office (or an application therefor diligently prosecuted) to be registered with such appropriate filing office in a manner sufficient to impart constructive notice of such Guarantor's ownership thereof, and (iii) cause to be prepared, executed, and delivered to Agent supplemental schedules to the -5- applicable Loan Documents to identify such patents, copyrights, and trademarks as being subject to the security interests created thereunder. 2.5. Power of Attorney. Each Guarantor hereby irrevocably makes, constitutes, and appoints Agent (and any of Agent's officers, employees, or agents designated by Agent) as such Guarantor's true and lawful attorney, with power to: (a) if such Guarantor refuses to, or fails timely to execute and deliver any of the documents described in Section 2.4, sign the name of such Guarantor on any of the documents described in Section 2.4; (b) at any time that an Event of Default has occurred and is continuing, sign such Guarantor's name on any invoice or bill of lading relating to the Collateral, drafts against Account Debtors, or notices to Account Debtors; (c) send requests for verification of such Guarantor's Accounts; (d) endorse such Guarantor's name on any of its payment items (including all of its Collections) that may come into Agent's possession; (e) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under such Guarantor's policies of insurance and make all determinations and decisions with respect to such policies of insurance; and (f) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting such Guarantor's Accounts, chattel paper, or General Intangibles directly with Account Debtors, for amounts and upon terms that Agent determines to be reasonable, and Agent may cause to be executed and delivered any documents and releases that Agent determines to be necessary. The appointment of Agent as each Guarantor's attorney, and each and every one of Agent's rights and powers, being coupled with an interest, is irrevocable until all of the Secured Obligations have been fully and finally repaid and performed and the Lender Group's obligation to extend credit under the Loan Agreement is terminated. 2.6. Right to Inspect. Agent and each Lender (through any of their respective officers, employees, or agents) shall have the right, from time to time hereafter to inspect the Books and make copies or abstracts thereof and to check, test, and appraise the Collateral, or any portion thereof, in order to verify Guarantor's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral; provided that so long as no Triggering Event has occurred, (a) Guarantor shall not be required to pay for more than 2 inspections/audits of the Collateral per year and (b) appraisals of the Collateral shall be conducted no more frequently than once per year. 2.7. Control Agreements.Each Guarantor agrees that it will not, and will not permit its Subsidiaries, if any, to, transfer assets out of any of their Deposit Accounts or Securities Accounts; provided, however, that so long as no Event of Default has occurred that is continuing or would result therefrom, each Guarantor and its respective Subsidiaries, if any, may use such assets (and the proceeds thereof) to the extent not prohibited by this Agreement or the other Loan Documents and, if the transfer is to another bank or securities intermediary, so long as such Guarantor (or its Subsidiary, as applicable), Agent, and the substitute bank or securities intermediary have entered into a Control Agreement if required by Section 7.12 of the Loan Agreement. Each Guarantor agrees that it will and will cause its Subsidiaries, if any, to take any or all reasonable steps that Agent requests to obtain control in accordance with Sections 9-104, 9-105, 9-106, and 9-107 of the Code with respect to any of its or their Securities Accounts, Deposit Accounts, electronic chattel paper, Investment Property, and letter-of-credit rights. No arrangement contemplated hereby or by any Control Agreement in respect of any Securities Accounts or other Investment Property shall be modified by any Guarantor without the prior -6- written consent of Agent. Upon the occurrence and during the continuance of an Event of Default, Agent may notify any bank or securities intermediary to liquidate the applicable Deposit Account or Securities Account or any related Investment Property maintained or held thereby and remit the proceeds thereof to the Agent's Account. 3. REPRESENTATIONS AND WARRANTIES. Each Guarantor makes the representations and warranties which are set forth in Section 5 of the Loan Agreement as if such Guarantor were a party thereto and to the extent the same are applicable to such Guarantor. 4. AFFIRMATIVE COVENANTS. Each Guarantor shall comply with each of the affirmative covenants which are set forth in Section 6 of the Loan Agreement as if such Guarantor were a party thereto and to the extent the same are applicable to such Guarantor. 5. NEGATIVE COVENANTS. Each Guarantor shall comply with each of the negative covenants which are set forth in Section 7 of the Loan Agreement as if such Guarantor were a party thereto and to the extent the same are applicable to such Guarantor. 6. AGENT'S RIGHTS AND REMEDIES. 6.1. Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, the security hereby constituted shall become enforceable and, in addition to all other rights and remedies available to Agent as provided hereafter, Agent may, without notice of its election and without demand, do any one or more of the following, subject to the terms of the Intercreditor Agreement, all of which are authorized by each Guarantor: (a) Proceed directly and at once, without notice, against any Guarantor to collect and recover the full amount or any portion of the Secured Obligations, without first proceeding against Borrower, or against any security or collateral for the Secured Obligations; (b) Without notice to any Guarantor and regardless of the acceptance of any security or collateral for the payment hereof, appropriate and apply toward the payment of the Secured Obligations (i) any indebtedness due or to become due from Agent to any Guarantor and (ii) any moneys, credits or other property belonging to a Guarantor at any time held by or coming into the possession of Agent; (c) Exercise in respect of the Collateral, in addition to other rights and remedies provided for herein and in the Guaranty or otherwise available to it, all the rights and remedies available to it at law (including those of a secured party under the Code) or in equity; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms that Agent considers advisable, and in such cases, Agent will credit the -7- Loan Account with only the net amounts received by Agent in payment of such disputed Accounts after deducting all Lender Group Expenses incurred or expended in connection therewith; (e) Cause each Guarantor to hold all returned Inventory in trust for Agent, segregate all returned Inventory from all other property of such Guarantor or in such Guarantor's possession and conspicuously label said returned Inventory as the property of Agent for the benefit thereof; (f) Without notice or demand upon any Guarantor, make such payments and do such acts as Agent considers necessary or reasonable to protect its security interest in the Collateral. Each Guarantor agrees to assemble the Collateral if Agent so requires, and to make the Collateral available to Agent as Agent may designate. Each Guarantor authorizes Agent to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Agent's determination appears to conflict with the Agent's Liens in and to the Collateral and to pay all expenses incurred in connection therewith. With respect to any of the Guarantors' owned premises, each Guarantor hereby grants Agent a license to enter into possession of such premises and to occupy the same, without charge, for up to one hundred twenty (120) days to exercise any of Agent's rights or remedies provided herein, at law, in equity, or otherwise; (g) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Agent is hereby granted a license or other right to use, without charge, each Guarantor's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of advertising for sale and selling any Collateral, and each Guarantor's rights under all licenses and all franchise agreements shall inure to Agent's benefit; (h) Sell all or any part of the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including a Guarantor's premises) as Agent determines is commercially reasonable. It is not necessary that the Collateral be present at any such sale; (i) Agent shall give notice of the disposition of the Collateral as follows: (i) Agent shall give the applicable Guarantor a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Collateral, then the time on or after which the private sale or other disposition is to be made; and (ii) The notice shall be personally delivered or mailed, postage prepaid, to the applicable Guarantor as provided in Section 9, at least ten (10) days before the earliest time of disposition set forth in the notice; no notice needs to be given prior to the disposition of any portion of the -8- Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market; (j) Agent, on behalf of the Lender Group, may credit bid and purchase at any public sale; (k) Agent may seek the appointment of a receiver or keeper to take possession of all or any portion of the Collateral or to operate same and, to the maximum extent permitted by law, may seek the appointment of such a receiver or keeper without the requirement of prior notice or a hearing; (l) Agent, on behalf of the Lender Group, shall have all other rights and remedies available at law or in equity or pursuant to any other Loan Document; and (m) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by the Guarantors. Any excess will be returned, without interest and subject to the rights of third Persons, by Agent to the applicable Guarantor. 6.2. Remedies Cumulative. Agent's rights and remedies under this Agreement, the other Loan Documents, and all other agreements shall be cumulative. Agent shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Agent of one right or remedy shall be deemed an election, and no waiver by any member of the Lender Group of any Event of Default on a Guarantor's part shall be deemed a continuing waiver. No delay by any member of the Lender Group shall constitute a waiver, election, or acquiescence by it. 7. TAXES AND EXPENSES REGARDING THE COLLATERAL. If any Guarantor fails to pay any monies (whether taxes, rents, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, Agent, in its sole discretion and without prior notice to any Guarantor, may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves in the Loan Account as Agent deems necessary to protect the Lender Group from the exposure created by such failure; or (c) in the case of the failure to comply with Section 6.8 of the Loan Agreement, obtain and maintain insurance policies insuring each Guarantor's ownership and use of the Collateral, and take any action with respect to such policies as Agent deems prudent. Any amounts paid or deposited by Agent shall constitute Lender Group Expenses, shall immediately become additional Secured Obligations, shall bear interest at the applicable rate described in the Loan Agreement, and shall be secured by the Collateral. Any payments made by Agent shall not constitute an agreement by Agent, or any member of the Lender Group, to make similar payments in the future or a waiver by the Lender Group, or Agent on behalf thereof, of any Event of Default under this Agreement. Agent need not inquire as to, or contest the validity of, any such expense, tax, security interest, encumbrance, or lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. Agent shall use its best efforts to provide notice to the applicable Guarantor of any action taken by it under this Section 7. -9- 8. WAIVERS; INDEMNIFICATION. 8.1. Demand; Protest; Etc. Except as otherwise specifically and explicitly set forth in this Agreement, the Loan Agreement, or the other Loan Documents, and to the extent permitted by law, each Guarantor waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by the Lender Group, or Agent on behalf thereof, on which such Guarantor may in any way be liable. 8.2. Lender Group's Liability for Collateral. So long as the Lender Group complies with its obligations, if any, under the Code and no willful misconduct or gross negligence occurs, Agent shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person. All risk of loss, damage, or destruction of the Collateral shall be borne by the Guarantors. 8.3. Indemnification. Each Guarantor agrees to defend, indemnify, save, and hold the Agent-Related Persons, the Lender-Related Persons with respect to each Lender, and each Participant (each an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them: (a) in connection with or as a result of or related to the execution, delivery, enforcement, performance, or administration (including any restructuring or workout with respect hereto) of this Agreement, any of the other Loan Documents, or the transactions contemplated hereby or thereby or the monitoring of each Guarantor's compliance with the terms of the Loan Documents, and (b) with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event, or circumstance in any manner related thereto (all of the foregoing, collectively, the "Indemnified Liabilities"). The foregoing to the contrary notwithstanding, no Guarantor shall have any obligation to any Indemnified Person under this Section 8.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Secured Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which any Guarantor was required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by such Guarantor with respect thereto. WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LIABILITIES WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON (OTHER THAN TO THE EXTENT IT IS FINALLY DETERMINED TO -10- HAVE RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY INDEMNIFIED PERSON). 9. NOTICES. All notices and other communications hereunder to Agent shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement and all notices and other communications hereunder to a Guarantor shall be in writing and shall be mailed, sent or delivered in care of Borrower in accordance with the Loan Agreement. 10. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE CALIFORNIA STATE COURTS AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. EACH GUARANTOR AND AGENT WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT SUCH PARTY MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 10. EACH GUARANTOR AND AGENT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH GUARANTOR AND AGENT REPRESENT THAT EACH SUCH PARTY HAS REVIEWED THIS WAIVER AND EACH SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 11. GENERAL PROVISIONS. 11.1. Effectiveness. This Agreement shall be binding and deemed effective when executed by each Guarantor and accepted and executed by Agent. -11- 11.2. Successors and Assigns. This Agreement shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of the successors and assigns of each member of the Lender Group; provided, however, no Guarantor shall assign this Agreement or delegate any of its duties hereunder without Agent's prior written consent and any assignment by a Guarantor without Agent's consent shall be absolutely void. In the event of any assignment or other transfer of rights by any member of the Lender Group, the rights and benefits herein conferred upon each member of the Lender Group shall automatically extend to and be vested in such assignee or other transferee. Subject to the provisions of the Loan Agreement, Agent may assign this Agreement and its rights and duties hereunder and no consent or approval by any Guarantor is required in connection with any such assignment 11.3. Section Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement or be given any substantive effect. 11.4. Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against any member of the Lender Group or any Guarantor, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 11.5. Severability of Provisions. Any provision of this Agreement that is prohibited or unenforceable under applicable law shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. 11.6. Amendments in Writing. This Agreement can only be amended by a writing signed by Agent and each Guarantor. 11.7. Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. 11.8. Revival and Reinstatement of Obligations. If the incurrence or payment of the Secured Obligations by a Guarantor or the transfer by a Guarantor to Agent of any property of a Guarantor should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, and other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if Agent is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the advice of its counsel, then, as to any such Voidable Transfer, or the -12- amount thereof that Agent is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys' fees of Agent related thereto, the liability of each of the Guarantors automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 11.9. Termination. Upon the indefeasible final payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, this Agreement shall terminate, and Agent shall execute and deliver such documents and instruments and take such further action reasonably requested by Guarantors, at Guarantors' expense, as shall be necessary to evidence termination of the security interests granted by Guarantors to Agent for the benefit of the Lender Group. [Signature page follows] -13- IN WITNESS WHEREOF, each of the undersigned has executed and delivered this Agreement as of the date first above written. RIVER HOLDING CORP., a Delaware corporation By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- IH HOLDINGS LLC, a Delaware limited liability company By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- WELLS FARGO FOOTHILL, INC., a California corporation, as Agent By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- [Signature Page to Guarantor Security Agreement] EX-10.5 8 dex105.txt PATENT SECURITY AGREEMENT- HUDSON RCI/WELLS FARGO Exhibit 10.5 PATENT SECURITY AGREEMENT ------------------------- This PATENT SECURITY AGREEMENT (this "Agreement"), dated as of October 7, 2003, is executed and delivered by and between HUDSON RESPIRATORY CARE INC., a California corporation ("Debtor"), and WELLS FARGO FOOTHILL, INC., a California corporation, as arranger and administrative agent for the Lenders (in such capacity, together with its successors and assigns, if any, in such capacity, "Agent"), with reference to the following: WHEREAS, Debtor, the Lenders (such Lenders, together with Agent, individually and collectively, the "Lender Group"), and Agent have entered into that certain Loan and Security Agreement, dated as of even date herewith (as amended, restated, modified, supplemented, refinanced, renewed, or extended from time to time, the "Loan Agreement"), pursuant to which the Lender Group has agreed to make certain financial accommodations to Debtor, and pursuant to which Debtor has granted to Agent for the benefit of the Lender Group security interests in (among other things) all general intangibles of Debtor; and WHEREAS, pursuant to the Loan Documents, and as one of the conditions precedent to the obligations of the Lenders under the Loan Agreement, Debtor has agreed to execute and deliver this Agreement to Agent for filing with the PTO and with any other relevant recording systems in any domestic or foreign jurisdiction, and as further evidence of and to effectuate Agent's existing security interests in the patents and other general intangibles described herein. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which is hereby acknowledged, Debtor hereby agrees in favor of Agent, for the benefit of the Lender Group, as follows: 1. Definitions; Interpretation. (a) Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Agent" has the meaning ascribed to such term in the preamble to this Agreement. "Agreement" has the meaning ascribed to such term in the preamble to this Agreement. "Debtor" has the meaning ascribed to such term in the preamble to this Agreement. "Debtor's Patents" has the meaning set forth in Section 4. "Event of Default" means any Event of Default under the Loan Agreement. - 1 - "Excluded Collateral" has the meaning ascribed to such term in the Loan Agreement. "Lender Group" has the meaning ascribed to such term in the recitals to this Agreement. "Lenders" means, individually and collectively, each of the lenders identified on the signature pages of the Loan Agreement, and any other person made a party thereto in accordance with the provisions of Section 14 thereof (together with their respective successors and assigns). "Loan Agreement" has the meaning ascribed to such term in the recitals to this Agreement. "Patent Collateral" has the meaning ascribed to such term in Section 2. "Patents" has the meaning ascribed to such term in Section 2. "Proceeds" means whatever is receivable or received from or upon the sale, lease, license, collection, use, exchange or other disposition, whether voluntary or involuntary, of any Patent Collateral, including "proceeds" as defined in the UCC, and all proceeds of proceeds. Proceeds shall include (i) any and all accounts, chattel paper, instruments, general intangibles, cash and other proceeds, payable to or for the account of Debtor, from time to time in respect of any of the Patent Collateral, (ii) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to or for the account of Debtor from time to time with respect to any of the Patent Collateral, (iii) any and all claims and payments (in any form whatsoever) made or due and payable to Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Patent Collateral by any Person acting under color of governmental authority, and (iv) any and all other amounts from time to time paid or payable under or in connection with any of the Patent Collateral or for or on account of any damage or injury to or conversion of or infringement of rights in any Patent Collateral by any Person. "PTO" means the United States Patent and Trademark Office and any successor thereto. "Secured Obligations" means all liabilities, obligations (including the Obligations), or undertakings owing by Debtor to the Lender Group of any kind or description arising out of or outstanding under, advanced or issued pursuant to, or evidenced by the Loan Agreement, this Agreement, or any of the other Loan Documents, irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, voluntary or involuntary, whether now existing or hereafter arising, and including all interest, costs, fees (including attorneys fees), and expenses (including interest, costs, fees, and expenses that, but for the provisions of the Bankruptcy Code, would have accrued) and any and all other amounts which Debtor is required to pay pursuant to any of the foregoing, by law, or otherwise. - 2 - "UCC" shall mean the Uniform Commercial Code as in effect from time to time in the State of California. "United States" and "U.S." shall each mean the United States of America. (b) Terms Defined in UCC. Where applicable and except as otherwise defined herein, terms used in this Agreement shall have the meanings ascribed to them in the UCC. (c) Interpretation. In this Agreement, except to the extent the context otherwise requires: (i) Any reference to a Section or a Schedule is a reference to a section hereof, or a schedule hereto, respectively, and to a subsection or a clause is, unless o therwise stated, a reference to a subsection or a clause of the Section or subsection in which the reference appears. (ii) The words "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement as a whole and not merely to the specific Section, subsection, paragraph or clause in which the respective word appears. (iii) The meaning of defined terms shall be equally applicable to both the singular and plural forms of the terms defined. (iv) The words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation." (v) References to agreements and other contractual instruments shall be deemed to include all subsequent permitted amendments, restatements, supplements, refinancings, renewals, extensions, and other modifications thereto and thereof. (vi) References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation referred to. (vii) Any captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. (viii) Capitalized words not otherwise defined herein shall have the respective meanings assigned to them in the Loan Agreement. (ix) In the event of a direct conflict between the terms and provisions of this Agreement and the Loan Agreement, it is the intention of the parties hereto that such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict between this Agreement and the Loan Agreement, that cannot be resolved as aforesaid, the terms and provisions of the Loan Agreement shall control and govern; - 3 - provided, however, that the inclusion herein of additional obligations on the part of the Debtor and supplemental rights and remedies in favor of Agent (whether under federal law or applicable California law), in each case in respect of the Patent Collateral, shall not be deemed a conflict with the Loan Agreement. 2. Security Interest. (a) Assignment and Grant of Security Interests. As security for the prompt payment and performance of the Secured Obligations, Debtor hereby grants, assigns, transfers, and conveys to Agent, for the benefit of the Lender Group, continuing security interests in all of such Debtor's right, title and interest in, to and under the following property, whether now existing or hereafter acquired or arising and whether registered or unregistered (collectively, the "Patent Collateral"): (i) all letters patent of the U.S. or any other country, all registrations and recordings thereof, and all applications for letters patent of the U.S. or any other country, owned, held, or used by Debtor in whole or in part, including all existing U.S. patents and patent applications of Debtor which are described on Schedule A hereto, as the same may be amended or supplemented pursuant hereto from time to time, and together with and including all patent licenses held by Debtor, including such patent licenses which are described on Schedule A hereto, together with all reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof and the inventions disclosed therein, and all rights corresponding thereto throughout the world, including the right to make, use, lease, sell and otherwise transfer the inventions disclosed therein, and all proceeds thereof, including all license royalties and proceeds of infringement suits (collectively, the "Patents"); (ii) all claims, causes of action and rights to sue for past, present and future infringement or unconsented use of any of the Patents and all rights arising therefrom and pertaining thereto; (iii) all general intangibles and all intangible intellectual or other similar property of Debtor of any kind or nature, whether now owned or hereafter acquired or developed, associated with or arising out of any of the Patents and not otherwise described above; and (iv) all products and Proceeds of any and all of the foregoing; provided, however, that Patent Collateral shall not include Excluded Collateral. (b) Continuing Security Interests. Debtor agrees that this Agreement shall create continuing security interests in the Patent Collateral which shall remain in effect until terminated in accordance with Section 17. (c) Incorporation into Loan Agreement. This Agreement shall be fully incorporated into the Loan Agreement and all understandings, agreements and provisions contained in the Loan Agreement shall be fully incorporated into this Agreement. Without - 4 - limiting the foregoing, the Patent Collateral described in this Agreement shall constitute part of the Collateral in the Loan Agreement. (d) Licenses. Debtor may grant licenses of the Patent Collateral in the ordinary course of business in accordance with the terms of the Loan Agreement. 3. Further Assurances; Appointment of Agent as Attorney-in-Fact. Debtor at its expense shall execute and deliver, or cause to be executed and delivered, to Agent any and all documents and instruments, in form and substance satisfactory to Agent, and take any and all action, which Agent, in the exercise of its discretion, may request from time to time, to perfect and continue perfected, maintain the priority of or provide notice of Agent's security interests in the Patent Collateral and to accomplish the purposes of this Agreement. If Debtor refuses to execute and deliver, or fails timely to execute and deliver, any of the documents it is requested to execute and deliver by Agent in accordance with the foregoing, Agent shall have the right to, in the name of Debtor, or in the name of Agent or otherwise, without notice to or assent by Debtor, and Debtor hereby irrevocably constitutes and appoints Agent (and any of Agent's officers or employees or agents designated by Agent) as Debtor's true and lawful attorney-in-fact with full power and authority, (i) to sign the name of Debtor on all or any of such documents or instruments, and perform all other acts, that Agent, in its reasonable discretion, deems necessary or advisable in order to perfect or continue perfected, maintain the priority or enforceability of or provide notice of Agent's security interests in, the Patent Collateral, and (ii) to execute any and all other documents and instruments, and to perform any and all acts and things for and on behalf of Debtor, which Agent, in its reasonable discretion, may deem necessary or advisable to maintain, preserve and protect the Patent Collateral and to accomplish the purposes of this Agreement, including (A) upon the occurrence and during the continuance of any Event of Default, to defend, settle, adjust or institute any action, suit or proceeding with respect to any Patent Collateral, (B) upon the occurrence and during the continuance of any Event of Default, to assert or retain any rights under any license agreement for any Patent Collateral, including any rights of Debtor arising under Section 365(n) of the Bankruptcy Code, and (C) upon the occurrence and during the continuance of any Event of Default, to execute any and all applications, documents, papers and instruments for Agent to use any Patent Collateral, to grant or issue any exclusive or non-exclusive license with respect to any Patent Collateral, and to assign, convey or otherwise transfer title in or dispose of the Patent Collateral. The power of attorney set forth in this Section 3, being coupled with an interest, is irrevocable so long as this Agreement shall not have terminated in accordance with Section 17; provided that the foregoing power of attorney shall terminate when all of the Secured Obligations have been fully and finally repaid and performed and the Lender Group's obligation to extend credit under the Loan Agreement is terminated. 4. Representations and Warranties. Debtor represents and warrants to each member of the Lender Group, in each case, to the best of its knowledge, information, and belief, as follows: (a) No Other Patents. A true and correct list of all Patents owned by Debtor, in whole or in part, is set forth on Schedule A (collectively, the "Debtor's Patents"). - 5 - Schedule A also sets forth a true and correct list of all of the Patents that Debtor holds (by reason of license or otherwise) from a third party. (b) Validity. Each of the Debtor's Patents listed on Schedule A is subsisting and has not been adjudged invalid or unenforceable, in whole or in part, all maintenance fees required to be paid on account of any Patents have been timely paid for maintaining such Patents in force, and, to the best of Debtor's knowledge, each of the Patents is valid and enforceable. (c) Title. (i) Debtor has rights in and good and defensible title to the Patent Collateral in respect of the Patents it owns, (ii) Debtor is the sole and exclusive owner of such Patent Collateral, free and clear of any Liens and rights of others (other than Permitted Liens), including licenses (other than licenses entered into as permitted herein), shop rights and covenants by Debtor not to sue third persons and (iii) with respect to any Patent for which Debtor is either a licensor or a licensee pursuant to a license or licensee agreement regarding such Patent, each such license or licensing agreement is in full force and effect, such Debtor is not in material default of any of its obligations thereunder and no other Person is known by such Debtor to have any rights in or to any of the Patent Collateral, other than (A) the parties to such licenses or licensing agreements, or (B) in the case of any non-exclusive license or license agreement entered into by Debtor or any such licensor regarding such Patent Collateral, the parties to any other such non-exclusive licenses or license agreements entered into by Debtor or any such licensor with any other Person. (d) No Infringement. To the best of Debtor's knowledge, (i) no material infringement or unauthorized use presently is being made of any of the Patent Collateral by any Person, and (ii) neither the past nor the present use of the Patent Collateral by Debtor has infringed or does infringe upon or violate any right, privilege or license agreement of or with any other Person or give such Person the right to terminate any such license agreement. (e) Powers. Debtor has the unqualified right, power and authority to pledge and to grant to Agent, for the benefit of the Lender Group, security interests in all of the Patent Collateral pursuant to this Agreement, and to execute, deliver and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other Person except as already obtained. 5. Covenants. Debtor covenants that so long as this Agreement shall be in effect, Debtor shall: (a) comply with all of the covenants, terms and provisions of this Agreement, the Loan Agreement, and the other Loan Documents; (b) promptly give Agent written notice of the occurrence of any event that could have a material adverse effect on any of the Patents or the Patent Collateral (except as to such Patent or Patents, which alone or in the aggregate, the absence of which would not reasonably be expected to materially impair the conduct of the business), including any petition under the Bankruptcy Code filed by or against any licensor of any of the Patents for which Debtor is a licensee, provided, however, that Debtor shall not be required to preserve, protect and - 6 - maintain, and may abandon, in whole or in part, any Patent as Debtor deems appropriate in the exercise of Debtor's reasonable business judgment, so long as the absence of such Patent or Patents, alone or in the aggregate, would not reasonably be expected to materially impair the conduct of Debtor's business or the Patent Collateral; (c) on a continuing basis, make, execute, acknowledge and deliver, and file and record in the proper filing and recording places, all such instruments and documents, including appropriate financing and continuation statements and security agreements, and take all such action as may be necessary or advisable or may be requested by Agent, in the exercise of its Permitted Discretion, to carry out the intent and purposes of this Agreement, or for assuring, confirming or protecting the grant or perfection of the security interests granted or purported to be granted hereby, to ensure Debtor's compliance with this Agreement or to enable Agent to exercise and enforce its rights and remedies hereunder with respect to the Patent Collateral. Without limiting the generality of the foregoing sentence, Debtor: (i) hereby authorizes Agent in its sole discretion if Debtor refuses to execute and deliver, or fails timely to execute and deliver, any of the documents it is requested to execute and deliver by Agent, to modify this Agreement without first obtaining Debtor's approval of or signature to such modification by amending Schedule A hereof to include a reference to any right, title or interest in any existing Patent Collateral or Patent Collateral acquired or developed by Debtor after the execution hereof, or to delete any reference to any right, title or interest in any Patent Collateral in which Debtor no longer has or claim any right, title or interest; and (ii) hereby authorizes Agent, in its sole discretion, to file one or more financing or continuation statements, or if Debtor refuses to execute and deliver, or fails timely to execute and deliver, any such amendment thereto it is requested to execute and deliver by Agent, any amendments thereto, relative to all or any portion of the Patent Collateral, without the signature of Debtor where permitted by law; (d) comply, in all material respects, with all applicable statutory and regulatory requirements in connection with any and all Patent Collateral and give such notice of patent, prosecute such material claims, and do all other acts and take all other measures which, in Debtor's reasonable business judgment, may be necessary or desirable to preserve, protect and maintain Patent Collateral and all of Debtor's rights therein, including the diligent prosecution of any patent application pending as of the date of this Agreement or thereafter; (e) comply with each of the terms and provisions of this Agreement, and not enter into any agreement (for example, a license agreement) which is inconsistent with the obligations of Debtor under this Agreement without Agent's prior written consent, which consent shall not be unreasonably withheld or delayed; and (f) not permit the inclusion in any contract to which Debtor becomes a party of any provision that could or might impair or prevent the creation of a security interest in favor of Agent (for the benefit of the Lender Group) in Debtor's rights and interest in any property included within the definition of Patent Collateral acquired under such contracts. - 7 - 6. Future Rights. If and when Debtor shall obtain rights to any new patentable inventions, or become entitled to the benefit of any Patent, or any reissue, division, continuation, renewal, extension or continuation-in-part of any Patent or Patent Collateral or any improvement thereof (whether pursuant to any license or otherwise), the provisions of this Agreement shall automatically apply thereto and Debtor shall give to Agent prompt notice thereof, within 20 days after obtaining such rights, reissuance, division, continuation, renewal, extension or any improvement thereof. Debtor shall do all things deemed necessary or advisable by Agent, in its discretion, to ensure the validity, perfection, priority and enforceability of the security interests of Agent in such future acquired Patent Collateral. Debtor hereby authorizes Agent to modify, amend or supplement the Schedules hereto and to re-execute this Agreement from time to time on Debtor's behalf and as its attorney-in-fact to include any future patents which are or become Patent Collateral and to cause such re-executed Agreement or such modified, amended or supplemented Schedules to be filed with the PTO. 7. Events of Default. The occurrence of any "Event of Default" under the Loan Agreement shall constitute an Event of Default hereunder. 8. Remedies. Upon the occurrence and during the continuance of an Event of Default, and subject to the Intercreditor Agreement, Agent shall have all rights and remedies available to it under the Loan Agreement and applicable law (which rights and remedies are cumulative) with respect to the security interests in any of the Patent Collateral or any other Collateral. Debtor agrees that such rights and remedies include the right of Agent as an Agent to sell or otherwise dispose of its Collateral after default, pursuant to the UCC. Debtor agrees that Agent shall at all times have such non-exclusive, royalty free licenses, to the extent permitted by law, for any Patent Collateral that is reasonably necessary to permit the exercise of any of Agent's rights or remedies upon the occurrence and during the continuation of an Event of Default with respect to (among other things) any tangible asset of Debtor in which Agent has a security interest, including Agent's rights to sell inventory, tooling or packaging which is acquired by Debtor (or its successor, assignee or trustee in bankruptcy). In addition to and without limiting any of the foregoing, upon the occurrence and during the continuance of an Event of Default, Agent shall have the right but shall in no way be obligated to bring suit, or to take such other action as Agent, in its discretion, deems necessary or advisable, in the name of Debtor or Agent, to enforce or protect any of the Patent Collateral, in which event Debtor shall, at the request of Agent, do any and all lawful acts and execute any and all documents required by Agent in aid of such enforcement. To the extent that Agent shall elect not to bring suit to enforce such Patent Collateral, upon the occurrence and during the continuation of an Event of Default, Debtor, in the exercise of its reasonable business judgment, agrees to use all reasonable measures and diligent efforts, whether by action, suit, proceeding or otherwise, to prevent the infringement, misappropriation or violations thereof by others and for that purpose agrees diligently to maintain any action, suit or proceeding against any Person necessary to prevent such infringement, misappropriation or violation. 9. Binding Effect. This Agreement shall be binding upon, inure to the benefit of and be enforceable by Debtor and Agent for the benefit of the Lender Group and their respective successors and assigns. - 8 - 10. Notices. All notices and other communications hereunder shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement. 11. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, except to the extent that the validity or perfection of the security interests hereunder in respect of the Patent Collateral are governed by federal law, in which case such choice of California law shall not be deemed to deprive Agent of such rights and remedies as may be available under federal law. 12. Entire Agreement; Amendment. This Agreement and the other Loan Documents, together with the Schedules hereto and thereto, contain the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior drafts and communications relating to such subject matter. Neither this Agreement nor any provision hereof may be modified, amended or waived except by the written agreement of the parties, as provided in the Loan Agreement. Notwithstanding the foregoing, Agent may re-execute this Agreement or modify, amend or supplement the Schedules hereto as provided in Section 6 hereof. 13. Severability. If one or more provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect in any jurisdiction or with respect to any party, such invalidity, illegality or unenforceability in such jurisdiction or with respect to such party shall, to the fullest extent permitted by applicable law, not invalidate or render illegal or unenforceable any such provision in any other jurisdiction or with respect to any other party, or any other provisions of this Agreement. 14. Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement 15. Loan Documents. Debtor acknowledges that the rights and remedies of Agent with respect to the security interests in the Patent Collateral granted hereby are more fully set forth in the Loan Agreement and the other Loan Documents and all such rights and remedies are cumulative. 16. No Inconsistent Requirements. Debtor acknowledges that this Agreement and the other Loan Documents may contain covenants and other terms and provisions variously stated regarding the same or similar matters, and Debtor agrees that all such covenants, terms and provisions are cumulative and all shall be performed and satisfied in accordance with their respective terms. - 9 - 17. Termination. Upon the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, this Agreement shall terminate and Agent shall execute and deliver such documents and instruments and take such further action reasonably requested by Debtor and at Debtor's expense as shall be necessary to evidence termination of the security interests granted by Debtor to Agent for the benefit of the Lender Group hereunder, including cancellation of this Agreement by written notice from Agent to the PTO. 18. Duties of Agent and the Lender Group. Notwithstanding any provision contained in this Agreement, none of Agent or any other member of the Lender Group shall have any duty to exercise any of the rights, privileges or powers afforded to it and shall not be responsible to Debtor for any failure to do so or delay in doing so. Except for the accounting for moneys actually received by Agent, any other member of the Lender Group, hereunder or in connection herewith, none of Agent or any other member of the Lender Group, shall have any duty to exercise or preserve any rights, privileges or powers pertaining to the Patent Collateral. [Signature page follows] - 10 - IN WITNESS WHEREOF, the parties have duly executed this Agreement, as of the date first above written. HUDSON RESPIRATORY CARE INC., a California corporation By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- WELLS FARGO FOOTHILL, INC., a California corporation, as Agent By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- [Signature Page to Patent Security Agreement] S-1 SCHEDULE A [See Attached] A-1 EX-10.6 9 dex106.txt TRADEMARK SECURITY AGREEMENT- HUDSON RCI/WELLS FARGO Exhibit 10.6 TRADEMARK SECURITY AGREEMENT ---------------------------- This TRADEMARK SECURITY AGREEMENT (this "Agreement"), dated as of October 7, 2003, is executed and delivered by and between HUDSON RESPIRATORY CARE INC., a California corporation ("Debtor"), and WELLS FARGO FOOTHILL, INC., a California corporation, as arranger and administrative agent for the Lenders (in such capacity, together with its successors and assigns, if any, in such capacity, "Agent"), with reference to the following: WHEREAS, Debtor, the Lenders (such Lenders, together with Agent, individually and collectively, the "Lender Group"), and Agent have entered into that certain Loan and Security Agreement, dated as of even date herewith (as amended, restated, modified, supplemented, refinanced, renewed, or extended from time to time, the "Loan Agreement"), pursuant to which the Lender Group has agreed to make certain financial accommodations to Debtor, and pursuant to which Debtor has granted to Agent for the benefit of the Lender Group security interests in (among other things) all general intangibles of Debtor; and WHEREAS, to induce the Lender Group to make the financial accommodations provided to Debtor pursuant to the Loan Agreement, Debtor has agreed to execute and deliver this Agreement to Agent for filing with the PTO and with any other relevant recording systems in any domestic or foreign jurisdiction, and as further evidence of and to effectuate Agent's existing security interests in the trademarks and other general intangibles described herein. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which is hereby acknowledged, Debtor hereby agrees in favor of Agent, for the benefit of the Lender Group, as follows: 1. Definitions; Interpretation. (a) Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Agent" has the meaning ascribed to such term in the preamble to this Agreement. "Agreement" has the meaning ascribed to such term in the preamble hereto. "Debtor" has the meaning ascribed to such term in the preamble to this Agreement. "Debtor's Trademarks" has the meaning set forth in Section 4. "Event of Default" has the meaning ascribed to such term in the Loan Agreement. "Excluded Collateral" has the meaning ascribed to such term in the Loan Agreement. 1 "Lender Group" has the meaning ascribed to such term in the recitals to this Agreement. "Lenders" means, individually and collectively, each of the lenders identified on the signature pages of the Loan Agreement, and any other person made a party thereto in accordance with the provisions of Section 14 thereof (together with their respective successors and assigns). "Loan Agreement" has the meaning ascribed to such term in the recitals to this Agreement. "Proceeds" means whatever is receivable or received from or upon the sale, lease, license, collection, use, exchange or other disposition, whether voluntary or involuntary, of any Trademark Collateral, including "proceeds" as such term is defined in the UCC, and all proceeds of proceeds. Proceeds shall include (i) any and all accounts, chattel paper, instruments, general intangibles, cash and other proceeds, payable to or for the account of Debtor, from time to time in respect of any of the Trademark Collateral, (ii) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to or for the account of Debtor from time to time with respect to any of the Trademark Collateral, (iii) any and all claims and payments (in any form whatsoever) made or due and payable to Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Trademark Collateral by any Person acting under color of governmental authority, and (iv) any and all other amounts from time to time paid or payable under or in connection with any of the Trademark Collateral or for or on account of any damage or injury to or conversion of or infringement of rights in any Trademark Collateral by any Person. "PTO" means the United States Patent and Trademark Office and any successor thereto. "Secured Obligations" means all liabilities, obligations, or undertakings owing by Debtor to the Lender Group of any kind or description arising out of or outstanding under, advanced or issued pursuant to, or evidenced by the Loan Agreement, this Agreement, or any of the other Loan Documents, irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, voluntary or involuntary, whether now existing or hereafter arising, and including all interest, costs, fees (including attorneys fees), and expenses (including interest, costs, fees, and expenses that, but for the provisions of the Bankruptcy Code, would have accrued) and any and all other amounts which Debtor is required to pay pursuant to any of the foregoing, by law, or otherwise. "Trademark Collateral" has the meaning set forth in Section 2. "Trademarks" has the meaning set forth in Section 2. "UCC" means the Uniform Commercial Code as in effect from time to time in the State of California. "United States" and "U.S." each mean the United States of America. 2 (b) Terms Defined in UCC. Where applicable and except as otherwise defined herein, terms used in this Agreement shall have the meanings ascribed to them in the UCC. (c) Interpretation. In this Agreement, except to the extent the context otherwise requires: (i) Any reference to a Section or a Schedule is a reference to a section hereof, or a schedule hereto, respectively, and to a subsection or a clause is, unless otherwise stated, a reference to a subsection or a clause of the Section or subsection in which the reference appears. (ii) The words "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement as a whole and not merely to the specific Section, subsection, paragraph or clause in which the respective word appears. (iii) The meaning of defined terms shall be equally applicable to both the singular and plural forms of the terms defined. (iv) The words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation." (v) References to agreements and other contractual instruments shall be deemed to include all subsequent permitted amendments, restatements, supplements, refinancings, renewals, extensions, and other modifications thereto and thereof. (vi) References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation referred to. (vii) Any captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. (viii) Capitalized words not otherwise defined herein shall have the respective meanings ascribed to them in the Loan Agreement. (ix) In the event of a direct conflict between the terms and provisions of this Agreement and the Loan Agreement, it is the intention of the parties hereto that such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of the Loan Agreement shall control and govern; provided, however, that the inclusion herein of additional obligations on the part of Debtor and supplemental rights and remedies in favor of Agent (whether under federal law or applicable state law), in each case in respect of the Trademark Collateral, shall not be deemed a conflict with the Loan Agreement. 2. Security Interest. 3 (a) Assignment and Grant of Security in respect of the Secured Obligations. To secure the prompt payment and performance of the Secured Obligations, Debtor hereby grants, assigns, transfers and conveys to Agent, for the benefit of the Lender Group, a continuing security interest in all of Debtor's right, title and interest in and to the following property, whether now existing or hereafter acquired or arising and whether registered or unregistered (collectively, the "Trademark Collateral"): (i) all state (including common law) and federal trademarks, service marks and trade names, corporate names, company names, business names, fictitious business names, trade styles, trade dress, logos, other source or business identifiers, designs and general intangibles of like nature, now existing or hereafter adopted or acquired, together with and including all licenses therefor held by Debtor, and all registrations and recordings thereof, and all applications filed or to be filed in connection therewith, including registrations and applications in the PTO, any State of the United States (but excluding each application to register any trademark, service mark, or other mark prior to the filing under applicable law of a verified statement of use (or the equivalent) for such trademark or service mark) and all extensions or renewals thereof, including without limitation any of the foregoing identified on Schedule A hereto (as the same may be amended, modified or supplemented from time to time), and the right (but not the obligation) to register claims under any state or federal trademark law or regulation and to apply for, renew and extend any of the same, to sue or bring opposition or cancellation proceedings in Debtor's name or in the name of Agent for past, present or future infringement or unconsented use thereof, and all rights arising therefrom throughout the world (collectively, the "Trademarks"); (ii) all claims, causes of action and rights to sue for past, present or future infringement or unconsented use of any Trademarks and all rights arising therefrom and pertaining thereto; (iii) all general intangibles related to or arising out of any of the Trademarks and all the goodwill of Debtor's business symbolized by the Trademarks or associated therewith; and (iv) all Proceeds of any and all of the foregoing; provided, however, that Trademark Collateral shall not include any Excluded Collateral. (b) Continuing Security Interest. Debtor hereby agrees that this Agreement shall create a continuing security interest in the Trademark Collateral which shall remain in effect until terminated in accordance with Section 18. (c) Incorporation into Loan Agreement. This Agreement shall be fully incorporated into the Loan Agreement and all understandings, agreements and provisions contained in the Loan Agreement shall be fully incorporated into this Agreement. Without limiting the foregoing, the Trademark Collateral described in this Agreement shall constitute part of the Collateral in the Loan Agreement. 4 (d) Licenses. Debtor may grant licenses of the Trademark Collateral in the ordinary course of business in accordance with the terms of the Loan Agreement. 3. Further Assurances; Appointment of Agent as Attorney-in-Fact. Debtor at its expense shall execute and deliver, or cause to be executed and delivered, to Agent any and all documents and instruments, in form and substance reasonably satisfactory to Agent, and take any and all action, which Agent, in the exercise of its discretion, may request from time to time, to perfect and continue the perfection or to maintain the priority of, or provide notice of the security interest in the Trademark Collateral held by Agent for the benefit of the Lender Group and to accomplish the purposes of this Agreement. If Debtor refuses to execute and deliver, or fails timely to execute and deliver, any of the documents it is requested to execute and deliver by Agent in accordance with the foregoing, Agent shall have the right, in the name of Debtor, or in the name of Agent or otherwise, without notice to or assent by Debtor, and Debtor hereby irrevocably constitutes and appoints Agent (and any of Agent's officers or employees or agents designated by Agent) as Debtor's true and lawful attorney-in-fact with full power and authority, (i) to sign the name of Debtor on all or any of such documents or instruments and perform all other acts that Agent in the exercise of its discretion deems necessary in order to perfect or continue the perfection of, maintain the priority or enforceability of or provide notice of the security interest in the Trademark Collateral held by Agent for the benefit of the Lender Group, and (ii) to execute any and all other documents and instruments, and to perform any and all acts and things for and on behalf of Debtor, that Agent, in the exercise of its discretion, may deem necessary or advisable to maintain, preserve and protect the Trademark Collateral and to accomplish the purposes of this Agreement, including (A) after the occurrence and during the continuance of any Event of Default, to defend, settle, adjust or institute any action, suit or proceeding with respect to the Trademark Collateral, (B) after the occurrence and during the continuation of any Event of Default, to assert or retain any rights under any license agreement for any of the Trademark Collateral, and (C) after the occurrence and during the continuance of any Event of Default, to execute any and all applications, documents, papers and instruments for Agent to use the Trademark Collateral, to grant or issue any exclusive or non-exclusive license with respect to any Trademark Collateral, and to assign, convey or otherwise transfer title in or dispose of the Trademark Collateral. The power of attorney set forth in this Section 3, being coupled with an interest, is irrevocable so long as this Agreement shall not have terminated in accordance with Section 18; provided that the foregoing power of attorney shall terminate when all of the Secured Obligations have been fully and finally repaid and performed and the Lender Group's obligation to extend credit under the Loan Agreement is terminated. 4. Representations and Warranties. Debtor represents and warrants to each member of the Lender Group, in each case to the best of its knowledge, information, and belief, as follows: (a) No Other Trademarks. Schedule A sets forth a true and correct list of all of Debtor's existing Trademarks that are registered, or for which any application for registration has been filed with the PTO or any corresponding or similar trademark office of any other U.S. jurisdiction, and that are owned or held and used by Debtor (collectively, the "Debtor's Trademarks"). Schedule A also sets forth a true and correct list of all of the Trademarks Debtor holds by reason of license from a third party. 5 (b) Trademarks Subsisting. Each of Debtor's Trademarks is subsisting and has not been adjudged invalid or unenforceable, in whole or in part, and, to the best of Debtor's knowledge, each of the Trademarks set forth on Schedule A is valid and enforceable. (c) Ownership of Trademark Collateral; No Violation. (i) Debtor has rights in and good and defensible title to the Trademark Collateral in respect of the Trademarks that it owns, (ii) Debtor is the sole and exclusive owner of such Trademark Collateral, free and clear of any Liens and rights of others (other than Permitted Liens), including licenses (other than licenses entered into as permitted herein), registered user agreements and covenants by Debtor not to sue third persons, and (iii) with respect to any Trademarks for which Debtor is either a licensor or a licensee pursuant to a license or licensing agreement regarding such Trademark, each such license or licensing agreement is in full force and effect, Debtor is not in material default of any of its obligations thereunder and, to the best of Debtor's knowledge other than (A) the parties to such licenses or licensing agreements, or (B) in the case of any non-exclusive license or license agreement entered into by Debtor or any such licensor regarding such Trademark, the parties to any other such non-exclusive licenses or license agreements entered into by Debtor or any such licensor with any other Person, no other Person has any rights in or to any of such Trademark Collateral, other than licenses entered into as permitted herein. To the best of Debtor's knowledge, neither the past nor the present use of the Trademark Collateral by Debtor has infringed or does infringe upon or violate any right, privilege or license agreement of or with any other Person or give any such Person the right to terminate any such right, privilege or license agreement. (d) No Infringement. To the best of Debtor's knowledge, (i) no material infringement or unauthorized use presently is being made of any of the Trademark Collateral by any Person, and (ii) neither the past nor the present use of the Trademark Collateral by Debtor has infringed or does infringe upon or violate any right, privilege, or license arrangement of or with any other Person or give such Person the right to terminate any such license arrangement. (e) Powers. Debtor has the unqualified right, power and authority to pledge and to grant to Agent, for the benefit of the Lender Group, security interests in the Trademark Collateral pursuant to this Agreement, and to execute, deliver and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other Person except as already obtained. 5. Covenants. So long as any of the Secured Obligations remain unsatisfied, Debtor agrees: (i) that it will comply in all material respects with all of the covenants, terms and provisions of this Agreement, and (ii) that it will promptly give Agent written notice of the occurrence of any event that could have a material adverse effect on any of the Trademarks and the Trademark Collateral (except as to such Trademark or Trademarks, which alone or in the aggregate, the absence of which would not reasonably be expected to materially impair the conduct of the business), including any petition under the Bankruptcy Code filed by or against any licensor of any of the Trademarks for which Debtor is a licensee, provided, however, that Debtor shall not be required to preserve, protect and maintain, and may abandon, in whole or in part, any Trademark as Debtor deems appropriate in the exercise of Debtor's reasonable business judgment, so long as the absence of such Trademark or Trademarks, alone or in the aggregate, 6 would not reasonably be expected to materially impair the conduct of Debtor's business or the Trademark Collateral. 6. Future Rights. For so long as any of the Secured Obligations shall remain outstanding, or, if earlier, until Agent shall have released or terminated, in whole but not in part, its interest in the Trademark Collateral, if and when Debtor shall obtain rights to any new Trademarks, or any reissue, renewal or extension of any Trademarks, the provisions of Section 2 shall automatically apply thereto and Debtor shall give to Agent prompt notice thereof, within 20 days after obtaining such rights, reissuance, renewal, or extension. Debtor shall do all things reasonably deemed necessary by Agent in the exercise of its discretion to ensure the validity, perfection, priority and enforceability of the security interests of Agent in such future acquired Trademark Collateral. If Debtor refuses to execute and deliver, or fails timely to execute and deliver, any of the documents it is requested to execute and deliver by Agent in connection herewith, Debtor hereby authorizes Agent to modify, amend or supplement the Schedules hereto and to re-execute this Agreement from time to time on Debtor's behalf and as its attorney-in-fact to include any future Trademarks which are or become Trademark Collateral and to cause such re-executed Agreement or such modified, amended or supplemented Schedules to be filed with the PTO. 7. Duties of Agent and the Lender Group. Notwithstanding any provision contained in this Agreement, none of Agent or any other member of the Lender Group shall have any duty to exercise any of the rights, privileges or powers afforded to it and shall not be responsible to Debtor for any failure to do so or delay in doing so. Except for the accounting for moneys actually received by Agent, any other member of the Lender Group hereunder or in connection herewith, none of Agent or any other member of the Lender Group shall have any duty to exercise or preserve any rights, privileges or powers pertaining to the Trademark Collateral. 8. Events of Default. The occurrence of any "Event of Default" under the Loan Agreement shall constitute an Event of Default hereunder. 9. Remedies. From and after the occurrence and during the continuation of an Event of Default, and subject to the Intercreditor Agreement, Agent shall have all rights and remedies available to it under the Loan Agreement, the other Loan Documents, and applicable law (which rights and remedies are cumulative) with respect to the security interests in any of the Trademark Collateral. Debtor hereby agrees that such rights and remedies include the right of Agent as a secured party to sell or otherwise dispose of the Trademark Collateral after default, pursuant to the UCC. Debtor hereby agrees that Agent shall at all times have such royalty-free licenses, to the extent permitted by law and the other Loan Documents, for any Trademark Collateral that is reasonably necessary to permit the exercise of any of Agent's rights or remedies upon or after the occurrence of (and during the continuance of) an Event of Default with respect to (among other things) any tangible asset of Debtor in which Agent has a security interest, including Agent's rights to sell inventory, tooling or packaging which is acquired by Debtor (or their successor, assignee or trustee in bankruptcy). In addition to and without limiting any of the foregoing, upon the occurrence and during the continuance of an Event of Default, Agent shall have the right but shall in no way be obligated to bring suit, or to take such other action as Agent, in the exercise of its discretion, deems necessary, in the name of Debtor or Agent, to enforce or 7 protect any of the Trademark Collateral, in which event Debtor shall, at the request of Agent, do any and all lawful acts and execute any and all documents required by Agent necessary to such enforcement. To the extent that Agent shall elect not to bring suit to enforce such Trademark Collateral, Debtor, in the exercise of its reasonable business judgment, agrees to use all reasonable measures and its diligent efforts, whether by action, suit, proceeding or otherwise, to prevent the infringement, misappropriation or violation thereof by others and for that purpose agrees diligently to maintain any action, suit or proceeding against any Person necessary to prevent such infringement, misappropriation or violation. 10. Binding Effect. This Agreement shall be binding upon, inure to the benefit of and be enforceable by Debtor and Agent for the benefit of the Lender Group and their respective successors and assigns. 11. Notices. All notices and other communications hereunder shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement. 12. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, except to the extent that the validity or perfection of the security interests hereunder in respect of the Trademark Collateral are governed by federal law, in which case such choice of California law shall not be deemed to deprive Agent of such rights and remedies as may be available under federal law. 13. Entire Agreement; Amendment. This Agreement and the other Loan Documents, together with the Schedules hereto and thereto, contains the entire agreement of the parties with respect to the subject matter hereof and supersede all prior drafts and communications relating to such subject matter. Neither this Agreement nor any provision hereof may be modified, amended or waived except by the written agreement of the parties to this Agreement. Notwithstanding the foregoing, Agent may reexecute this Agreement or modify, amend or supplement the Schedules hereto as provided in Section 6 hereof. 14. Severability. If one or more provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect in any jurisdiction or with respect to any party, such invalidity, illegality or unenforceability in such jurisdiction or with respect to such party shall, to the fullest extent permitted by applicable law, not invalidate or render illegal or unenforceable any such provision in any other jurisdiction or with respect to any other party, or any other provisions of this Agreement. 15. Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. 8 16. Loan Documents. Debtor acknowledges that the rights and remedies of Agent with respect to the security interest in the Trademark Collateral granted hereby are more fully set forth in the Loan Agreement and the other Loan Documents and all such rights and remedies are cumulative. 17. No Inconsistent Requirements. Debtor acknowledges that this Agreement, the Loan Agreement, and the other Loan Documents may contain covenants and other terms and provisions variously stated regarding the same or similar matters, and Debtor agrees that all such covenants, terms and provisions are cumulative and all shall be performed and satisfied in accordance with their respective terms. 18. Termination. Upon the indefeasible payment and performance in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, this Agreement shall terminate, and Agent shall execute and deliver such documents and instruments and take such further action reasonably requested by Debtor, at Debtor's expense, as shall be necessary to evidence termination of the security interest granted by Debtor to Agent for the benefit of the Lender Group hereunder, including cancellation of this Agreement by written notice from Agent to the PTO. [Signature page follows] 9 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, as of the date first above written. HUDSON RESPIRATORY CARE INC., a California corporation By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- WELLS FARGO FOOTHILL, INC., a California corporation, as Agent By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- [Signature Page to Patent Security Agreement] S - 1 SCHEDULE A ---------- [See Attached] A-1 EX-10.13 10 dex1013.txt GENERAL CONTINUING GUARANTY- HUDSON RCI/WELLS FARGO Exhibit 10.13 GENERAL CONTINUING GUARANTY --------------------------- This GENERAL CONTINUING GUARANTY (this "Guaranty"), dated as of October 7, 2003, is executed and delivered by and among each of the undersigned Affiliates of HUDSON RESPIRATORY CARE INC., a California corporation ("Borrower") (each such Affiliate individually a "Guarantor", and individually and collectively, jointly and severally, the "Guarantors"), and WELLS FARGO FOOTHILL, INC., a California corporation, as the arranger and administrative agent for the Lenders (in such capacity, together with its successors and assigns, if any, in such capacity, "Agent"), in light of the following: WHEREAS, Borrower and the Lender Group are, contemporaneously herewith, entering into the Loan Agreement; WHEREAS, in order to induce the Lender Group to extend financial accommodations to Borrower pursuant to the Loan Agreement, and in consideration thereof, and in consideration of any loans or other financial accommodations heretofore or hereafter extended by the Lender Group to Borrower, whether pursuant to the Loan Agreement or otherwise, each Guarantor has agreed to guaranty the Guarantied Obligations; and WHEREAS, each Guarantor is an Affiliate of Borrower, and will benefit by virtue of the financial accommodations from the Lender Group to Borrower. NOW, THEREFORE, in consideration of the foregoing, each Guarantor and Agent hereby agrees, as follows: 1. Definitions and Construction. (a) Definitions. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. The following terms, as used in this Guaranty, shall have the following meanings: "Agent" has the meaning set forth in the preamble to this Guaranty. "Borrower" has the meaning set forth in the preamble to this Guaranty. "Guarantied Obligations" means, the Obligations, as defined in the Loan Agreement. "Guarantor" and "Guarantors" have the respective meanings set forth in the preamble to this Guaranty. "Guaranty" has the meaning set forth in the preamble to this Guaranty. "Indebtedness" shall mean any and all obligations (including the Obligations), indebtedness, or liabilities of any kind or character owed by Borrower and arising directly or indirectly out of or in connection with the Loan Agreement or the other Loan Documents, including all such obligations, indebtedness, or liabilities, whether for principal, interest (including any and all interest which, but for the application of the provisions of the Bankruptcy Code, would have accrued on such amounts), premium, reimbursement obligations, fees, costs, expenses (including attorneys fees), or indemnity obligations, whether heretofore, now, or hereafter made, incurred, or created, whether voluntarily or involuntarily made, incurred, or created, whether secured or unsecured (and if secured, regardless of the nature or extent of the security), whether absolute or contingent, liquidated or unliquidated, or determined or indeterminate, whether Borrower is liable individually or jointly with others, and whether recovery is or hereafter becomes barred by any statute of limitations or otherwise becomes unenforceable for any reason whatsoever, including any act or failure to act by any member of the Lender Group. "Lender Group" means, individually and collectively, each of the Lenders and Agent. "Lenders" means, individually and collectively, each of the lenders identified on the signature pages of the Loan Agreement, and any other person made a party thereto in accordance with the provisions of Section 14 thereof (together with their respective successors and assigns). "Loan Agreement" shall mean that certain Loan and Security Agreement, of even date herewith, entered into among Borrower, the Lenders, and Agent. (b) Construction. Unless the context of this Guaranty clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the part includes the whole, the terms "include" and "including" are not limiting, and the term "or" has the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and other similar terms refer to this Guaranty as a whole and not to any particular provision of this Guaranty. Any reference in this Guaranty to any of the following documents includes any and all permitted alterations, amendments, restatements, extensions, modifications, renewals, or supplements thereto or thereof, as applicable: the Loan Agreement, any of the Loan Documents, or this Guaranty. Neither this Guaranty nor any uncertainty or ambiguity herein shall be construed or resolved against Agent, the Lenders, or any Guarantor, whether under any rule of construction or otherwise. On the contrary, this Guaranty has been reviewed by Guarantors, Agent, the Lenders, and their respective counsel, and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of Agent, the Lenders and Guarantors. 2. Guarantied Obligations. Each Guarantor, jointly and severally, hereby irrevocably and unconditionally guaranties to Agent, for the benefit of the Lender Group, as and for its own debt, until final and indefeasible payment thereof has been made, (a) the payment of the Guarantied Obligations, in each case when and as the same shall become due and payable, whether at maturity, pursuant to a mandatory prepayment requirement, by acceleration, or otherwise; it being the intent of such Guarantor that the guaranty set forth herein shall be a guaranty of payment and not a guaranty of collection; and (b) the punctual and faithful performance, keeping, observance, and fulfillment by Borrower of all of the agreements, conditions, covenants, and obligations of Borrower contained in the Loan Agreement and under each of the other Loan Documents. 2 3. Continuing Guaranty. This Guaranty includes Guarantied Obligations arising under successive transactions continuing, compromising, extending, increasing, modifying, releasing, or renewing the Guarantied Obligations, changing the interest rate, payment terms, or other terms and conditions thereof, or creating new or additional Guarantied Obligations after prior Guarantied Obligations have been satisfied in whole or in part. To the maximum extent permitted by law, each Guarantor hereby waives any right to revoke this Guaranty as to future Indebtedness. If such a revocation is effective notwithstanding the foregoing waiver, each Guarantor acknowledges and agrees that (a) no such revocation shall be effective until written notice thereof has been received by Agent, (b) no such revocation shall apply to any Guarantied Obligations in existence on such date (including any subsequent continuation, extension, or renewal thereof, or change in the interest rate, payment terms, or other terms and conditions thereof), (c) no such revocation shall apply to any Guarantied Obligations made or created after such date to the extent made or created pursuant to a legally binding commitment of Agent in existence on the date of such revocation, (d) no payment by any Guarantor, Borrower, or from any other source, prior to the date of such revocation shall reduce the maximum obligation of such Guarantor hereunder, and (e) any payment by Borrower or from any source other than such Guarantor subsequent to the date of such revocation shall first be applied to that portion of the Guarantied Obligations as to which the revocation is effective and which is not, therefore, guarantied hereunder, and to the extent so applied shall not reduce the maximum obligation of such Guarantor hereunder. 4. Performance Under this Guaranty. In the event that Borrower fails to make any payment of any Guarantied Obligations, on or before the due date thereof, or if Borrower shall fail to perform, keep, observe, or fulfill any other obligation referred to in clause (b) of Section 2 hereof in the manner provided in the Loan Agreement or the other Loan Documents, as applicable (and subject to any applicable grace or notice periods expressly provided for in the Loan Agreement), each Guarantor immediately shall cause such payment to be made or each of such obligations to be performed, kept, observed, or fulfilled. 5. Primary Obligations. This Guaranty is a primary and original obligation of each Guarantor, is not merely the creation of a surety relationship, and is an absolute, unconditional, and continuing guaranty of payment and performance that shall remain in full force and effect without respect to future changes in conditions. Each Guarantor hereby agrees that it is directly, jointly and severally with any other guarantor of the Guarantied Obligations, liable to Agent for the benefit of the Lender Group, that the obligations of such Guarantor hereunder are independent of the obligations of Borrower or any other guarantor, and that a separate action may be brought against such Guarantor, whether such action is brought against Borrower or any other guarantor or whether Borrower or any other guarantor is joined in such action. Each Guarantor hereby agrees that its liability hereunder shall be immediate and shall not be contingent upon the exercise or enforcement by the Lender Group of whatever remedies they may have against Borrower or any other guarantor, or the enforcement of any lien or realization upon any security the Lender Group may at any time possess. Each Guarantor hereby agrees that any release that may be given by Agent on behalf of the Lender Group to Borrower or any other guarantor shall not release such Guarantor. Each Guarantor consents and agrees that no member of the Lender Group shall be under any obligation to marshal any property or assets of Borrower or any other guarantor in favor of such Guarantor, or against or in payment of any or all of the Guarantied Obligations. 3 6. Waivers. (a) To the fullest extent permitted by applicable law, each Guarantor hereby waives: (i) notice of acceptance hereof; (ii) notice of any loans or other financial accommodations made or extended under the Loan Agreement, or the creation or existence of any Guarantied Obligations; (iii) notice of the amount of the Guarantied Obligations, subject, however, to such Guarantor's right to make inquiry of Agent to ascertain the amount of the Guarantied Obligations at any reasonable time; (iv) notice of any adverse change in the financial condition of Borrower or of any other fact that might increase such Guarantor's risk hereunder; (v) notice of presentment for payment, demand, protest, and notice thereof as to any instrument among the Loan Documents; (vi) notice of any Default or Event of Default under the Loan Agreement; and (vii) all other notices (except if such notice is specifically required to be given to such Guarantor under this Guaranty or any other Loan Documents to which such Guarantor is a party) and demands to which such Guarantor might otherwise be entitled. (b) To the fullest extent permitted by applicable law, each Guarantor hereby waives the right by statute or otherwise to require the Lender Group to institute suit against Borrower or to exhaust any rights and remedies that the Lender Group has or may have against Borrower. In this regard, each Guarantor agrees that it is bound to the payment of each and all Guarantied Obligations, whether now existing or hereafter arising, as fully as if the Guarantied Obligations were directly owing to the Lender Group or its Affiliates, as applicable, by such Guarantor. Each Guarantor further waives any defense arising by reason of any disability or other defense (other than the defense that the Guarantied Obligations shall have been performed and indefeasibly paid in cash, to the extent of any such payment) of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower in respect thereof. (c) To the fullest extent permitted by applicable law, each Guarantor hereby waives: (i) any rights to assert against the Lender Group any defense (legal or equitable), set-off, counterclaim, or claim that such Guarantor may now or at any time hereafter have against Borrower or any other party liable to the Lender Group; (ii) any defense, set-off, counterclaim, or claim, of any kind or nature, arising directly or indirectly from the present or future lack of perfection, sufficiency, validity, or enforceability of the Guarantied Obligations or any security therefor; (iii) any defense arising by reason of any claim or defense based upon an election of remedies by the Lender Group, including any defense based upon an election of remedies by the Lender Group under the provisions of Sections 580d and 726 of the California Code of Civil Procedure, or any similar law of any other jurisdiction; (iv) the benefit of any statute of limitations affecting such Guarantor's liability hereunder or the enforcement thereof, and any act that shall defer or delay the operation of any statute of limitations applicable to the Guarantied Obligations shall similarly operate to defer or delay the operation of such statute of limitations applicable to such Guarantor's liability hereunder. (d) Until such time as all of the Guarantied Obligations have been fully and finally paid in full in cash, each Guarantor hereby postpones and agrees not to assert any right (i) of subrogation such Guarantor has or may have against Borrower with respect to the Guarantied Obligations, including, without limitation, under any one or more of California Civil Code Sections 2847, 2848, and 2849 or any similar law of any other jurisdiction; (ii) to proceed against Borrower or any other Person, now or hereafter, for contribution, indemnity, reimbursement, or 4 any other suretyship rights and claims (irrespective of whether direct or indirect, liquidated or contingent), with respect to the Guarantied Obligations; and (iii) to proceed or to seek recourse against or with respect to any property or asset of Borrower. (e) If any of the Guarantied Obligations at any time are secured by a mortgage or deed of trust upon real property, the Lender Group may elect, in its sole discretion, upon a default with respect to the Guarantied Obligations, to foreclose such mortgage or deed of trust judicially or nonjudicially in any manner permitted by law, before or after enforcing this Guaranty, without diminishing or affecting the liability of any Guarantor hereunder. Each Guarantor understands that (a) by virtue of the operation of California's antideficiency law applicable to nonjudicial foreclosures or any similar laws of any other jurisdiction, an election by the Lender Group nonjudicially to foreclose such a mortgage or deed of trust probably would have the effect of impairing or destroying rights of subrogation, reimbursement, contribution, or indemnity of such Guarantor against Borrower or other guarantors or sureties, and (b) absent the waiver given by such Guarantor herein, such an election would estop the Lender Group from enforcing this Guaranty against such Guarantor. Understanding the foregoing, and understanding that the Guarantors hereby are relinquishing a defense to the enforceability of this Guaranty, each Guarantor hereby waives any right to assert against the Lender Group any defense to the enforcement of this Guaranty, whether denominated "estoppel" or otherwise, based on or arising from an election by the Lender Group nonjudicially to foreclose any such mortgage or deed of trust. Each Guarantor understands that the effect of the foregoing waiver may be that such Guarantor may have liability hereunder for amounts with respect to which such Guarantor may be left without rights of subrogation, reimbursement, contribution, or indemnity against Borrower or other guarantors or sureties. Each Guarantor also agrees that the "fair market value" provisions of Section 580a of the California Code of Civil Procedure or any similar laws of any other jurisdiction shall have no applicability with respect to the determination of such Guarantor's liability under this Guaranty. (f) Without limiting the generality of any other waiver or other provision set forth in this Guaranty, each Guarantor waives all rights and defenses that such Guarantor may have if Borrower's debt is secured by real property. This means, among other things: (i) The Lender Group may collect from any Guarantor without first foreclosing on any real or personal property collateral that may be pledged by Borrower. (ii) If the Lender Group foreclose(s) on any real property collateral that may be pledged by Borrower: (1) the amount of the debt may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price. (2) the Lender Group may collect from any Guarantor even if the Lender Group, by foreclosing on the real property collateral, has/have destroyed any right any Guarantor may have to collect from Borrower. 5 This is an unconditional and irrevocable waiver of any rights and defenses each Guarantor may have if Borrower's debt is secured by real property. These rights and defenses are based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure or any similar laws of any other jurisdiction. (G) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS GUARANTY, EACH GUARANTOR HEREBY WAIVES, TO THE MAXIMUM EXTENT SUCH WAIVER IS PERMITTED BY LAW, ANY AND ALL BENEFITS OR DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE Sections 2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2838, 2839, 2845, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE Sections 580a, 580b, 580c, 580d, AND 726, AND CHAPTER 2 OF TITLE 14 OF THE CALIFORNIA CIVIL CODE OR ANY SIMILAR LAWS OF ANY OTHER JURISDICTION. (H) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS GUARANTY, EACH GUARANTOR WAIVES ALL RIGHTS AND DEFENSES ARISING OUT OF AN ELECTION OF REMEDIES BY THE LENDER GROUP, EVEN THOUGH THAT ELECTION OF REMEDIES, SUCH AS A NONJUDICIAL FORECLOSURE WITH RESPECT TO SECURITY FOR A GUARANTIED OBLIGATION, HAS DESTROYED SUCH GUARANTOR'S RIGHTS OF SUBROGATION AND REIMBURSEMENT AGAINST BORROWER BY THE OPERATION OF SECTION 580d OF THE CALIFORNIA CODE OF CIVIL PROCEDURE OR OTHERWISE. 7. Releases. Each Guarantor consents and agrees that, without notice to or by such Guarantor and without affecting or impairing the obligations of such Guarantor hereunder, the Lender Group may, by action or inaction, compromise or settlement, extend the period of duration or the time for the payment, or discharge the performance of, or may refuse to, or otherwise not enforce, or may, by action or inaction, release all or any one or more parties to, any one or more of the terms and provisions of the Loan Agreement or any of the other Loan Documents or may grant other indulgences to Borrower in respect thereof, or may amend or modify in any manner and at any time (or from time to time) any one or more of the Loan Agreement or any of the other Loan Documents, or may, by action or inaction, release or substitute any other guarantor, if any, of the Guarantied Obligations, or may enforce, exchange, release, or waive, by action or inaction, any security for the Guarantied Obligations or any other guaranty of the Guarantied Obligations, or any portion thereof. 8. No Election. The Lender Group shall have the right to seek recourse against any Guarantor to the fullest extent provided for herein and no election by the Lender Group to proceed in one form of action or proceeding, or against any party, or on any obligation, shall constitute a waiver of the Lender Group's right to proceed in any other form of action or proceeding or against other parties unless Agent on behalf of the Lender Group has expressly waived such right in writing. Specifically, but without limiting the generality of the foregoing, no action or proceeding by the Lender Group under any document or instrument evidencing the Guarantied Obligations shall serve to diminish the liability of the Guarantors under this Guaranty 6 except to the extent that the Lender Group finally and unconditionally shall have realized indefeasible payment by such action or proceeding. 9. Indefeasible Payment. The Guarantied Obligations shall not be considered indefeasibly paid for purposes of this Guaranty unless and until all payments to the Lender Group are no longer subject to any right on the part of any person whomsoever, including Borrower, Borrower as a debtor in possession, or any trustee (whether appointed under the Bankruptcy Code or otherwise) of Borrower's assets to invalidate or set aside such payments or to seek to recoup the amount of such payments or any portion thereof, or to declare same to be fraudulent or preferential. In the event that, for any reason, all or any portion of such payments to the Lender Group is set aside or restored, whether voluntarily or involuntarily, after the making thereof, the obligation or part thereof intended to be satisfied thereby shall be revived and continued in full force and effect as if said payment or payments had not been made and the Guarantors shall be liable for the full amount the Lender Group is required to repay plus any and all reasonable costs and expenses (including reasonable attorneys fees) paid by the Lender Group in connection therewith. 10. Financial Condition of Borrower. Each Guarantor represents and warrants to the Lender Group that it is currently informed of the financial condition of Borrower and of all other circumstances that a diligent inquiry would reveal and that bear upon the risk of nonpayment of the Guarantied Obligations. Each Guarantor further represents and warrants to the Lender Group that it has read and understands the terms and conditions of the Loan Agreement and the other Loan Documents. Each Guarantor hereby covenants that it will continue to keep itself informed of Borrower's financial condition, the financial condition of other guarantors, if any, and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the Guarantied Obligations. 11. Payments; Application. All payments to be made hereunder by any Guarantor shall be made in lawful money of the United States of America at the time of payment, shall be made in immediately available funds, and shall be made without deduction (whether for taxes or otherwise) or offset. All payments made by any Guarantor hereunder shall be applied as follows: first, to all reasonable costs and expenses (including reasonable attorneys fees) incurred by the Lender Group in enforcing this Guaranty or in collecting the Guarantied Obligations; second, to all accrued and unpaid interest, premium, if any, and fees owing to the Lender Group constituting Guarantied Obligations; and third, to the balance of the Guarantied Obligations. 12. Attorneys Fees and Costs. Each Guarantor agrees to pay, on demand, all reasonable attorneys fees and all other reasonable costs and expenses that may be incurred by the Lender Group in the enforcement of this Guaranty or in any way arising out of, or consequential to, the protection, assertion, or enforcement of the Guarantied Obligations (or any security therefor), irrespective of whether suit is brought. 13. Notices. All notices and other communications hereunder to Agent shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement. All notices and other communications hereunder to a Guarantor shall be in writing and shall be mailed, sent or delivered in care of Borrower in accordance with the Loan Agreement. 7 14. Cumulative Remedies. No remedy under this Guaranty, under the Loan Agreement, or any other Loan Document is intended to be exclusive of any other remedy, but each and every remedy shall be cumulative and in addition to any and every other remedy given under this Guaranty, under the Loan Agreement, or any other Loan Document, and those provided by law. No delay or omission by the Lender Group or Agent on behalf thereof to exercise any right under this Guaranty shall impair any such right nor be construed to be a waiver thereof. No failure on the part of the Lender Group or Agent on behalf thereof to exercise, and no delay in exercising, any right under this Guaranty shall operate as a waiver thereof; nor shall any single or partial exercise of any right under this Guaranty preclude any other or further exercise thereof or the exercise of any other right. 15. Severability of Provisions. Any provision of this Guaranty that is prohibited or unenforceable under applicable law shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. 16. Entire Agreement; Amendments. This Guaranty constitutes the entire agreement between each Guarantor and the Lender Group, or Agent on behalf thereof pertaining to the subject matter contained herein. This Guaranty may not be altered, amended, or modified, nor may any provision hereof be waived or noncompliance therewith consented to, except by means of a writing executed by each Guarantor and Agent on behalf of the Lender Group. Any such alteration, amendment, modification, waiver, or consent shall be effective only to the extent specified therein and for the specific purpose for which given. No course of dealing and no delay or waiver of any right or default under this Guaranty shall be deemed a waiver of any other, similar or dissimilar, right or default or otherwise prejudice the rights and remedies hereunder. 17. Successors and Assigns. This Guaranty shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of the successors and assigns of each member of the Lender Group; provided, however, no Guarantor shall assign this Guaranty or delegate any of its duties hereunder without Agent's prior written consent and any assignment by a Guarantor without Agent's consent shall be absolutely void. In the event of any assignment or other transfer of rights by any member of the Lender Group the rights and benefits herein conferred upon each member of the Lender Group shall automatically extend to and be vested in such assignee or other transferee. 18. No Third Party Beneficiary. This Guaranty is solely for the benefit of each member of the Lender Group and each of their successors and assigns and may not be relied on by any other Person. 19. Counterparts; Telefacsimile Execution. This Guaranty may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Guaranty. Delivery of an executed counterpart of this Guaranty by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Guaranty. Any party delivering an executed counterpart of this Guaranty by telefacsimile also shall deliver an original executed counterpart of this Guaranty but the failure to 8 deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Guaranty. 20. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER THE VALIDITY OF THIS GUARANTY, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS GUARANTY AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE CALIFORNIA STATE COURTS AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. EACH GUARANTOR AND THE LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT SUCH PARTY MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 20. EACH GUARANTOR AND AGENT ON BEHALF OF THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS GUARANTY OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH GUARANTOR AND AGENT ON BEHALF OF THE LENDER GROUP REPRESENT THAT EACH SUCH PARTY HAS REVIEWED THIS WAIVER AND EACH such party KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS GUARANTY MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 21. Agreement to be Bound. (a) Each Guarantor hereby makes to the Lender Group each of the representations and warranties set forth in the Loan Agreement applicable to such Guarantor fully as though such Guarantor were a party thereto, and such representations and warranties are incorporated herein by this reference, mutatis mutandis; and (b) each Guarantor that is a Subsidiary of Borrower agrees and covenants for the benefit of the Lender Group (i) to do each of the things set forth in the Loan Agreement 9 that Borrower agrees and covenants to cause its Subsidiaries to do, and (ii) to not do each of the things set forth in the Loan Agreement that Borrower agrees and covenants to cause its Subsidiaries not to do, in each case, fully as though such Guarantor was a party thereto, and such agreements and covenants are incorporated herein by this reference, mutatis mutandis. 22. Termination. Upon the indefeasible final payment in full of the Guarantied Obligations, including the cash collateralization, expiration, or cancellation of all Guarantied Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, this Guaranty shall terminate, and Agent shall execute and deliver such documents and instruments and take such further action reasonably requested by Guarantors, at Guarantors' expense, as shall be necessary to evidence the termination hereof. [Signature page follows] 10 IN WITNESS WHEREOF, each of the undersigned has executed and delivered this Guaranty as of the date first written above. RIVER HOLDING CORP., a Delaware corporation By: ----------------------------------- Name : -------------------------------- Title: -------------------------------- IH HOLDINGS LLC, a Delaware limited liability company By: ----------------------------------- Name : -------------------------------- Title: -------------------------------- WELLS FARGO FOOTHILL, INC., a California corporation, as Agent By: ----------------------------------- Name : -------------------------------- Title: -------------------------------- [Signature Page to Guaranty] S-1 EX-10.16 11 dex1016.txt INTERCOMPANY SUBORDINATION AGREEMENT (WELLS FARGO AS AGENT) Exhibit 10.16 INTERCOMPANY SUBORDINATION AGREEMENT THIS INTERCOMPANY SUBORDINATION AGREEMENT (this "Agreement"), dated as of October 7, 2003, is made among WELLS FARGO FOOTHILL, INC., a California corporation ("Agent"), and the Debtors (as defined below), with reference to the following: WHEREAS, Hudson Respiratory Care Inc., a California corporation (the "Borrower"), the lenders signatory thereto from time to time (individually and collectively, being referred to as "Lenders"; together with Agent, individually and collectively, the "Lender Group"), and Agent have entered into that certain Loan and Security Agreement, dated as of even date herewith (as amended, restated, modified, supplemented, refinanced, renewed, or extended from time to time, the "Loan Agreement"), pursuant to which the Lender Group has agreed to make certain financial accommodations to Borrower; WHEREAS, each Debtor has made or may make certain loans or advances from time to time to one or more other Debtors; and WHEREAS, in order to induce the Lender Group to enter into the Loan Agreement, each Debtor has agreed to the subordination of such indebtedness of each other Debtor to such Debtor, upon the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises, covenants, conditions, representations, and warranties set forth herein and for other good and valuable consideration, the parties hereto agree as follows: SECTION 1 Definitions; Interpretation. (a) Terms Defined in Loan Agreement. All capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to them in the Loan Agreement. (b) Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Agreement" has the meaning set forth in the preamble to this Agreement. "Borrower" has the meaning set forth in the recitals to this Agreement. "Debtors" means, collectively, Borrower, River Holding Corp., a Delaware corporation, IH Holding LLC, a Delaware limited liability company, Industrias Hudson S.A. de C.V., a company organized under the laws of Mexico, Hudson Respiratory Care Tecate, S. de R.L. de C.V., a company organized under the laws of Mexico, and HRC Holding Inc., a Delaware corporation. "Insolvency Event" has the meaning set forth in Section 3. "Lender Group" has the meaning set forth in the recitals to this Agreement. "Lenders" has the meaning set forth in the recitals to this Agreement. "Loan Agreement" has the meaning set forth in the recitals to this Agreement. "Senior Debt" means the Obligations and other indebtedness and liabilities of the Debtors to Agent and the Lender Group under or in connection with the Loan Agreement and the other Loan Documents, including all unpaid principal of the Advances, all interest accrued thereon, all fees due under the Loan Agreement and the other Loan Documents, and all other amounts payable by the Debtors to Agent and the Lender Group thereunder or in connection therewith, whether now existing or hereafter arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and including without limitation interest, fees, and other such amounts, which would accrue and become due but for the commencement of one or more of the Insolvency Events, whether or not such interest, fees, and other amounts are allowed or allowable in whole or in part in any of such Insolvency Events. "Subordinated Debt" means, with respect to each Debtor, all indebtedness, liabilities, and other monetary obligations of any other Debtor owing to such Debtor in respect of any and all loans or advances made by such Debtor to such other Debtor whether now existing or hereafter arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined, including all fees and all other amounts payable by any other Debtor to such Debtor under or in connection with any documents or instruments related thereto. "Subordinated Debt Payment" means any payment or distribution by or on behalf of the Debtors, directly or indirectly, of assets of the Debtors of any kind or character, whether in cash, property, or securities, including on account of the purchase, redemption, or other acquisition of Subordinated Debt, as a result of any collection, sale, or other disposition of collateral, or by setoff, exchange, or in any other manner, for or on account of the Subordinated Debt. (c) Interpretation. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" is not exclusive. The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Section, subsection, clause, schedule, and exhibit references are to this Agreement unless otherwise specified. References to agreements and other contractual instruments shall be deemed to include all subsequent amendments, restatements and other modifications thereto. References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending, or replacing the statute or regulation referred to. The captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. SECTION 2 Subordination To Payment Of Senior Debt. As to each Debtor, all payments on account of the Subordinated Debt shall be subject, subordinate, and junior, in right of payment and exercise of remedies, to the extent and in the manner set forth herein, to the prior payment, in full, in cash or cash equivalents of the Senior Debt. 2 SECTION 3 Subordination Upon Any Distribution Of Assets Of The Debtors. As to each Debtor, in the event of any payment or distribution of assets of any other Debtor of any kind or character, whether in cash, property, or securities, upon the dissolution, winding up, or total or partial liquidation or reorganization, readjustment, arrangement, or similar proceeding relating to such other Debtor or its property, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership, arrangement, or similar proceedings or upon an assignment for the benefit of creditors, or upon any other marshaling or composition of the assets and liabilities of such other Debtor, or otherwise, (such events, collectively, the "Insolvency Events"): (i) all amounts owing on account of the Senior Debt shall first be paid, in full, in cash, or payment provided for in cash or in cash equivalents, before any Subordinated Debt Payment is made; and (ii) to the extent permitted by applicable law, any Subordinated Debt Payment to which such Debtor would be entitled except for the provisions hereof, shall be paid or delivered by the trustee in bankruptcy, receiver, assignee for the benefit of creditors, or other liquidating lender making such payment or distribution directly to Agent for application to the payment of the Senior Debt in accordance with clause (i), after giving effect to any concurrent payment or distribution or provision therefor to Agent in respect of such Senior Debt. SECTION 4 Payments On Subordinated Debt. (a) Permitted Payments. So long as no Event of Default has occurred and is continuing, each Debtor may make, and each other Debtor shall be entitled to accept and receive, (i) payments on account of the Subordinated Debt in the ordinary course of business and (ii) payments allowed, if any, under the Loan Agreement. (b) No Payment Upon Senior Debt Defaults. Upon the occurrence of any Event of Default, and until such Event of Default is cured or waived, no Debtor shall make, and no other Debtor shall accept or receive, any Subordinated Debt Payment. SECTION 5 Subordination Of Remedies. As long as any Senior Debt shall remain outstanding and unpaid, following the occurrence of any Event of Default and until such Event of Default is cured or waived, no Debtor shall, without the prior written consent of Agent: (a) accelerate, make demand, or otherwise make due and payable prior to the original due date thereof any Subordinated Debt or bring suit or institute any other actions or proceedings to enforce its rights or interests in respect of the obligations of any other Debtor owing to such Debtor; (b) exercise any rights under or with respect to guaranties of the Subordinated Debt, if any; (c) exercise any rights to set-offs and counterclaims in respect of any indebtedness, liabilities, or obligations of such Debtor to any other Debtor against any of the Subordinated Debt; or (d) commence, or cause to be commenced, or join with any creditor other than Agent or any Lender in commencing, any bankruptcy, insolvency, or receivership proceeding against the other Debtor. 3 SECTION 6 Payment Over To Agent. In the event that, notwithstanding the provisions of Sections 3, 4, or 5, any Subordinated Debt Payments shall be received in contravention of such Sections 3, 4, or 5 by any Debtor before all Senior Debt is paid, in full, in cash or cash equivalents, such Subordinated Debt Payments shall be held in trust for the benefit of the Lender Group and shall be paid over or delivered to Agent for application to the payment, in full, in cash or cash equivalents of all Senior Debt remaining unpaid to the extent necessary to give effect to such Sections 3, 4, or 5, after giving effect to any concurrent payments or distributions to Agent in respect of the Senior Debt. SECTION 7 Authorization To Agent. If, while any Subordinated Debt is outstanding, any Insolvency Event shall occur and be continuing with respect to any Debtor or its property: (i) Agent hereby is irrevocably authorized and empowered (in the name of each other Debtor or otherwise), but shall have no obligation, to demand, sue for, collect, and receive every payment or distribution in respect of the Subordinated Debt and give acquittance therefor and to file claims and proofs of claim and take such other action (including voting the Subordinated Debt) as it may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of Agent; and (ii) each other Debtor shall promptly take such action as Agent reasonably may request (a) to collect the Subordinated Debt, to the extent permitted by law, for the account of the Lender Group and to file appropriate claims or proofs of claim in respect of the Subordinated Debt, (b) to execute and deliver to Agent such powers of attorney, assignments, and other instruments as it may request to enable it to enforce any and all claims with respect to the Subordinated Debt, and (c) to collect and receive any and all Subordinated Debt Payments, to the extent permitted by law. SECTION 8 Certain Agreements Of Each Debtor. (a) No Benefits. Each Debtor understands that there may be various agreements among Agent, the Lenders, and any other Debtor evidencing and governing the Senior Debt, and each Debtor acknowledges and agrees that such agreements are not intended to confer any benefits on such Debtor unless such Debtor is also a party thereto and that Agent and the Lenders shall have no obligation to such Debtor or any other Person to exercise any rights, enforce any remedies, or take any actions which may be available to them under such agreements unless such Debtor is also a party thereto. (b) No Interference. Each Debtor acknowledges that certain other Debtors have granted to Agent for the benefit of the Lender Group security interests in all of such other Debtor's assets, and agrees not to interfere with or in any manner oppose a disposition of any Collateral by Agent in accordance with applicable law. (c) Reliance by Agent and Lenders. Each Debtor acknowledges and agrees that Agent and the Lenders will have relied upon and will continue to rely upon the subordination provisions provided for herein and the other provisions hereof in entering into the Loan Documents and making or issuing the Advances, the Letters of Credit, or other financial accommodations thereunder. 4 (d) Waivers. Except as provided under the Loan Agreement, each Debtor hereby waives any and all notice of the incurrence of the Senior Debt or any part thereof and any right to require marshaling of assets. (e) Obligations of Each Debtor Not Affected. Each Debtor hereby agrees that at any time and from time to time, without notice to or the consent of such Debtor, without incurring responsibility to such Debtor, and without impairing or releasing the subordination provided for herein or otherwise impairing the rights of Agent hereunder: (i) the time for any other Debtor's performance of or compliance with any of its agreements contained in the Loan Documents may be extended or such performance or compliance may be waived by Agent or the Lenders; (ii) the agreements of any other Debtor with respect to the Loan Documents may from time to time be modified by such other Debtor, Agent, and the Lenders for the purpose of adding any requirements thereto or changing in any manner the rights and obligations of such other Debtor, Agent, or the Lenders thereunder; (iii) the manner, place, or terms for payment by any other Debtor of Senior Debt or any portion thereof may be altered or the terms for payment extended, or the Senior Debt of any other Debtor may be renewed in whole or in part; (iv) the maturity of the Senior Debt of any other Debtor may be accelerated in accordance with the terms of any present or future agreement by any other Debtor, Agent, and the Lenders; (v) any Collateral may be sold, exchanged, released, or substituted and any Lien in favor of Agent may be terminated, subordinated, or fail to be perfected or become unperfected; (vi) any Person liable in any manner for Senior Debt may be discharged, released, or substituted; and (vii) all other rights against the other Debtors, any other Person, or with respect to any Collateral may be exercised (or Agent may waive or refrain from exercising such rights). (f) Rights of Agent Not to Be Impaired. No right of Agent or the Lenders to enforce the subordination provided for herein or to exercise its other rights hereunder shall at any time in any way be prejudiced or impaired by any act or failure to act by any Debtor, Agent, or the Lenders hereunder or under or in connection with the other Loan Documents or by any noncompliance by the other Debtors with the terms and provisions and covenants herein or in any other Loan Document, regardless of any knowledge thereof Agent or the Lenders may have or otherwise be charged with. (g) Financial Condition of the Debtors. Except as provided under the Loan Agreement or by applicable law, no Debtor shall have any right to require Agent to obtain or disclose any information with respect to: (i) the financial condition or character of any other Debtor or the ability of any other Debtor to pay and perform Senior Debt; (ii) the Senior Debt; (iii) the Collateral or other security for any or all of the Senior Debt; (iv) the existence or nonexistence of any guarantees of, or any other subordination agreements with respect to, all or any part of the Senior Debt; (v) any action or inaction on the part of Agent or any other Person; or (vi) any other matter, fact, or occurrence whatsoever. (h) Acquisition of Liens or Guaranties. No Debtor shall, without the prior consent of Agent, acquire any right or interest in or to any Collateral not owned by such Debtor or accept any guaranties for the Subordinated Debt. SECTION 9 Subrogation. 5 (a) Subrogation. Until the payment and performance in full of all Senior Debt, each Debtor agrees to postpone, and shall not directly or indirectly exercise, any rights that it may acquire by way of subrogation under this Agreement, by any payment or distribution to Agent hereunder or otherwise. Upon the payment and performance in full of all Senior Debt, each Debtor shall be subrogated to the rights of Agent and Lenders to receive payments or distributions applicable to the Senior Debt until the Subordinated Debt shall be paid in full. For the purposes of the foregoing subrogation, no payments or distributions to Agent of any cash, property, or securities to which any Debtor would be entitled except for the provisions of Section 3, 4, or 5 shall, as among such Debtor, its creditors (other than Agent and the Lenders), and the other Debtors, be deemed to be a payment by the other Debtors to or on account of the Senior Debt. (b) Payments Over to the Debtors. If any payment or distribution to which any Debtor would otherwise have been entitled but for the provisions of Section 3, 4, or 5 shall have been applied pursuant to the provisions of Section 3, 4, or 5 to the payment of all amounts payable under the Senior Debt, such Debtor shall be entitled to receive from Agent or the Lenders any payments or distributions received by Agent or the Lenders in excess of the amount sufficient to pay in full in cash all amounts payable under or in respect of the Senior Debt. If any such excess payment is made to Agent or the Lenders, Agent or the Lenders shall promptly remit such excess to such Debtor and until so remitted shall hold such excess payment for the benefit of such Debtor. SECTION 10 Continuing Agreement; Reinstatement. (a) Continuing Agreement. This Agreement is a continuing agreement of subordination and shall continue in effect and be binding upon each Debtor until payment and performance in full in cash of the Senior Debt. The subordinations, agreements, and priorities set forth herein shall remain in full force and effect regardless of whether any party hereto in the future seeks to rescind, amend, terminate, or reform, by litigation or otherwise, its respective agreements with the other Debtor. (b) Reinstatement. This Agreement shall continue to be effective or shall be reinstated, as the case may be, if, for any reason, any payment of the Senior Debt by or on behalf of any other Debtor shall be rescinded or must otherwise be restored by Agent or the Lenders, whether as a result of an Insolvency Event or otherwise. SECTION 11 Transfer Of Subordinated Debt. No Debtor may assign or transfer its rights and obligations in respect of the Subordinated Debt without the prior written consent of Agent, and any such transferee or assignee, as a condition to acquiring an interest in the Subordinated Debt shall agree to be bound hereby, in form satisfactory to Agent. SECTION 12 Obligations Of The Debtors Not Affected. The provisions of this Agreement are intended solely for the purpose of defining the relative rights of each Debtor against the other Debtors, on the one hand, and of Agent and the Lenders against the Debtors, on the other hand. Nothing contained in this Agreement shall (i) impair, as between each Debtor and the other Debtors, the obligation of the other Debtors to pay their respective obligations with respect to the Subordinated Debt as and when the same shall become due and payable, or (ii) 6 otherwise affect the relative rights of each Debtor against the other Debtors, on the one hand, and of the creditors (other than Agent or the Lenders) of the other Debtors against the other Debtors, on the other hand. SECTION 13 Endorsement Of Debtor Documents; Further Assurances And Additional Acts. (a) Endorsement of Debtor Documents. At the request of Agent, all documents and instruments evidencing any of the Subordinated Debt, if any, shall be endorsed with a legend noting that such documents and instruments are subject to this Agreement, and each Debtor shall promptly deliver to Agent evidence of the same. (b) Further Assurances and Additional Acts. Each Debtor shall execute, acknowledge, deliver, file, notarize, and register at its own expense all such further agreements, instruments, certificates, financing statements, documents, and assurances, and perform such acts as Agent reasonably shall deem necessary or appropriate to effectuate the purposes of this Agreement, and promptly provide Agent with evidence of the foregoing reasonably satisfactory in form and substance to Agent. SECTION 14 Notices. All notices and other communications hereunder to Agent shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement and all notices and other communications hereunder to a Debtor shall be in writing and shall be mailed, sent or delivered in care of Borrower in accordance with the Loan Agreement. SECTION 15 No Waiver; Cumulative Remedies. No failure on the part of Agent or the Lenders to exercise, and no delay in exercising, any right, remedy, power, or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power, or privilege preclude any other or further exercise thereof or the exercise of any other right, remedy, power, or privilege. The rights and remedies under this Agreement are cumulative and not exclusive of any rights, remedies, powers, and privileges that may otherwise be available to Agent and the Lenders. SECTION 16 Costs And Expenses. Each of the Debtors, jointly and severally, agrees to pay to Agent on demand the (a) reasonable out-of-pocket costs and expenses of Agent, and the reasonable fees and disbursements of counsel to Agent, in connection with the negotiation, preparation, execution, delivery, and administration of this Agreement, and any amendments, modifications, or waivers of the terms thereof; and (b) all reasonable out-of-pocket costs and expenses of Agent, and the reasonable fees and disbursements of counsel, in connection with the enforcement or attempted enforcement of, and preservation of rights or interests under, this Agreement, including any losses, reasonable out-of-pocket costs and expenses sustained by Agent as a result of any failure by any Debtor to perform or observe its obligations contained in this Agreement. SECTION 17 Survival. All covenants, agreements, representations and warranties made in this Agreement shall, except to the extent otherwise provided herein, survive the execution and delivery of this Agreement, and shall continue in full force and effect so long 7 as any Senior Debt remains unpaid. Without limiting the generality of the foregoing, the obligations of each Debtor under Section 16 shall survive the satisfaction of the Senior Debt. SECTION 18 Benefits Of Agreement. This Agreement is entered into for the sole protection and benefit of the parties hereto and their successors and assigns, and no other person shall be a direct or indirect beneficiary of, or shall have any direct or indirect cause of action or claim in connection with, this Agreement. SECTION 19 Binding Effect. This Agreement shall be binding upon, inure to the benefit of and be enforceable by each Debtor, Agent, and the Lenders and their respective successors and permitted assigns. SECTION 20 Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the law of the State of California. SECTION 21 Submission To Jurisdiction; Waiver of Jury Trial. Each Debtor hereby (i) submits to the exclusive jurisdiction of the courts of the County of Los Angeles, State of California and the federal courts of the United States sitting in the County of Los Angeles, State of California, for the purpose of any action or proceeding arising out of or relating to this Agreement, (ii) agrees that all claims in respect of any such action or proceeding may be heard and determined in such courts, or at the sole option of Agent, in any other court which has subject matter jurisdiction over the matter in controversy, (iii) irrevocably waives (to the extent permitted by applicable law) any objection which it now or hereafter may have to the laying of venue of any such action or proceeding brought in any of the foregoing courts, and any objection on the ground that any such action or proceeding in any such court has been brought in an inconvenient forum, (iv) agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner permitted by law, and (v) EACH DEBTOR HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH DEBTOR REPRESENTS THAT EACH SUCH PARTY HAS REVIEWED THIS WAIVER AND EACH SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. SECTION 22 Entire Agreement; Amendments And Waivers. (a) Entire Agreement. This Agreement constitutes the entire agreement of each of the Debtors and Agent with respect to the matters set forth herein and supersedes any prior agreements, commitments, drafts, communications, discussions, and understandings, oral or written, with respect thereto. None of the terms or conditions of this Agreement imposes on the Debtors any obligation or liability under any Loan Document (other than this Agreement). The foregoing notwithstanding, the terms and conditions of this Agreement shall not in any way 8 limit or affect the obligations or liabilities of any Debtor under the Loan Documents to which such Debtor is a party. (b) Amendments and Waivers. No amendment to any provision of this Agreement shall in any event be effective unless the same shall be in writing and signed by each of the Debtors and Agent; and no waiver of any provision of this Agreement, or consent to any departure by any Debtor therefrom, shall in any event be effective unless the same shall be in writing and signed by Agent. Any such amendment, waiver, or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 23 Conflicts. In case of any conflict or inconsistency between any terms of this Agreement, on the one hand, and any documents or instruments in respect of the Subordinated Debt, on the other hand, then the terms of this Agreement shall control. SECTION 24 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under all applicable laws and regulations. If, however, any provision of this Agreement shall be prohibited by or invalid under any such law or regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such law or regulation, or, if for any reason it is not deemed so modified, it shall be ineffective and invalid only to the extent of such prohibition or invalidity without affecting the remaining provisions of this Agreement or the validity or effectiveness of such provision in any other jurisdiction. SECTION 25 Interpretation. This Agreement is the result of negotiations between, and has been reviewed by the respective counsel to, the Debtors and Agent and is the product of all parties hereto. Accordingly, this Agreement shall not be construed against Agent merely because of Agent's involvement in the preparation hereof. SECTION 26 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. SECTION 27 Termination Of Agreement. Upon indefeasible payment and performance in full of the Senior Debt, this Agreement shall terminate and Agent shall promptly execute and deliver to each Debtor such documents and instruments as shall be reasonably necessary to evidence such termination; provided, however, that the obligations of each Debtor under Section 16 shall survive such termination. [Signature page follows.] 9 IN WITNESS WHEREOF, the undersigned has executed and delivered this Agreement as of the date first written above. RIVER HOLDING CORP., a Delaware corporation By: ----------------------------------- Title: HUDSON RESPIRATORY CARE INC., a California corporation By: ----------------------------------- Title: IH HOLDING LLC, a Delaware limited liability company By: ----------------------------------- Title: HUDSON RESPIRATORY CARE TECATE, S. DE R.L. DE C.V., a company organized under the laws of Mexico By: ----------------------------------- Title: INDUSTRIAS HUDSON S.A. DE C.V., a company organized under the laws of Mexico By: ----------------------------------- Title: HRC HOLDING INC., a Delaware corporation By: ----------------------------------- Title: S-1 WELLS FARGO FOOTHILL, INC., a California corporation, as Agent By: ----------------------------------- Title: S-2 EX-10.17 12 dex1017.txt SUBORDINATION AGREEMENT (WELLS FARGO AS AGENT) Exhibit 10.17 INTERCOMPANY SUBORDINATION AGREEMENT THIS INTERCOMPANY SUBORDINATION AGREEMENT (this "Agreement"), dated as of October 7, 2003, is made among WELLS FARGO FOOTHILL, INC., a California corporation ("Agent"), and the Debtors (as defined below), with reference to the following: WHEREAS, Hudson Respiratory Care Inc., a California corporation (the "Borrower"), the lenders signatory thereto from time to time (individually and collectively, being referred to as "Lenders"; together with Agent, individually and collectively, the "Lender Group"), and Agent have entered into that certain Loan and Security Agreement, dated as of even date herewith (as amended, restated, modified, supplemented, refinanced, renewed, or extended from time to time, the "Loan Agreement"), pursuant to which the Lender Group has agreed to make certain financial accommodations to Borrower; WHEREAS, each Debtor has made or may make certain loans or advances from time to time to one or more other Debtors; and WHEREAS, in order to induce the Lender Group to enter into the Loan Agreement, each Debtor has agreed to the subordination of such indebtedness of each other Debtor to such Debtor, upon the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises, covenants, conditions, representations, and warranties set forth herein and for other good and valuable consideration, the parties hereto agree as follows: SECTION 1 Definitions; Interpretation. (a) Terms Defined in Loan Agreement. All capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to them in the Loan Agreement. (b) Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Agreement" has the meaning set forth in the preamble to this Agreement. "Borrower" has the meaning set forth in the recitals to this Agreement. "Debtors" means, collectively, Borrower, River Holding Corp., a Delaware corporation, IH Holding LLC, a Delaware limited liability company, Industrias Hudson S.A. de C.V., a company organized under the laws of Mexico, Hudson Respiratory Care Tecate, S. de R.L. de C.V., a company organized under the laws of Mexico, and HRC Holding Inc., a Delaware corporation. "Insolvency Event" has the meaning set forth in Section 3. "Lender Group" has the meaning set forth in the recitals to this Agreement. "Lenders" has the meaning set forth in the recitals to this Agreement. "Loan Agreement" has the meaning set forth in the recitals to this Agreement. "Senior Debt" means the Obligations and other indebtedness and liabilities of the Debtors to Agent and the Lender Group under or in connection with the Loan Agreement and the other Loan Documents, including all unpaid principal of the Advances, all interest accrued thereon, all fees due under the Loan Agreement and the other Loan Documents, and all other amounts payable by the Debtors to Agent and the Lender Group thereunder or in connection therewith, whether now existing or hereafter arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and including without limitation interest, fees, and other such amounts, which would accrue and become due but for the commencement of one or more of the Insolvency Events, whether or not such interest, fees, and other amounts are allowed or allowable in whole or in part in any of such Insolvency Events. "Subordinated Debt" means, with respect to each Debtor, all indebtedness, liabilities, and other monetary obligations of any other Debtor owing to such Debtor in respect of any and all loans or advances made by such Debtor to such other Debtor whether now existing or hereafter arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined, including all fees and all other amounts payable by any other Debtor to such Debtor under or in connection with any documents or instruments related thereto. "Subordinated Debt Payment" means any payment or distribution by or on behalf of the Debtors, directly or indirectly, of assets of the Debtors of any kind or character, whether in cash, property, or securities, including on account of the purchase, redemption, or other acquisition of Subordinated Debt, as a result of any collection, sale, or other disposition of collateral, or by setoff, exchange, or in any other manner, for or on account of the Subordinated Debt. (c) Interpretation. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" is not exclusive. The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Section, subsection, clause, schedule, and exhibit references are to this Agreement unless otherwise specified. References to agreements and other contractual instruments shall be deemed to include all subsequent amendments, restatements and other modifications thereto. References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending, or replacing the statute or regulation referred to. The captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. SECTION 2 Subordination To Payment Of Senior Debt. As to each Debtor, all payments on account of the Subordinated Debt shall be subject, subordinate, and junior, in right of payment and exercise of remedies, to the extent and in the manner set forth herein, to the prior payment, in full, in cash or cash equivalents of the Senior Debt. 2 SECTION 3 Subordination Upon Any Distribution Of Assets Of The Debtors. As to each Debtor, in the event of any payment or distribution of assets of any other Debtor of any kind or character, whether in cash, property, or securities, upon the dissolution, winding up, or total or partial liquidation or reorganization, readjustment, arrangement, or similar proceeding relating to such other Debtor or its property, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership, arrangement, or similar proceedings or upon an assignment for the benefit of creditors, or upon any other marshaling or composition of the assets and liabilities of such other Debtor, or otherwise, (such events, collectively, the "Insolvency Events"): (i) all amounts owing on account of the Senior Debt shall first be paid, in full, in cash, or payment provided for in cash or in cash equivalents, before any Subordinated Debt Payment is made; and (ii) to the extent permitted by applicable law, any Subordinated Debt Payment to which such Debtor would be entitled except for the provisions hereof, shall be paid or delivered by the trustee in bankruptcy, receiver, assignee for the benefit of creditors, or other liquidating lender making such payment or distribution directly to Agent for application to the payment of the Senior Debt in accordance with clause (i), after giving effect to any concurrent payment or distribution or provision therefor to Agent in respect of such Senior Debt. SECTION 4 Payments On Subordinated Debt. (a) Permitted Payments. So long as no Event of Default has occurred and is continuing, each Debtor may make, and each other Debtor shall be entitled to accept and receive, (i) payments on account of the Subordinated Debt in the ordinary course of business and (ii) payments allowed, if any, under the Loan Agreement. (b) No Payment Upon Senior Debt Defaults. Upon the occurrence of any Event of Default, and until such Event of Default is cured or waived, no Debtor shall make, and no other Debtor shall accept or receive, any Subordinated Debt Payment. SECTION 5 Subordination Of Remedies. As long as any Senior Debt shall remain outstanding and unpaid, following the occurrence of any Event of Default and until such Event of Default is cured or waived, no Debtor shall, without the prior written consent of Agent: (a) accelerate, make demand, or otherwise make due and payable prior to the original due date thereof any Subordinated Debt or bring suit or institute any other actions or proceedings to enforce its rights or interests in respect of the obligations of any other Debtor owing to such Debtor; (b) exercise any rights under or with respect to guaranties of the Subordinated Debt, if any; (c) exercise any rights to set-offs and counterclaims in respect of any indebtedness, liabilities, or obligations of such Debtor to any other Debtor against any of the Subordinated Debt; or (d) commence, or cause to be commenced, or join with any creditor other than Agent or any Lender in commencing, any bankruptcy, insolvency, or receivership proceeding against the other Debtor. 3 SECTION 6 Payment Over To Agent. In the event that, notwithstanding the provisions of Sections 3, 4, or 5, any Subordinated Debt Payments shall be received in contravention of such Sections 3, 4, or 5 by any Debtor before all Senior Debt is paid, in full, in cash or cash equivalents, such Subordinated Debt Payments shall be held in trust for the benefit of the Lender Group and shall be paid over or delivered to Agent for application to the payment, in full, in cash or cash equivalents of all Senior Debt remaining unpaid to the extent necessary to give effect to such Sections 3, 4, or 5, after giving effect to any concurrent payments or distributions to Agent in respect of the Senior Debt. SECTION 7 Authorization To Agent. If, while any Subordinated Debt is outstanding, any Insolvency Event shall occur and be continuing with respect to any Debtor or its property: (i) Agent hereby is irrevocably authorized and empowered (in the name of each other Debtor or otherwise), but shall have no obligation, to demand, sue for, collect, and receive every payment or distribution in respect of the Subordinated Debt and give acquittance therefor and to file claims and proofs of claim and take such other action (including voting the Subordinated Debt) as it may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of Agent; and (ii) each other Debtor shall promptly take such action as Agent reasonably may request (a) to collect the Subordinated Debt, to the extent permitted by law, for the account of the Lender Group and to file appropriate claims or proofs of claim in respect of the Subordinated Debt, (b) to execute and deliver to Agent such powers of attorney, assignments, and other instruments as it may request to enable it to enforce any and all claims with respect to the Subordinated Debt, and (c) to collect and receive any and all Subordinated Debt Payments, to the extent permitted by law. SECTION 8 Certain Agreements Of Each Debtor. (a) No Benefits. Each Debtor understands that there may be various agreements among Agent, the Lenders, and any other Debtor evidencing and governing the Senior Debt, and each Debtor acknowledges and agrees that such agreements are not intended to confer any benefits on such Debtor unless such Debtor is also a party thereto and that Agent and the Lenders shall have no obligation to such Debtor or any other Person to exercise any rights, enforce any remedies, or take any actions which may be available to them under such agreements unless such Debtor is also a party thereto. (b) No Interference. Each Debtor acknowledges that certain other Debtors have granted to Agent for the benefit of the Lender Group security interests in all of such other Debtor's assets, and agrees not to interfere with or in any manner oppose a disposition of any Collateral by Agent in accordance with applicable law. (c) Reliance by Agent and Lenders. Each Debtor acknowledges and agrees that Agent and the Lenders will have relied upon and will continue to rely upon the subordination provisions provided for herein and the other provisions hereof in entering into the Loan Documents and making or issuing the Advances, the Letters of Credit, or other financial accommodations thereunder. 4 (d) Waivers. Except as provided under the Loan Agreement, each Debtor hereby waives any and all notice of the incurrence of the Senior Debt or any part thereof and any right to require marshaling of assets. (e) Obligations of Each Debtor Not Affected. Each Debtor hereby agrees that at any time and from time to time, without notice to or the consent of such Debtor, without incurring responsibility to such Debtor, and without impairing or releasing the subordination provided for herein or otherwise impairing the rights of Agent hereunder: (i) the time for any other Debtor's performance of or compliance with any of its agreements contained in the Loan Documents may be extended or such performance or compliance may be waived by Agent or the Lenders; (ii) the agreements of any other Debtor with respect to the Loan Documents may from time to time be modified by such other Debtor, Agent, and the Lenders for the purpose of adding any requirements thereto or changing in any manner the rights and obligations of such other Debtor, Agent, or the Lenders thereunder; (iii) the manner, place, or terms for payment by any other Debtor of Senior Debt or any portion thereof may be altered or the terms for payment extended, or the Senior Debt of any other Debtor may be renewed in whole or in part; (iv) the maturity of the Senior Debt of any other Debtor may be accelerated in accordance with the terms of any present or future agreement by any other Debtor, Agent, and the Lenders; (v) any Collateral may be sold, exchanged, released, or substituted and any Lien in favor of Agent may be terminated, subordinated, or fail to be perfected or become unperfected; (vi) any Person liable in any manner for Senior Debt may be discharged, released, or substituted; and (vii) all other rights against the other Debtors, any other Person, or with respect to any Collateral may be exercised (or Agent may waive or refrain from exercising such rights). (f) Rights of Agent Not to Be Impaired. No right of Agent or the Lenders to enforce the subordination provided for herein or to exercise its other rights hereunder shall at any time in any way be prejudiced or impaired by any act or failure to act by any Debtor, Agent, or the Lenders hereunder or under or in connection with the other Loan Documents or by any noncompliance by the other Debtors with the terms and provisions and covenants herein or in any other Loan Document, regardless of any knowledge thereof Agent or the Lenders may have or otherwise be charged with. (g) Financial Condition of the Debtors. Except as provided under the Loan Agreement or by applicable law, no Debtor shall have any right to require Agent to obtain or disclose any information with respect to: (i) the financial condition or character of any other Debtor or the ability of any other Debtor to pay and perform Senior Debt; (ii) the Senior Debt; (iii) the Collateral or other security for any or all of the Senior Debt; (iv) the existence or nonexistence of any guarantees of, or any other subordination agreements with respect to, all or any part of the Senior Debt; (v) any action or inaction on the part of Agent or any other Person; or (vi) any other matter, fact, or occurrence whatsoever. (h) Acquisition of Liens or Guaranties. No Debtor shall, without the prior consent of Agent, acquire any right or interest in or to any Collateral not owned by such Debtor or accept any guaranties for the Subordinated Debt. SECTION 9 Subrogation. 5 (a) Subrogation. Until the payment and performance in full of all Senior Debt, each Debtor agrees to postpone, and shall not directly or indirectly exercise, any rights that it may acquire by way of subrogation under this Agreement, by any payment or distribution to Agent hereunder or otherwise. Upon the payment and performance in full of all Senior Debt, each Debtor shall be subrogated to the rights of Agent and Lenders to receive payments or distributions applicable to the Senior Debt until the Subordinated Debt shall be paid in full. For the purposes of the foregoing subrogation, no payments or distributions to Agent of any cash, property, or securities to which any Debtor would be entitled except for the provisions of Section 3, 4, or 5 shall, as among such Debtor, its creditors (other than Agent and the Lenders), and the other Debtors, be deemed to be a payment by the other Debtors to or on account of the Senior Debt. (b) Payments Over to the Debtors. If any payment or distribution to which any Debtor would otherwise have been entitled but for the provisions of Section 3, 4, or 5 shall have been applied pursuant to the provisions of Section 3, 4, or 5 to the payment of all amounts payable under the Senior Debt, such Debtor shall be entitled to receive from Agent or the Lenders any payments or distributions received by Agent or the Lenders in excess of the amount sufficient to pay in full in cash all amounts payable under or in respect of the Senior Debt. If any such excess payment is made to Agent or the Lenders, Agent or the Lenders shall promptly remit such excess to such Debtor and until so remitted shall hold such excess payment for the benefit of such Debtor. SECTION 10 Continuing Agreement; Reinstatement. (a) Continuing Agreement. This Agreement is a continuing agreement of subordination and shall continue in effect and be binding upon each Debtor until payment and performance in full in cash of the Senior Debt. The subordinations, agreements, and priorities set forth herein shall remain in full force and effect regardless of whether any party hereto in the future seeks to rescind, amend, terminate, or reform, by litigation or otherwise, its respective agreements with the other Debtor. (b) Reinstatement. This Agreement shall continue to be effective or shall be reinstated, as the case may be, if, for any reason, any payment of the Senior Debt by or on behalf of any other Debtor shall be rescinded or must otherwise be restored by Agent or the Lenders, whether as a result of an Insolvency Event or otherwise. SECTION 11 Transfer Of Subordinated Debt. No Debtor may assign or transfer its rights and obligations in respect of the Subordinated Debt without the prior written consent of Agent, and any such transferee or assignee, as a condition to acquiring an interest in the Subordinated Debt shall agree to be bound hereby, in form satisfactory to Agent. SECTION 12 Obligations Of The Debtors Not Affected. The provisions of this Agreement are intended solely for the purpose of defining the relative rights of each Debtor against the other Debtors, on the one hand, and of Agent and the Lenders against the Debtors, on the other hand. Nothing contained in this Agreement shall (i) impair, as between each Debtor and the other Debtors, the obligation of the other Debtors to pay their respective obligations with respect to the Subordinated Debt as and when the same shall become due and payable, or (ii) 6 otherwise affect the relative rights of each Debtor against the other Debtors, on the one hand, and of the creditors (other than Agent or the Lenders) of the other Debtors against the other Debtors, on the other hand. SECTION 13 Endorsement Of Debtor Documents; Further Assurances And Additional Acts. (a) Endorsement of Debtor Documents. At the request of Agent, all documents and instruments evidencing any of the Subordinated Debt, if any, shall be endorsed with a legend noting that such documents and instruments are subject to this Agreement, and each Debtor shall promptly deliver to Agent evidence of the same. (b) Further Assurances and Additional Acts. Each Debtor shall execute, acknowledge, deliver, file, notarize, and register at its own expense all such further agreements, instruments, certificates, financing statements, documents, and assurances, and perform such acts as Agent reasonably shall deem necessary or appropriate to effectuate the purposes of this Agreement, and promptly provide Agent with evidence of the foregoing reasonably satisfactory in form and substance to Agent. SECTION 14 Notices. All notices and other communications hereunder to Agent shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement and all notices and other communications hereunder to a Debtor shall be in writing and shall be mailed, sent or delivered in care of Borrower in accordance with the Loan Agreement. SECTION 15 No Waiver; Cumulative Remedies. No failure on the part of Agent or the Lenders to exercise, and no delay in exercising, any right, remedy, power, or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power, or privilege preclude any other or further exercise thereof or the exercise of any other right, remedy, power, or privilege. The rights and remedies under this Agreement are cumulative and not exclusive of any rights, remedies, powers, and privileges that may otherwise be available to Agent and the Lenders. SECTION 16 Costs And Expenses. Each of the Debtors, jointly and severally, agrees to pay to Agent on demand the (a) reasonable out-of-pocket costs and expenses of Agent, and the reasonable fees and disbursements of counsel to Agent, in connection with the negotiation, preparation, execution, delivery, and administration of this Agreement, and any amendments, modifications, or waivers of the terms thereof; and (b) all reasonable out-of-pocket costs and expenses of Agent, and the reasonable fees and disbursements of counsel, in connection with the enforcement or attempted enforcement of, and preservation of rights or interests under, this Agreement, including any losses, reasonable out-of-pocket costs and expenses sustained by Agent as a result of any failure by any Debtor to perform or observe its obligations contained in this Agreement. SECTION 17 Survival. All covenants, agreements, representations and warranties made in this Agreement shall, except to the extent otherwise provided herein, survive the execution and delivery of this Agreement, and shall continue in full force and effect so long 7 as any Senior Debt remains unpaid. Without limiting the generality of the foregoing, the obligations of each Debtor under Section 16 shall survive the satisfaction of the Senior Debt. SECTION 18 Benefits Of Agreement. This Agreement is entered into for the sole protection and benefit of the parties hereto and their successors and assigns, and no other person shall be a direct or indirect beneficiary of, or shall have any direct or indirect cause of action or claim in connection with, this Agreement. SECTION 19 Binding Effect. This Agreement shall be binding upon, inure to the benefit of and be enforceable by each Debtor, Agent, and the Lenders and their respective successors and permitted assigns. SECTION 20 Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the law of the State of California. SECTION 21 Submission To Jurisdiction; Waiver of Jury Trial. Each Debtor hereby (i) submits to the exclusive jurisdiction of the courts of the County of Los Angeles, State of California and the federal courts of the United States sitting in the County of Los Angeles, State of California, for the purpose of any action or proceeding arising out of or relating to this Agreement, (ii) agrees that all claims in respect of any such action or proceeding may be heard and determined in such courts, or at the sole option of Agent, in any other court which has subject matter jurisdiction over the matter in controversy, (iii) irrevocably waives (to the extent permitted by applicable law) any objection which it now or hereafter may have to the laying of venue of any such action or proceeding brought in any of the foregoing courts, and any objection on the ground that any such action or proceeding in any such court has been brought in an inconvenient forum, (iv) agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner permitted by law, and (v) EACH DEBTOR HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH DEBTOR REPRESENTS THAT EACH SUCH PARTY HAS REVIEWED THIS WAIVER AND EACH SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. SECTION 22 Entire Agreement; Amendments And Waivers. (a) Entire Agreement. This Agreement constitutes the entire agreement of each of the Debtors and Agent with respect to the matters set forth herein and supersedes any prior agreements, commitments, drafts, communications, discussions, and understandings, oral or written, with respect thereto. None of the terms or conditions of this Agreement imposes on the Debtors any obligation or liability under any Loan Document (other than this Agreement). The foregoing notwithstanding, the terms and conditions of this Agreement shall not in any way 8 limit or affect the obligations or liabilities of any Debtor under the Loan Documents to which such Debtor is a party. (b) Amendments and Waivers. No amendment to any provision of this Agreement shall in any event be effective unless the same shall be in writing and signed by each of the Debtors and Agent; and no waiver of any provision of this Agreement, or consent to any departure by any Debtor therefrom, shall in any event be effective unless the same shall be in writing and signed by Agent. Any such amendment, waiver, or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 23 Conflicts. In case of any conflict or inconsistency between any terms of this Agreement, on the one hand, and any documents or instruments in respect of the Subordinated Debt, on the other hand, then the terms of this Agreement shall control. SECTION 24 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under all applicable laws and regulations. If, however, any provision of this Agreement shall be prohibited by or invalid under any such law or regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such law or regulation, or, if for any reason it is not deemed so modified, it shall be ineffective and invalid only to the extent of such prohibition or invalidity without affecting the remaining provisions of this Agreement or the validity or effectiveness of such provision in any other jurisdiction. SECTION 25 Interpretation. This Agreement is the result of negotiations between, and has been reviewed by the respective counsel to, the Debtors and Agent and is the product of all parties hereto. Accordingly, this Agreement shall not be construed against Agent merely because of Agent's involvement in the preparation hereof. SECTION 26 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. SECTION 27 Termination Of Agreement. Upon indefeasible payment and performance in full of the Senior Debt, this Agreement shall terminate and Agent shall promptly execute and deliver to each Debtor such documents and instruments as shall be reasonably necessary to evidence such termination; provided, however, that the obligations of each Debtor under Section 16 shall survive such termination. [Signature page follows.] 9 IN WITNESS WHEREOF, the undersigned has executed and delivered this Agreement as of the date first written above. RIVER HOLDING CORP., a Delaware corporation By: ___________________________________ Title: HUDSON RESPIRATORY CARE INC., a California corporation By: ___________________________________ Title: IH HOLDING LLC, a Delaware limited liability company By: ___________________________________ Title: HUDSON RESPIRATORY CARE TECATE, S. DE R.L. DE C.V., a company organized under the laws of Mexico By: ___________________________________ Title: INDUSTRIAS HUDSON S.A. DE C.V., a company organized under the laws of Mexico By: ___________________________________ Title: HRC HOLDING INC., a Delaware corporation By: ___________________________________ Title: S-1 WELLS FARGO FOOTHILL, INC., a California corporation, as Agent By: ___________________________________ Title: S-2 EX-10.22 13 dex1022.txt DEED OF TRUST AND OTHER- BENEFIT OF WELLS FARGO Exhibit 10.22 PREPARED BY, RECORDING REQUESTED BY, AND WHEN RECORDED MAIL TO: Paul, Hastings, Janofsky & Walker LLP 3579 Valley Centre Drive San Diego, California 92130 Attention: Scott G. Sand, Esq. DEED OF TRUST, FINANCING STATEMENT, FIXTURE FILING, ASSIGNMENT OF RENTS AND LEASES AND SECURITY AGREEMENT by and from HUDSON RESPIRATORY CARE INC., "Grantor" to CHICAGO TITLE COMPANY, "Trustee" for the benefit of WELLS FARGO FOOTHILL, INC., "Beneficiary" Dated as of October __, 2003 Municipality: Temecula County: Riverside State: California DEED OF TRUST, FINANCING STATEMENT, FIXTURE FILING, ASSIGNMENT OF RENTS AND LEASES AND SECURITY AGREEMENT DEED OF TRUST, FINANCING STATEMENT, FIXTURE FILING, ASSIGNMENT OF RENTS AND LEASES AND SECURITY AGREEMENT (as amended, supplemented or otherwise modified from time to time, this "Deed of Trust") is made as of October __, 2003 by and from Hudson Respiratory Care Inc. ("Grantor"), with a taxpayer identification number of 95-1867330 and having an office at 27711 Diaz Road, Temecula, California 92589, to Chicago Title Company ("Trustee"), having an office at 560 E. Hospitality Lane, San Bernardino, California, for the benefit of Wells Fargo Foothill, Inc., a California corporation, having an office at 2450 Colorado Avenue, Suite 3000, Santa Monica, California 90404 ("Beneficiary"). Terms appearing in this Deed of Trust with an initial capital letter that are not otherwise defined herein, shall have the same respective meanings as such terms have in that certain Loan and Security Agreement by and among Grantor, as Borrower, the lenders that are signatories thereto, as Lenders, and Beneficiary, as the Arranger and Administrative Agent, dated as of October __, 2003 (as such may be amended, restated, supplemented or otherwise modified from time to time after the date hereof, the "Loan and Security Agreement"). Beneficiary and the Trustee are sometimes referred to herein collectively as the "Secured Parties." RECITALS WHEREAS, Grantor is the owner of a fee simple estate in the Land (as defined below); WHEREAS, pursuant to the Loan and Security Agreement the Lenders have agreed to make loan and credit Advances to Borrower in a principal amount not to exceed $30,000,000.00; WHEREAS, pursuant to the Loan and Security Agreement the Maturity Date of the loans and credit Advances made by Lenders to Borrower is October 1, 2007; WHEREAS, Grantor is receiving a good and valuable benefit, the sufficiency and receipt of which is hereby acknowledged, as a result of Beneficiary and Grantor entering into the Loan and Security Agreement; and WHEREAS, as a condition precedent to the lending of funds under the Loan and Security Agreement, the Lenders have required that Grantor grant this Deed of Trust and grant to Beneficiary, for the benefit of the Secured Parties, the liens and security interests referred to herein to secure (i) prompt and complete payment and performance of all of Grantor's obligations now or hereafter existing under the Loan and Security Agreement and other Loan Documents to which the Grantor is or may become a party, whether principal, interest, costs, fees, expenses or otherwise (including without limitation the "Obligations," as defined in the Loan and Security Agreement); and (ii) all other payment and performance obligations provided by this Deed of Trust in connection with the property mortgaged hereby, whenever incurred (all of the aforesaid obligations of Grantor to any of the Secured Parties, together with the other payment and performance obligations and liabilities described herein, being hereinafter referred to collectively as the "Obligations Secured"). GRANTING CLAUSE NOW, THEREFORE, in consideration of the foregoing recitals and to secure payment of the Obligations Secured and in consideration of Ten Dollars ($10.00) in hand paid, the receipt and sufficiency whereof are hereby acknowledged, GRANTOR DOES HEREBY IRREVOCABLY GRANT, ASSIGN, BARGAIN, SELL, TRANSFER, REMISE, RELEASE, ALIENATE, CONVEY, MORTGAGE, PLEDGE AND WARRANT TO TRUSTEE AND ITS SUCCESSORS AND ASSIGNS IN TRUST, WITH RIGHT OF ENTRY AND POWER OF SALE FOR THE BENEFIT OF BENEFICIARY AND ITS SUCCESSORS AND ASSIGNS, FOR THE PURPOSES SET FORTH IN THIS DEED OF TRUST, all right, title and interest of Grantor in and to that certain real property legally described in Exhibit A attached hereto (the "Land") located in the County of Riverside and the State of California (the "State"); together with all right, title and interest, if any, which Grantor may now have or hereafter acquire in and to all improvements, buildings and structures now or hereafter located thereon of every nature whatsoever (which, together with the Land, is herein called the "Premises"); TOGETHER WITH all right, title and interest, if any, including any after-acquired right, title and interest, and including any right of use or occupancy, which Grantor may now have or hereafter acquire in and to (a) all easements, rights of way, gores of land or any lands occupied by streets, ways, alleys, passages, sewer rights, air rights, water courses, water rights and powers, and public places adjoining said Land, and any other interests in property constituting appurtenances to the Premises, or which hereafter shall in any way belong, relate or be appurtenant thereto, and (b) all hereditaments, gas, oil, minerals (with the right to extract, sever and remove such gas, oil and minerals), and easements, of every nature whatsoever, located in or on the Land and all other rights and privileges thereunto belonging or appertaining and all extensions, additions, improvements, betterments, renewals, substitutions and replacements to or of any of the rights and interests described in subparagraphs (a) and (b) above (hereinafter the "Property Rights"); TOGETHER WITH all right, title and interest, if any, including any after-acquired right, title and interest, and including any right of use or occupancy, which Grantor may now or hereafter acquire in and to all fixtures and appurtenances of every nature whatsoever now or hereafter located in, on or attached to, or used or intended to be used in connection with, or with the operation of, the Premises, including, but not limited to (a) all apparatus, inventory, machinery and equipment of Grantor (the "Equipment"); and (b) all extensions, additions, improvements, betterments, renewals, substitutions and replacements to or of any of the foregoing (the "Fixtures"). It is mutually agreed, intended and declared that the Premises and all of the Property Rights, Equipment and Fixtures owned by Grantor (referred to collectively herein as the "Real Property") shall, so far as permitted by law, be deemed to form a part and parcel of the Land and for the purpose of this Deed of Trust to be real estate and covered by this Deed of Trust; 2 TOGETHER WITH all the estate, right, title and interest of the Grantor in and to (i) all judgments, insurance proceeds, awards of damages and settlements resulting from condemnation proceedings or the taking of the Real Property, or any part thereof, under the power of eminent domain or for any damage (whether caused by such taking or otherwise) to the Real Property, or any part thereof, or to any rights appurtenant thereto, and all proceeds of any sales or other dispositions of the Real Property or any part thereof; and (subject to the terms of the Loan and Security Agreement) Beneficiary is hereby authorized to collect and receive said awards and proceeds and to give proper receipts and acquittance therefor, and to apply the same unless otherwise provided in the Loan and Security Agreement, in any order determined by Beneficiary in its sole and absolute discretion, notwithstanding any instructions, directions or requests from Grantor; and (ii) all contract rights, general intangibles, actions and rights in action relating to the Real Property including, without limitation, all rights to insurance proceeds and unearned premiums arising from or relating to damage to the Real Property; and (iii) all proceeds, products, replacements, additions, substitutions, renewals and accessions of and to the Real Property. (The rights and interests described in this paragraph shall hereinafter be called the "Intangibles."); and Grantor (i) does hereby pledge and assign to Trustee for the benefit of Beneficiary from and after the date hereof (including any period of redemption), primarily and on a parity with the Real Property, and not secondarily, all the rents, issues and profits of the Real Property and all rents, issues, profits, revenues, royalties, bonuses, rights and benefits due, payable or accruing (including all deposits of money as advance rent, for security or as earnest money or as down payment for the purchase of all or any part of the Real Property) (the "Rents") under any and all present and future leases, contracts or other agreements relative to the ownership or occupancy of all or any portion of the Real Property; provided, however, that subject to the terms of the Loan and Security Agreement, until such time as an Event of Default has occurred and is continuing, Grantor shall have a license to collect such rents, and (ii) except to the extent such a transfer or assignment is prohibited by the terms thereof, does hereby transfer and assign to Trustee for the benefit of Beneficiary all such leases and agreements (including all Grantor's rights under any contracts for the sale of any portion of the Mortgaged Property (as defined below) and all Grantor's right, title and interest in and to all revenues and royalties under any oil, gas and mineral leases relating to the Real Property) (the "Leases"). All of the property described above, and each item of property therein described, not limited to but including the Land, the Premises, the Property Rights, the Equipment, the Fixtures, the Real Property, the Intangibles, the Rents and the Leases, is herein referred to as the "Mortgaged Property." Nothing herein contained shall be construed as constituting the Trustee or Beneficiary a mortgagee-in-possession in the absence of the taking of actual possession of the Mortgaged Property by Beneficiary. Nothing contained in this Deed of Trust shall be construed as imposing on Beneficiary any of the obligations of the lessor under any Lease of the Mortgaged Property in the absence of an explicit assumption thereof by Beneficiary. In the exercise of the powers herein granted Beneficiary, except as provided in the Loan and Security Agreement, no liability shall be asserted or enforced against Beneficiary, all such liability being expressly waived and released by Grantor. 3 TO HAVE AND TO HOLD the Mortgaged Property, properties, rights and privileges hereby conveyed or assigned, or intended so to be, unto Trustee, its beneficiaries, successors and assigns, for the benefit of Beneficiary, its successors and assigns, forever upon the trusts, terms and conditions and for the uses and purposes herein set forth. Grantor hereby releases and waives all rights of redemption under and by virtue of any of the laws, if any, of the State, and Grantor hereby covenants, represents and warrants that, at the time of the execution and delivery of this Deed of Trust, Grantor owns the Premises in fee simple, has the authority to sell, assign, convey and mortgage the Mortgaged Property, that Grantor's title to the Mortgaged Property is free and clear of all encumbrances, except for Permitted Liens, and that, except for the Permitted Liens, Grantor will forever defend the same against all claims in derogation of the foregoing. Grantor also acknowledges, represents and warrants that the execution, delivery and performance of this Deed of Trust have been duly authorized by all necessary action of Grantor, that when executed and delivered by the undersigned person on behalf of Grantor, this Deed of Trust will be a valid and binding obligation of Grantor, legally enforceable in accordance with its terms and that Grantor's execution of and performance under this Deed of Trust does not conflict with any other contract, agreement to which Grantor is a party or violate any other obligation of Grantor or any of its affiliates. It is also agreed that if any of the property herein mortgaged is of a nature so that a security interest therein can be perfected under the Uniform Commercial Code in effect in the State (the "Code"), this instrument shall constitute a security agreement, fixture filing and financing statement, and for that purpose, the following information is set forth: (a) In addition to the foregoing grant of mortgage, Grantor hereby grants a continuing security interest to the Trustee for the benefit of Beneficiary in all Fixtures and that portion of the Mortgaged Property with respect to which the creation and perfection of a lien is governed by the Code. (b) The "Debtor" is the Grantor and "Secured Party" is Beneficiary for the benefit of the Secured Parties. (c) The name and address of Debtor are the same as set forth for Grantor in the Preamble to this document. (d) The name and address of Secured Party are as set forth for Beneficiary in the Preamble to this document. (e) The description of the types or items of property covered by this financing statement and fixture filing is all of the Equipment, Fixtures and other property described or referred to in this Deed of Trust with respect to which Grantor has granted a security interest to Beneficiary pursuant to this Deed of Trust and for which a security interest may be perfected pursuant to the Code and laws of the State. (f) The description of real estate to which collateral is attached or upon which it is located: As set forth in Exhibit A. (g) The taxpayer identification number of the Debtor is as set forth in the Preamble to this document. 4 (h) Beneficiary is to file this Deed of Trust or a reproduction thereof, in the real estate records or other appropriate index, as a financing statement and/or fixture filing for any of the items specified herein as part of the Mortgaged Property. Any reproduction of this Deed of Trust or of any other security agreement or financing statement is sufficient as a financing statement and fixture filing. (i) Grantor agrees to execute, deliver, record, file and/or refile (and Grantor grants to Beneficiary the authority to do the same on Grantor's behalf) any financing statement, continuation statement, or other instruments Beneficiary may reasonably require from time to time to perfect or renew such security interest under the Code. To the extent permitted by law, (i) all of the Fixtures are or are to become fixtures on the Land and (ii) this instrument, upon recording or registration in the real estate records of the proper office, shall constitute a financing statement and "fixture-filing" within the meaning of Sections 9102 and 9502 of the Code. Subject to the terms and conditions of the Loan and Security Agreement, the remedies for any violation of the covenants, terms and conditions of the agreements herein contained shall be as prescribed herein or by general law, or, as to that part of the security in which a security interest may be perfected under the Code, by the specific statutory consequences now or hereafter enacted and specified in the Code, all at Beneficiary's sole election. THE FOLLOWING PROVISIONS SHALL ALSO CONSTITUTE AN INTEGRAL PART OF THIS DEED OF TRUST: Section 1. Payment of Taxes on the Deed of Trust. Without limiting any of the provisions of the Loan and Security Agreement, Grantor agrees that, if the government of the United States or any department, agency or bureau thereof or if the State or any of its subdivisions having jurisdiction shall at any time require documentary stamps to be affixed to this Deed of Trust or shall levy, assess, or charge any tax, assessment or imposition upon this Deed of Trust or the credit or indebtedness secured hereby or the interest of any Secured Party in the Premises or upon any Secured Party by reason of or as holder of any of the foregoing then, Grantor shall pay for such documentary stamps in the required amount and deliver them to Beneficiary or pay (or reimburse Beneficiary for) such taxes, assessments or impositions. Grantor agrees to exhibit to Beneficiary, at any time upon request, official receipts showing payment of all taxes, assessments and charges that Grantor is required or elects to pay under this paragraph. Grantor agrees to indemnify each Secured Party against liability on account of such documentary stamps, taxes, assessments or impositions. Section 2. Leases Affecting the Real Property. All future lessees under any Lease made after the date of recording of this Deed of Trust shall, at Beneficiary's option and without any further documentation, attorn to Beneficiary as lessor if for any reason Beneficiary becomes lessor thereunder, and, upon demand after an Event of Default, pay rent to Beneficiary, and Beneficiary shall not be responsible under such Lease for matters arising prior to Beneficiary becoming lessor thereunder; provided, however, Beneficiary shall not become lessor or obligated as lessor under any such Leases unless or until it shall elect in writing to do so. Section 3. Use of the Real Property. Grantor further covenants that (except as otherwise provided in the Loan Documents) it shall not institute or acquiesce in any proceeding to change the zoning classification of the Real Property, nor shall Grantor change the use of the 5 Mortgaged Property without the prior written consent of Beneficiary, which shall not be unreasonably withheld. Section 4. Indemnity. Grantor hereby agrees to indemnify and hold harmless the Secured Parties against (i) any and all transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of this Deed of Trust and the other Loan Documents, and (ii) any and all claims, actions, liabilities, costs and expenses of any kind or nature whatsoever (including reasonable fees and disbursements of counsel) that may be imposed on, incurred by, or asserted against any of them, in any way relating to or arising out of the Mortgaged Property, this Deed of Trust or any action taken or omitted by the Secured Parties hereunder, except to the extent that they resulted from the gross negligence or willful misconduct of any such Secured Party. Section 5. Insurance. Grantor shall, at its sole expense, obtain for, deliver to, assign and maintain for the benefit of Beneficiary, until the Obligations Secured are paid in full, insurance policies as specified in the Loan and Security Agreement. Each such policy shall name Beneficiary as loss payee under a standard mortgage endorsement. In the event of a casualty loss, the net insurance proceeds from such insurance policies shall be paid and applied in any order determined by Beneficiary in its reasonable discretion towards the Obligations Secured, unless otherwise provided in the Loan and Security Agreement. After an Event of Default (and subject to the terms of the Loan and Security Agreement), Beneficiary shall be entitled to adjust any casualty loss and Beneficiary shall be entitled to apply the proceeds thereof as provided in Section 10 of this Deed of Trust. Section 6. Real Property Taxes. Subject to good faith contest by the Grantor in accordance with the provisions of the Loan Documents, Grantor covenants and agrees to pay before due all real property taxes, assessments, ground rent, if any, water and sewer rents, fees and charges, levies, permit, inspection and license fees and other dues, charges or impositions, including all charges and license fees for the use of vaults, chutes and similar areas adjoining the Land, maintenance and similar charges and charges for utility services, in each instance whether now or in the future, directly or indirectly, levied, assessed or imposed on the Mortgaged Property or Grantor and whether levied, assessed or imposed as excise, privilege or property taxes ("Property Taxes"). Section 7. Condemnation Awards. Grantor hereby assigns to Beneficiary, as additional security, all awards of damage resulting from condemnation proceedings or the taking of or injury to the Real Property for public use, and Grantor agrees that the proceeds of all such awards shall be paid and applied in any order determined by Beneficiary in its reasonable discretion towards the Obligations Secured, unless otherwise provided in the Loan and Security Agreement. After an Event of Default (and subject to the terms of the Loan and Security Agreement), Beneficiary shall be entitled to direct any condemnation proceeding and Beneficiary shall be entitled to apply the proceeds thereof as provided in Section 10 of this Deed of Trust. Section 8. Event of Default. The following shall constitute an "Event of Default" under this Deed of Trust: 6 (a) The occurrence of an "Event of Default" as such term is defined in the Loan and Security Agreement; or (b) With respect to occurrences which do not constitute an Event of Default under the Loan and Security Agreement, any breach or default of the terms of this Deed or Trust by Grantor which is not cured within the following timeframes after receipt of written notice from Beneficiary: (i) ten (10) days for default or breach of any monetary obligation of Grantor set forth herein; or (ii) thirty (30) days for default or breach of any non-monetary obligation of Grantor set forth herein (or such longer period as may be reasonably required to cure; provided Grantor commences such cure within thirty (30) days and diligently prosecutes such cure to completion). Section 9. Remedies. Following an Event of Default, in addition to any rights and remedies provided for elsewhere in this Deed of Trust, the Loan and Security Agreement or in any other Loan Documents, and to the extent permitted by applicable law, subject to the terms of the Intercreditor Agreement, the following provisions shall apply: (a) Beneficiary's Power of Enforcement. Beneficiary may, at Beneficiary's sole discretion, (i) immediately cause the Trustee to sell the Mortgaged Property either in whole or in separate parcels, as prescribed by the laws of the State, under right of entry and power of sale, which power of sale (along with a right of entry) is hereby granted to Trustee to the full extent permitted by the law of the State, and thereupon, to make and execute to any purchasers thereof deeds of conveyance pursuant to applicable law; or (ii) immediately foreclose this Deed of Trust by judicial action pursuant to the law of the State. The court in which any proceeding is pending for the purpose of foreclosure of this Deed of Trust may, at once or at any time thereafter, either before or after sale, without notice and without requiring bond, and without regard to the solvency or insolvency of any person liable for payment of the Obligations Secured hereby, and without regard to the then value of the Mortgaged Property or the occupancy thereof as a homestead, appoint a receiver (the provisions for the appointment of a receiver and assignment of rents being an express condition upon which the obligations secured hereby are made) for the benefit of the Secured Parties, with power to collect the Rents, due and to become due, during such foreclosure suit and the full statutory period of redemption notwithstanding any redemption. The receiver, out of the Rents when collected, may pay costs incurred in the management and operation of the Real Property, prior and subordinate liens, if any, and taxes, assessments, water and other utilities and insurance, then due or thereafter accruing, and may make and pay for any necessary repairs to the Real Property, and may pay all or any part of the Obligations Secured or other sums secured hereby or any deficiency decree entered in such foreclosure proceedings. Upon or at any time after the filing of a suit to foreclose this Deed of Trust, the court in which such suit is filed shall have full power to enter an order placing Beneficiary in possession of the Real Property with the same power granted to a receiver pursuant to this subparagraph and with all other rights and privileges of a mortgagee-in possession under applicable law. (b) Beneficiary's Right to Enter and Take Possession, Operate and Apply Income. Beneficiary shall, at its option, have the right, acting through its agents or attorneys or a receiver, with process of law, to enter upon, take possession of, and, to the extent applicable, remove the Real Property and other Collateral located thereon, expel and remove any persons, goods, or chattels occupying or upon the same, to collect or receive all the Rents, and to manage and 7 control the same, and to lease the same or any part thereof, from time to time, and, after deducting all reasonable attorneys' fees and expenses, and all reasonable expenses incurred in the protection, care, maintenance, management and operation of the Real Property and other Collateral located thereon, distribute and apply the remaining net income in such order and to such of the Obligations Secured as Beneficiary may determine in its sole discretion (subject to the terms of the Loan and Security Agreement) or in accordance with any deficiency decree entered in any foreclosure proceedings. (c) Foreclosure by Power of Sale. Should Beneficiary elect to foreclose by exercise of the power of sale contained herein, Beneficiary will notify Trustee and will deposit with Trustee this Deed of Trust and evidence of the Obligations Secured and such receipts and evidence of expenditures made and secured hereby as Trustee may require. Trustee will exercise such power of sale in accordance with the following: (i) Upon receipt of such notice from Beneficiary, Trustee will cause to be recorded, mailed or delivered to Grantor such notice of default and election to sell as is then required by law and by this Deed of Trust. Trustee will, without demand on Grantor, after lapse of such time as may then be required by law and after recordation of such notice of default and after notice of sale has been given as required by law, sell the Mortgaged Property at the time and place of sale fixed by Trustee in said notice of sale, either as a whole, or in separate lots or parcels or items as Trustee deems expedient, and in such order as it may determine, at public auction, to the highest bidder for cash in lawful money of the United States payable at the time of sale. Trustee will deliver to such purchaser or purchasers thereof its good and sufficient deed or deeds conveying the property so sold, but without any covenant or warranty, express or implied. The recitals in such deed of any matters or facts will be conclusive proof of the truthfulness thereof. Any person, including without limitation Grantor, Trustee or Beneficiary, may purchase at such sale. Beneficiary, if it is the purchaser, may tender to Trustee evidence of the Obligations Secured at the amount owing thereon toward payment of the purchase price (or for endorsement of the purchase price as a payment on the Obligations Secured if the amount owing thereon exceeds the purchase price). Grantor expressly waives, to the extent waivable under law, any right of redemption after sale that Grantor may have at the time of sale or that may apply to the sale. (ii) After deducting all costs, fees and expenses of Trustee and of this Deed of Trust, including costs of evidence of title in connection with sale and reasonable Trustee's and attorneys' fees for conducting the sale, Trustee will apply the proceeds of sale to payment of all sums expended under the terms hereof and not then repaid (with accrued interest at the highest interest rate applicable to the Obligations Secured after an Event of Default), and to all other sums then secured hereby in such order as Beneficiary determines in its sole discretion (subject to the terms of the Loan and Security Agreement), and the remainder, if any, to the persons legally entitled thereto. (iii) At Beneficiary's direction, Trustee may postpone sale of all or any portion of the Mortgaged Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at the time fixed by the preceding postponement or by subsequently noticed sale, and 8 without further notice make such sale at the time fixed by the last postponement; or Trustee may, in its discretion, give a new notice of sale. Beneficiary may rescind any such notice of default at any time before Trustee's sale by executing a notice of rescission and recording the same. Section 10. Application of the Rents or Proceeds from Foreclosure or Sale. In any foreclosure of this Deed of Trust by judicial action, or any sale of the Mortgaged Property by advertisement, subject to the terms and provisions of the Loan and Security Agreement, there shall be allowed (and included in the decree for sale in the event of a foreclosure by judicial action) to be paid out of the Rents or the proceeds of such foreclosure proceeding and/or sale: (a) Obligations Secured. All of the Obligations Secured and other sums secured hereby which then remain unpaid; and (b) Other Advances. All other items advanced or paid by Beneficiary pursuant to this Deed of Trust; and (c) Costs, Fees and Other Expenses. All court costs, reasonable attorneys' and paralegals' fees and expenses, appraiser's fees, environmental audit, testing and survey fees, advertising costs, filing fees and transfer taxes, notice expenses, expenditures for documentary and expert evidence, stenographer's charges, publication costs, and costs (which may be estimated as to items to be expended after entry of the decree) of procuring all abstracts of title, title searches and examinations, title guarantees, title insurance policies, Torrens certificates and similar data with respect to title which Beneficiary in the reasonable exercise of its judgment may deem necessary. All such expenses shall become additional Obligations Secured hereby when paid or incurred by Beneficiary in connection with any proceedings, including but not limited to probate and bankruptcy proceedings, to which any Secured Party shall be a party, either as plaintiff, claimant or defendant, by reason of this Deed of Trust or any indebtedness hereby secured or in connection with the preparations for the commencement of any suit for the foreclosure, whether or not actually commenced, or sale by advertisement. The proceeds of any sale (whether through a foreclosure proceeding or Beneficiary's exercise of the power of sale) shall be distributed and applied in such order and to such of the Obligations Secured as Beneficiary may determine in its sole discretion, subject to the terms and provisions of the Loan and Security Agreement. Unless otherwise provided in the Loan and Security Agreement, Beneficiary shall apply the rents or proceeds received by such foreclosure proceeding and/or sale in any order determined by Beneficiary in its sole and absolute discretion. Section 11. Cumulative Remedies; Delay or Omission Not a Waiver. Each remedy or right of Beneficiary shall not be exclusive of but shall be in addition to every other remedy or right now or hereafter existing at law or in equity. No delay in the exercise or omission to exercise any remedy or right accruing on the occurrence or existence of any Event of Default shall impair any such remedy or right or be construed to be a waiver of any such Event of Default or acquiescence therein, nor shall it affect any subsequent Event of Default of the same or different nature. Every such remedy or right may be exercised concurrently or independently and when and as often as may be deemed expedient by Beneficiary. 9 Section 12. Beneficiary's Remedies against Multiple Parcels. If more than one property, lot or parcel is covered by this Deed of Trust, and if this Deed of Trust is foreclosed upon, or judgment is entered upon any Obligations Secured hereby, or if Beneficiary causes the Trustee to exercise its power of sale, execution may be made upon or Beneficiary may cause the Trustee to exercise its power of sale against any one or more of the properties, lots or parcels and not upon the others, or upon all of such properties or parcels, either together or separately, and at different times or at the same time, and execution sales or sales by advertisement may likewise be conducted separately or concurrently, in each case at Beneficiary's election. Section 13. No Merger. In the event of a foreclosure of this Deed of Trust or any other mortgage or trust deed securing the Obligations Secured, the Obligations Secured then due Beneficiary shall, at Beneficiary's option, not be merged into any decree of foreclosure entered by the court, and Beneficiary may concurrently or subsequently seek to foreclose one or more mortgages or deeds of trust which also secure said Obligations Secured. Section 14. Notices. All notices and other communications provided to any party hereto under this Deed of Trust shall be in writing and shall be given in the manner, within the time periods and to the addressees identified in the Loan and Security Agreement, provided that notices to the Trustee shall be addressed to Trustee at the address provided in the Preamble to this Deed of Trust. Section 15. Extension of Payments. Grantor agrees that, without affecting the liability of any person for payment of the Obligations Secured hereby or affecting the lien of this Deed of Trust upon the Mortgaged Property or any part thereof (other than persons or property explicitly released as a result of the exercise by Beneficiary of its rights and privileges hereunder), Beneficiary may at any time and from time to time, on request of the Grantor, without notice to any person liable for payment of any Obligations Secured, but otherwise subject to the provisions of the Loan and Security Agreement, extend the time, or agree to alter or amend the terms of payment of such Obligations Secured, provided, however, that such actions of Beneficiary are expressly limited by the terms and provisions of the Loan and Security Agreement. Grantor further agrees that any part of the security herein described may be released with or without consideration without affecting any other mortgage, deed of trust or other instrument now or hereafter given to secure the Obligations Secured or otherwise without affecting the remainder of the Obligations Secured or the remainder of the security. Section 16. Governing Law. The provisions of this Deed of Trust shall be governed by the laws of the State, without regard to conflicts of law principles. Section 17. Satisfaction of Deed of Trust. Upon full payment and performance of all the Obligations Secured, at the time and in the manner provided in the applicable Loan Document, or upon satisfaction of the conditions set forth in the Loan and Security Agreement for release of the Mortgaged Property from this Deed of Trust, then upon demand therefor following such payment or satisfaction of the conditions set forth in the Loan and Security Agreement for release of the Mortgaged Property, as the case may be, a satisfaction of mortgage or reconveyance of the Mortgaged Property shall promptly be provided by Beneficiary to Grantor. 10 Section 18. Successors and Assigns Included in Parties. This Deed of Trust shall be binding upon the Grantor and upon the successors, assigns and vendees of the Grantor and shall inure to the benefit of the Secured Parties' respective successors and assigns; all references herein to the Grantor and to Beneficiary shall be deemed to include their respective successors and assigns. Grantor's successors and assigns shall include, without limitation, a receiver, trustee or debtor in possession of or for the Grantor. Wherever used, the singular number shall include the plural, the plural shall include the singular, and the use of any gender shall be applicable to all genders. Notwithstanding anything to the contrary set forth herein, except as expressly permitted pursuant to the terms of the Loan and Security Agreement, Grantor shall not sell, transfer, pledge, encumber (except for Permitted Liens), create a security interest in, ground lease, or otherwise hypothecate (collectively "Transfer"), all or any portion of the Mortgaged Property without the prior written consent of Beneficiary. The consent by Beneficiary to any Transfer of any portion of the Mortgaged Property shall not be deemed to constitute a novation or a consent to any further Transfer or to waive the right of Beneficiary, at its option, to declare the indebtedness secured hereby immediately due and payable, without notice to Grantor or any other person or entity, upon any such attempted Transfer to which beneficiary shall not have consented. Section 19. Waiver of Appraisement, Valuation, Stay, Extension and Redemption Laws. Grantor agrees, to the full extent permitted by law, that at all times following an Event of Default, neither Grantor nor anyone claiming through or under it shall or will set up, claim or seek to take advantage of any appraisement, valuation, stay, homestead or extension laws now or hereafter in force, in order to prevent or hinder the enforcement or foreclosure of this Deed of Trust or the absolute sale of the Mortgaged Property or the final and absolute putting into possession thereof, immediately after such sale, of the purchaser thereat; and Grantor, for itself and all who may at any time claim through or under it, hereby waives, to the full extent that it may lawfully so do, the benefit of all such laws and any and all right to have the assets comprising the Mortgaged Property marshaled upon any foreclosure of the lien hereof and agrees that Trustee or any court having jurisdiction to foreclose such lien may sell the Mortgaged Property in part or as an entirety. To the full extent permitted by law, Grantor hereby irrevocably waives any and all statutory or other rights of redemption from sale under any order or decree of foreclosure of this Deed of Trust, on its own behalf and on behalf of each and every person acquiring any interest in or title to the Mortgaged Property subsequent to the date hereof. Grantor further waives, to the full extent it may lawfully do so, all statutory or other rights in its favor, limiting concurrent actions to foreclose this Deed of Trust and exercising other rights with respect to the Obligations Secured, including, without limitation, any right vested in Grantor or any affiliate to limit the right of Beneficiary to pursue or commence concurrent actions against Grantor or any such affiliate or any property owned by any one or more of them. Section 20. Interpretation with Other Documents. Notwithstanding anything in this Deed of Trust to the contrary: (a) in the event of a conflict or inconsistency between this Deed of Trust and the Loan and Security Agreement, the provisions of the Loan and Security Agreement shall govern; and (b) to the extent set forth in the Loan and Security Agreement, the exercise of any right or remedy by Beneficiary under this Deed of Trust shall be done in accordance with and is subject to the terms and provisions of the Loan and Security Agreement. 11 Section 21. Future Advances. This Deed of Trust is given in part for the purpose of securing loan advances which Beneficiary may make to or for the benefit of Grantor as Borrower pursuant and subject to the terms and provisions of the Loan and Security Agreement, which may include future advances under one or more revolving credit lines not to exceed a maximum aggregate principal amount at any one time outstanding of $30,000,000.00 (which limit shall not include Overadvances or Agent Advances or the Secured Parties' costs, fees and expenses set forth in Section 10 of this Deed of Trust). The parties hereto intend that, in addition to any other debt or obligation secured hereby, this Deed of Trust shall secure unpaid balances of revolving credit loan advances made after this Deed of Trust is delivered to the offices in which mortgages are recorded in the applicable county of the State (including, without limitation, advances made pursuant to Letters of Credit) and in such event, such revolving credit future advances shall be secured to the same extent as if such advances were made on the date hereof, although there may be no credit or advance made at the time of execution hereof, although there may be no indebtedness outstanding at the time any advance is made and although such advance may from time to time be repaid to zero balance and thereafter re-advanced. Such loan advances may or may not be evidenced by guarantees or notes executed pursuant to the Loan and Security Agreement. Section 22. Invalid Provisions to Affect No Others. Wherever possible, each provision of this Deed of Trust shall be interpreted in such manner as to be effective and valid under applicable law, but in the event that any of the covenants, agreements, terms or provisions contained in this Deed of Trust shall be invalid, illegal or unenforceable in any respect, the validity of the remaining covenants, agreements, terms or provisions contained herein or in the Loan and Security Agreement shall not be in any way affected, prejudiced or disturbed thereby. In the event that the application of any of the covenants, agreements, terms or provisions of this Deed of Trust is held to be invalid, illegal or unenforceable, those covenants, agreements, terms and provisions shall not be in any way affected, prejudiced or disturbed when otherwise applied. Section 23. Changes. Neither this Deed of Trust nor any term hereof may be changed, waived, discharged or terminated orally, or by any action or inaction, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. To the extent permitted by law, any agreement hereafter made by Grantor and Beneficiary relating to this Deed of Trust shall be superior to the rights of the holder of any intervening lien or encumbrance. Section 24. Consent to Jurisdiction; Waiver of Immunities. The Grantor hereby acknowledges and agrees that: (a) With respect to the provisions of this Deed of Trust regarding the creation, perfection and enforcement of the liens and security interests herein granted, Grantor irrevocably submits to the jurisdiction of any state or federal court sitting in the State, in any action or proceeding arising out of or relating to this Deed of Trust, and the Grantor hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such State's state or federal court. The Grantor hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding. The Grantor hereby irrevocably consents to the service of any and all process in any such action or proceeding by the mailing of copies of such process to the Grantor at its address 12 provided in the preamble to this Deed of Trust along with a copy to the addressees provided in the Loan and Security Agreement. The Grantor agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (b) Nothing in this Section shall affect the right of Beneficiary to serve legal process in any other manner permitted by law or affect the right of Beneficiary to bring any action or proceeding against the Grantor or its property arising out of or relating to this Deed of Trust or any other of the Loan Documents in any court having jurisdiction under the provisions therein or under applicable law. (c) To the extent that the Grantor has or hereafter may acquire any immunity from the jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, the Grantor hereby irrevocably waives such immunity with respect to its obligations under this Deed of Trust. Section 25. Time of Essence. Time is of the essence with respect to the provisions of this Deed of Trust. Section 26. No Strict Construction. The parties hereto have participated jointly in the negotiation and drafting of this Deed of Trust. In the event an ambiguity or question of intent or interpretation arises, this Deed of Trust shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Deed of Trust. Section 27. Beneficiary's Right to Appear. Beneficiary shall have the right to appear in and defend any legal proceeding brought regarding the Mortgaged Property and to bring any legal proceeding, in the name and on behalf of Grantor or in Beneficiary's name, that Beneficiary, in its sole discretion, determines should be brought to protect Beneficiary's or the Secured Parties' interest in the Mortgaged Property. Section 28. Savings Clause. Any provision of this Deed of Trust that is prohibited or unenforceable in any jurisdiction, will, 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 will not invalidate or render unenforceable such provision in any other jurisdiction. Section 29. Trustee Provisions. (a) Trustee accepts this Deed of Trust and the Trust created hereby upon execution and delivery of this Deed of Trust. Except as provided by law, Trustee is not obligated to notify any party of a pending sale under this Deed of Trust or of a proceeding in which any Secured Party or Trustee is a party. (b) Trustee shall be under no duty to take any action hereunder except as expressly required herein or by law, or to perform any act which would involve Trustee in any expense or liability or to institute or defend any suit in respect hereof, unless properly 13 indemnified to Trustee's reasonable satisfaction. Trustee, by acceptance of this Deed of Trust, covenants to perform and fulfill the trusts herein created, being liable, however, only for willful negligence or misconduct, and hereby waives any statutory fee and agrees to accept reasonable compensation, in lieu thereof, for any services rendered by Trustee in accordance with the terms hereof. Trustee may resign at any time upon giving thirty (30) days' notice to Grantor and to Beneficiary. Beneficiary in its sole and absolute discretion and with or without cause may unilaterally remove Trustee at any time or from time to time and select a successor trustee. In the event of the death, removal, resignation, refusal to act, or inability to act of Trustee, or in its sole and absolute discretion for any reason whatsoever Beneficiary may, without notice and without specifying any reason therefor and without applying to any court, select and appoint a successor trustee, by an instrument recorded wherever this Deed of Trust is recorded and all powers rights, duties and authority of Trustee, as aforesaid, shall thereupon become vested in such successor and without conveyance of the Mortgaged Property, the successor trustee shall succeed to all the title, powers, and duties conferred upon Trustee herein and by applicable law as if the successor had been named Trustee at the time this Deed of Trust was recorded. Such substitute trustee shall not be required to give bond for the faithful performance of the duties of Trustee hereunder unless required to do so by Beneficiary. Grantor shall pay all costs, fees and expenses incurred by Trustee and Trustee's agents and counsel in connection with the performance by Trustee of Trustee's duties hereunder and all such costs, fees and expenses shall be secured by this Deed of Trust. Section 30. Additional Provisions Pertaining to State Laws. (a) Proof of Default. In the event of a sale of the Mortgaged Property or any part thereof upon an Event of Default and in accordance with applicable law, and the execution of a deed therefor, such deed and the recitals therein (i) of default, (ii) of recording the notice of breach and election of sale, (iii) of the elapsing of the required time (if any) between the foregoing recording and the following notice, (iv) of the giving of notice of sale, and (v) of a demand by Beneficiary, or its successors or assigns, will be effective and conclusive against Grantor, its successors and assigns, and all other persons; and the receipt for the purchase money recited or contained in any deed executed to the purchaser as aforesaid will be sufficient to discharge such purchaser from any and all obligations to ensure the proper application of the purchase money. (b) Additional Security Agreement Provisions. Grantor shall (and Grantor upon the occurrence and during the continuation of an Event of Default hereunder irrevocably constitutes and appoints Beneficiary the attorney-in-fact of Grantor to) execute, deliver and, if appropriate, file with the appropriate filing officer or office such security agreements, financing statements, continuation statements or other instruments as Beneficiary may request or require in order to impose, perfect or continue the perfection of the security interests created hereby in those portions of the Mortgaged Property that are personal property subject to the Code (the "Personal Property Collateral"). Grantor will pay (or reimburse Beneficiary for) all costs of filing such statements and renewals and releases thereof and will pay all reasonable costs and expenses of any record searches for financing statements that Beneficiary may reasonably require. Upon the occurrence of any Event of Default hereunder, Beneficiary will have the right to access and remove any of the Collateral that is Personal Property and to cause the same to be sold at any one or more public or private sales as permitted by the Code or other applicable law, 14 and Beneficiary will further have all other rights and remedies, whether at law, in equity or by statute, as are available to secured creditors under the Code or other applicable law. Any such disposition may be conducted by an employee or agent of Beneficiary or Trustee. Any person, including both Grantor and Beneficiary, will be eligible to purchase any part or all of such personal property collateral at any such disposition. Grantor, upon demand of Beneficiary, will assemble the personal property collateral and make it available to Beneficiary at the Land, a place which is hereby deemed to be reasonably convenient to Beneficiary and Grantor. Beneficiary will give Grantor at least five (5) business days' prior written notice of the time and place of any public sale or other disposition of such personal property collateral or of the time on or after which any private sale or any other intended disposition is to be made, and if such notice is sent to Grantor in the manner provided for the mailing of notices herein, Grantor acknowledges that such notice will be and is reasonable notice to Grantor. (c) Actions Affecting Personal Property Collateral. Grantor, at Grantor's sole cost and expense, will appear in, defend and contest any action or proceeding purporting to affect any of the collateral that is personal property or the security interests therein created by this Deed of Trust or any of the other Loan Documents or the rights or powers of Trustee or Beneficiary hereunder or thereunder. Grantor will pay all reasonable costs and expenses incurred by Trustee or Beneficiary, including the cost of evidence of title and attorneys' fees and costs, in any such action or proceeding in which Trustee or Beneficiary may appear. (d) Request for Notices. Grantor requests that copies of any notice of default and any notice of sale hereunder be mailed to it at the address provided in the preamble to this Deed of Trust. (e) Beneficiary Statements. For each statement of accounting as to the obligations secured hereby furnished at Grantor's request, Grantor shall pay Beneficiary the fee provided for pursuant to Section 2943(e)(6) of the California Civil Code, as amended from time to time. Grantor also will pay the charges of Beneficiary pursuant to Section 2941(e)(1) of the California Civil Code, as amended from time to time, for any other service rendered to Grantor, or on its behalf, in connection with this Deed of Trust or the obligations secured hereby, including, without limitation the delivery to an escrow holder of a request for full or partial reconveyance of this Deed of Trust or charges due to transferring or transmitting records pertaining to this Deed of Trust and the Obligations Secured to a new owner of the Mortgaged Property. (f) Code of Civil Procedure Section 736. Beneficiary will have all of the rights, privileges and remedies of a secured lender under Section 736 of the California Code of Civil Procedure, as amended from time to time. (g) Code of Civil Procedure Section 726.5. In accordance with California Code of Civil Procedure Section 726.5, Beneficiary may waive its lien against the Mortgaged Property or any portion thereof, to the extent such property is found to be environmentally impaired, and may exercise any and all rights and remedies of an unsecured creditor against Grantor and all of Grantor's assets and property for the recovery of any deficiency, including, without limitation, seeking an attachment order under California Code of Civil Procedure Section 483.010. No such waiver shall be final or binding on Beneficiary unless and until a final money judgment is 15 obtained against Grantor. As between Beneficiary and Grantor, for purposes of California Code of Civil Procedure Section 726.5, Grantor shall have the burden of proving that the release or threatened release was not knowingly or negligently caused or contributed to, or knowingly or willfully permitted or acquiesced to by Grantor or any related party (or any Subsidiary, affiliate or agent of Grantor or any related party) and that Grantor made written disclosure thereof to Beneficiary or that Beneficiary otherwise obtained actual knowledge thereof prior to the making of the Loan and Security Agreement. Notwithstanding anything to the contrary contained in this Deed of Trust or any of the Loan Documents, Grantor shall be fully and personally liable for all judgments and awards entered against Grantor pursuant to California Code of Civil Procedure 726.5 and such liability shall not be limited by the original principal amount of the obligations secured by this Deed of Trust. Grantor's obligations hereunder shall survive the foreclosure, deed in lieu of foreclosure, release, reconveyance or any other transfer of the Mortgaged Property or this Deed of Trust. For the purposes of any action brought under this Deed of Trust, Grantor hereby waives the defense of laches and any applicable statute of limitations. For purposes of California Code of Civil Procedure 726.5, the acts, knowledge and notice of each "726.5 Party" shall be attributed to and be deemed to have been performed by the party or parties then obligated on or liable for payment of the indebtedness. As used herein, "726.5 Party" shall mean Grantor, any partner thereof, any successor owner of Grantor of all or any portion of the Mortgaged Property, any Subsidiary or related party of Grantor or any such successor and any affiliate or agent of such party or any such related party. (h) Code of Civil Procedure (S) 1265.225(a). Grantor hereby unconditionally and irrevocably waives all rights of a property owner under the provisions of California Code of Civil Procedure (S) 1265.225(a), or any successor statute, providing for the allocation of condemnation proceeds between a property owner and a lienholder. (i) Obligations Remain. The provisions of this Deed of Trust shall remain in full force and effect notwithstanding (i) any partial release of Grantor from any liability with respect to the Obligations Secured; or (ii) any partial release or subordination of any real or personal property now or hereafter held by Beneficiary as security for the performance of the Obligations Secured. (j) Waiver. (i) Grantor expressly waives any and all benefits which might otherwise be available to Grantor under California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2849, 2850, 2899 and 3433. (ii) Grantor hereby waives any and all defenses, including but not limited to Grantor's defense of estoppel discussed in Union Bank vs. Gradsky (1968) 265 Cal.App.2d 40, based upon a foreclosure against all or any part of the real property security for the indebtedness evidenced by the Loan and Security Agreement and the Loan Documents pursuant to the power of sale contained in this Deed of Trust or any of the additional deeds of trust as opposed to proceeding by way of judicial foreclosure. Grantor waives all rights and defenses arising out of an election of remedies by Beneficiary, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, 16 has destroyed Grantor's rights of subrogation and reimbursement by the operation of Section 580d of the Code of Civil Procedure or otherwise. (iii) Grantor hereby waives all rights and defenses that Grantor may have because any of Grantor's debt is secured by real property. This means, among other things: (i) Beneficiary may collect from Grantor without first foreclosing on any real or personal property collateral pledged by Grantor; and (ii) if Beneficiary forecloses on any real property collateral pledged by Grantor (A) the amount of debt may be reduced only by the price for which the collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price, and (B) Beneficiary may collect from Grantor even if Beneficiary, by foreclosing on the real property collateral, has destroyed any right Grantor may have to collect from any other party. This is an unconditional and irrevocable waiver of any rights and defenses Grantor may have because Grantor's debt is secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure. (iv) In the case of a power of sale foreclosure under this Deed of Trust or any other deed of trust entered into by the parties as security for the Obligations Secured, the fair market value of the real property collateral shall be conclusively deemed to be the amount of the successful bid at the foreclosure sale. Grantor waives any rights or benefits it may now or hereafter have to a fair value hearing under Section 580a of the California Code of Civil Procedure. Beneficiary shall have absolutely no obligation to make a bid at any foreclosure sale, but rather may make no bid or bid any amount which Beneficiary, in its sole discretion, deems appropriate. (v) Grantor hereby irrevocably authorizes Beneficiary, at Beneficiary's sole discretion, to apply any and all amounts received by Beneficiary in repayment of the Obligations Secured first to amounts which are guaranteed pursuant to the terms of the Deed of Trust and then to amounts which are not guaranteed pursuant to the terms of the Deed of Trust, if any. Grantor hereby waives any and all rights that it has or may hereafter have under Section 2822 of the California Civil Code which provides that if a guarantor is "liable upon only a portion of an obligation and the principal provides partial satisfaction of the obligation, the principal may designate the portion of the obligation that is to be satisfied." (vi) Beneficiary acknowledges that the provisions of this Section 30(j) are intended to constitute a waiver of any rights and defenses Grantor may now or hereafter have as a "guarantor" to the extent this Deed of Trust is construed to be in whole or in part a guaranty of any of its Subsidiaries' obligations under the Loan and Security Agreement or the Loan Documents. (k) Attorneys' Fees. Subject to the terms of the Loan and Security Agreement, if the Obligations Secured are not paid when due or if any other Event of Default occurs, Grantor shall pay all costs of enforcement and collection, including reasonable attorneys' fees, whether or not such enforcement and collection includes a legal proceeding. As used in this Deed of Trust, the term "attorneys' fees" or "attorneys' fees and costs" will mean the fees and expenses of counsel to the parties hereto, which may include printing, photostating, duplicating and other expenses, air freight charges, and fees billed for law clerks, paralegals, librarians and others not 17 admitted to the bar but performing services under the supervision of an attorney. The terms "attorneys' fees" or "attorneys' fees and costs" will also include all such fees and expenses incurred with respect to appeals, arbitrations, bankruptcy proceedings and any post-judgment proceedings to collect any judgment, and whether or not any legal proceeding is brought with respect to the matter for which said fees and expenses were incurred. (l) Controlling Provisions. In the event of any conflict between this Section 30 and any other provisions of this Deed of Trust (other than Section 20 which shall govern), the provisions of this Section 30 will control. (m) Additional Remedies. Without limiting any other provisions of this Deed of Trust but subject to the terms of the Loan and Security Agreement, Beneficiary shall have the following additional rights and remedies upon the occurrence of an Event of Default: (i) Beneficiary may deliver to Trustee a written declaration of default and demand for sale, and a written notice of default and election to cause Grantor's interest in the Mortgaged Property to be sold, which notice Trustee or Beneficiary shall cause to be duly filed for record in the Official Records of the county in which the Mortgaged Property is located. (ii) Beneficiary may exercise all other rights and remedies provided herein, in the Loan and Security Agreement or other document or agreement now or hereafter securing all or any portion of the obligations secured hereby, or by law. (iii) Should Beneficiary elect to foreclose by exercise of the power of sale herein contained, Beneficiary shall notify Trustee and shall deposit with Trustee this Deed of Trust and such receipts and evidence of expenditures made and secured hereby as Trustee may require. (1) Upon receipt of such notice from Beneficiary, Trustee shall cause to be recorded, published and delivered to Grantor such notice of default and election to sell ("Notice of Sale") as then required by applicable law of the State and by this Deed of Trust. Trustee shall, without demand on Grantor, after lapse of such time as may then be required by applicable law and after recordation of such Notice of Sale having been given as required by applicable law, sell the Mortgaged Property at the time and place of sale fixed by it in said Notice of Sale, either as a whole, or in separate lots or parcels or items as Trustee shall deem expedient, and in such order as it may determine, at public auction to the highest bidder for cash in lawful money of the United States payable at the time of sale. Trustee shall deliver to such purchaser or purchasers thereof its good and sufficient deed or deeds conveying the property so sold, but without any covenant or warranty, express or implied. Provided, however, Grantor covenants to warrant and defend the title to the property so sold. The recitals in such deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including Grantor, Trustee or Beneficiary, may purchase at such sale. (2) Trustee shall apply the proceeds of sale as follows: FIRST, to the expenses of such sale and of all proceedings in connection therewith, including, without limitation, reasonable fees of the Beneficiary's attorney (and attorney fees and expenses shall become 18 absolutely due and payable whenever foreclosure is commenced), court costs, advertising expenses, auctioneer's allowance, the expenses, if any, required to correct any irregularity in the title, premium for the Trustee's bond, auditors fee, and all other costs and expenses of entering upon, taking possession of, operating or managing the Mortgaged Property reasonably incurred by the Beneficiary and the Trustee; then SECOND, to all expenses incurred in and about the protection of the Mortgaged Property and execution of this Deed of Trust and all insurance premiums, liens, assessments, taxes, and charges including utility charges advanced by the Beneficiary, and interest thereon from the date of advancement; then THIRD, in accordance with the terms of the Loan and Security Agreement, to payment of the Obligations Secured and accrued interest thereon; and FINALLY the remainder, if any, shall be paid to Grantor, or to the person or entity lawfully entitled thereto, upon the delivery and surrender to the purchaser of possession of the Mortgaged Property, less costs and expenses of obtaining possession. (iv) Subject to applicable law, Trustee may postpone sale of all or any portion of the Mortgaged Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement or subsequently noticed sale, and without further notice make such sale at the time fixed by the last postponement, or may, in its discretion, give a new notice of sale. (v) Upon the occurrence of an Event of Default, Beneficiary may proceed, in any sequence: (a) to exercise its rights hereunder with respect to all or any portion of the Mortgaged Property and all or any portion of the Personal Property; and (b) to exercise its rights under this Deed of Trust with respect to all or any portion of the Personal Property in accordance with the provisions of the Code and applicable law. (n) Accommodation Provisions. Grantor has executed and delivered this Deed of Trust as an accommodation instrument with the intent of subjecting its interests in the Mortgaged Property to the lien of this Deed of Trust as security for the Obligations Secured; accordingly Grantor hereby agrees, to the fullest extent permitted by law, not to assert or take advantage of: (i) Any right to require Beneficiary to proceed against Borrower or any guarantor under the Loan Documents, or any other person or to proceed against or exhaust any other security held by Beneficiary at any time or to pursue any other remedy in Beneficiary's power before exercising any right or remedy under this Deed of Trust. (ii) Any defense that may arise by reason of: (1) Beneficiary's failure to proceed against any of Borrower's property, or any other party against whom Beneficiary might assert a claim, before proceeding against Grantor under this Deed of Trust; or (2) The release, suspension, discharge or impairment of any of Beneficiary's rights against Borrower or any other party against whom Beneficiary might assert a claim, whether such release, suspension, discharge or impairment is explicit, tacit or inadvertent; or 19 (3) Beneficiary's failure to pursue any other remedies available to Beneficiary that would reduce the burden of the indebtedness secured hereby on Grantor's interests in the Mortgaged Property; or (4) Any extension of the time for the payment or performance of any of Borrower's obligations under the Loan and Security Agreement or any of the Loan Documents; or (5) The incapacity or lack of authority of Borrower or any person or persons; or (6) The failure of Beneficiary to file or enforce a claim against the estate (in either administration, bankruptcy or any other proceedings) of any owner or officer of any of Borrower or any other person or persons. (iii) Subject to the terms of the Loan and Security Agreement and this Deed of Trust, and except as required by law, the sufficiency of any demand, protest and/or notice of any kind, including, without limitation, the following notices: (1) Notice of the evidence, creation or incurring of any new or additional indebtedness or obligation by the Borrower (provided that such indebtedness or obligation is not secured by this Deed of Trust); or (2) Notice of any amendment of any of the Loan Documents; or (3) Notice of any action or non-action on the part of Borrower or Beneficiary in connection with any obligation or evidence of indebtedness held by Beneficiary as collateral pursuant to the Loan Documents; or (4) Notice of payment or non-payment by Borrower of the indebtedness secured by this Deed of Trust. (iv) Any right to assert against Beneficiary any defense arising by reason of any claim or defense based upon an election of remedies by Beneficiary to foreclose, either by judicial foreclosure or by exercise of the power of sale, this Deed of Trust, which in any manner impairs, reduces, releases, destroys or extinguishes Grantor's subrogation rights, rights to proceed against any Guarantor for reimbursement, or any other rights of Grantor to proceed against any other person or security. Grantor waives all rights and defenses to enforcement of all or any part of the indebtedness secured hereby which defenses are based on an election of remedies by Beneficiary, even though the election of remedies, such as nonjudicial foreclosure with respect to this Deed of Trust, may destroy Grantor's rights of subrogation and reimbursement against any Guarantor by operation of Section 580d of the California Code of Civil Procedure. (v) Any rights arising because of Grantor's payment or satisfaction of the indebtedness secured hereby against any guarantor or any other party obligated to pay any of the indebtedness secured hereby, by way of contribution or reimbursement or otherwise, but only until the indebtedness secured hereby is paid in full. 20 (vi) Any duty on the part of Beneficiary to disclose to Grantor any default under the Loan and Security Agreement or any other Loan Document. (vii) Any duty on the part of Beneficiary to disclose to Grantor any facts Beneficiary may now know or may hereafter know about Borrower or any successors in interest (if any) regardless of whether Beneficiary (i) has reason to believe that any such facts materially increase the risk beyond the risk which Grantor intends to assume by executing this Deed of Trust, (ii) has reason to believe that these facts are unknown to Grantor, or (iii) has a reasonable opportunity to communicate such facts to Grantor, it being understood and agreed that Grantor is fully responsible for being and keeping informed of the financial condition of Borrower or any successor in interest of Borrower and of all circumstances bearing on the risk of nonpayment of any indebtedness of Borrower to Beneficiary that is secured hereby. (viii) Any right to object to the release of any portions of the Mortgaged Property from the lien of this Deed of Trust notwithstanding the fact that such releases may be made without Beneficiary having received any or adequate consideration therefor. (o) Grantor further agrees that with respect to any obligation secured hereby Beneficiary may, in such manner and upon such terms and at such times as Beneficiary deems best and without demand or notice to or consent of Grantor (i) release any party now or hereafter liable for the performance of any such obligation, (ii) extend the time for the performance of any such obligation, (iii) accept additional security therefor, and (iv) alter, substitute or release any property securing such performance. (p) Before executing this Deed of Trust, Grantor has made such independent legal and factual inquiries and investigations as Grantor deemed necessary or desirable with respect to Grantor's and Guarantors' ability to honor all of Grantor's covenants and agreements with Beneficiary, and Grantor has relied solely on said independent inquiries and investigations preparatory to entering into this Deed of Trust. GRANTOR PLEASE NOTE: UPON THE OCCURRENCE OF AN EVENT OF DEFAULT, CALIFORNIA PROCEDURE PERMITS THE TRUSTEE TO SELL THE COLLATERAL AT A SALE HELD WITHOUT SUPERVISION BY ANY COURT AFTER EXPIRATION OF A PERIOD PRESCRIBED BY LAW. UNLESS YOU PROVIDE AN ADDRESS FOR THE GIVING OF NOTICE, YOU MAY NOT BE ENTITLED TO NOTICE OF THE COMMENCEMENT OF SALE PROCEEDINGS. BY EXECUTION OF THIS DEED OF TRUST, YOU CONSENT TO SUCH PROCEDURE. THE SECURED PARTIES URGE YOU TO GIVE PROMPT NOTICE OF ANY CHANGE IN YOUR ADDRESS SO THAT YOU MAY RECEIVE PROMPTLY ANY NOTICE GIVEN PURSUANT TO THIS DEED OF TRUST. THE GRANTOR HEREBY DECLARES AND ACKNOWLEDGES THAT THE GRANTOR HAS RECEIVED, WITHOUT CHARGE, A TRUE COPY OF THIS DEED OF TRUST. 21 IN WITNESS WHEREOF, this instrument is executed to be effective as of the day and year first above written by the person or persons identified below on behalf of Grantor (and said person or persons hereby represent that they possess full power and authority to execute this instrument). GRANTOR: HUDSON RESPIRATORY CARE INC., a California corporation By__________________________________ Name:_______________________________ Title:______________________________ STATE OF CALIFORNIA ) ) ss COUNTY OF ) On ______________________, before me, ___________________________________, Notary Public, personally appeared ____________________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. _____________________________________ [SEAL] Signature of Notary Public Exhibit A Legal Description for 27711 Diaz Road, Temecula, California 92589 [TO BE ATTACHED] EX-10.23 14 dex1023.txt LOAN AND SECURITY AGREEMENT (MW POST AS AGENT) Exhibit 10.23 ================================================================================ LOAN AND SECURITY AGREEMENT among HUDSON RESPIRATORY CARE INC. as Borrower, the Lenders Referred to herein and MW POST ADVISORY GROUP, LLC as Administrative Agent Dated as of October 7, 2003 ================================================================================ TABLE OF CONTENTS 1. DEFINITIONS AND CONSTRUCTION............................................. 1 1.1 Definitions........................................................ 1 1.2 Accounting Terms.................................................. 22 1.3 Code.............................................................. 22 1.4 Construction...................................................... 22 1.5 Schedules and Exhibits............................................ 22 2. LOAN AND TERMS OF PAYMENT............................................... 22 2.1 Advances.......................................................... 22 2.2 [Intentionally Omitted]........................................... 23 2.3 Borrowing Procedures.............................................. 23 2.4 Payments.......................................................... 25 2.5 [Intentionally Omitted]............................................27 2.6 Interest Rates: Rates, Payments, and Calculations.................................................. 27 2.7 [Intentionally Omitted]........................................... 28 2.8 Crediting Payments................................................ 28 2.9 Designated Account................................................ 28 2.10 Maintenance of Loan Account; Statements of Obligations............ 28 2.11 Fees.............................................................. 29 2.12 [Intentionally Omitted]........................................... 29 2.13 [Intentionally Omitted]........................................... 29 2.14 [Intentionally Omitted]............................................29 2.15 Designated Senior Debt............................................ 29 3. CONDITIONS; TERM OF AGREEMENT............................................30 3.1 Conditions Precedent to the Initial Extension of Credit........... 30 3.2 Conditions Subsequent to the Initial Extension of Credit.......... 34 3.3 Conditions Precedent to all Extensions of Credit...................34 3.4 Term...............................................................34 3.5 Effect of Termination..............................................35 3.6 Early Termination by Borrower......................................35 4. CREATION OF SECURITY INTERESTS.......................................... 35 4.1 Grant of Security Interests........................................35 4.2 Negotiable Collateral..............................................36 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral..............................................36 4.4 Filing of Financing Statements; Commercial Tort Claims; Delivery of Additional Documentation Required......................36 4.5 Power of Attorney................................................. 37 4.6 Right to Inspect.................................................. 38 4.7 Control Agreements................................................ 38 1 5. REPRESENTATIONS AND WARRANTIES.......................................... 39 5.1 No Encumbrances................................................... 39 5.2 Usury Exemption................................................... 39 5.3 [Intentionally omitted]........................................... 39 5.4 Equipment......................................................... 39 5.5 Location of Inventory and Equipment............................... 39 5.6 Inventory Records................................................. 39 5.7 State of Incorporation; Location of Chief Executive Office; FEIN; Organizational ID Number; Commercial Tort Claims.............................................................39 5.8 Due Organization and Qualification; Subsidiaries...................40 5.9 Due Authorization; No Conflict.....................................40 5.10 Litigation.........................................................42 5.11 No Material Adverse Change.........................................42 5.12 Fraudulent Transfer................................................42 5.13 Employee Benefits..................................................42 5.14 Environmental Condition............................................43 5.15 Brokerage Fees.....................................................43 5.16 Intellectual Property..............................................43 5.17 Leases.............................................................43 5.18 Deposit Accounts and Securities Accounts...........................43 5.19 Complete Disclosure................................................43 5.20 Indebtedness.......................................................44 5.21 Subordinated Notes Indenture.......................................44 5.22 CFCs...............................................................44 6. AFFIRMATIVE COVENANTS................................................... 44 6.1 Accounting System..................................................44 6.2 Collateral Reporting...............................................44 6.3 Financial Statements, Reports, Certificates........................45 6.4 Guarantor Reports..................................................47 6.5 Returns............................................................47 6.6 Maintenance of Properties..........................................47 6.7 Taxes..............................................................47 6.8 Insurance..........................................................47 6.9 Location of Inventory and Equipment................................49 6.10 Compliance with Laws...............................................49 6.11 Leases.............................................................49 6.12 Existence..........................................................49 6.13 Environmental......................................................49 6.14 Disclosure Updates.................................................49 6.15 Formation of Subsidiaries..........................................50 6.16 Amendment of Preferred Stock.......................................50 7. NEGATIVE COVENANTS...................................................... 50 7.1 Indebtedness.......................................................50 2 7.2 Liens..............................................................52 7.3 Restrictions on Fundamental Changes................................52 7.4 Disposal of Assets.................................................52 7.5 Change Name........................................................52 7.6 Nature of Business.................................................52 7.7 Prepayments and Amendments.........................................52 7.8 Change of Control..................................................53 7.9 Consignments.......................................................53 7.10 Distributions......................................................53 7.11 Accounting Methods.................................................53 7.12 Investments........................................................53 7.13 Transactions with Affiliates.......................................54 7.14 Suspension.........................................................54 7.15 [Intentionally Omitted]............................................54 7.16 Use of Proceeds....................................................54 7.17 Inventory and Equipment with Bailees...............................54 7.18 Financial Covenants................................................54 7.19 Payments on Affiliate Notes........................................55 7.20 Limitation on Indebtedness of Unrestricted Subsidiaries............55 8. EVENTS OF DEFAULT........................................................55 9. THE LENDER GROUP'S RIGHTS AND REMEDIES...................................57 9.1 Rights and Remedies................................................57 9.2 Remedies Cumulative................................................60 10. TAXES AND EXPENSES.......................................................60 11. WAIVERS; INDEMNIFICATION.................................................60 11.1 Demand; Protest; etc...............................................60 11.2 The Lender Group's Liability for Borrower Collateral...............60 11.3 Indemnification....................................................61 12. NOTICES..................................................................61 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.............................. 62 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS...............................63 14.1 Assignments and Participations.....................................63 14.2 Successors.........................................................66 15. AMENDMENTS; WAIVERS..................................................... 66 15.1 Amendments and Waivers.............................................66 15.2 [Intentionally Omitted]............................................67 15.3 No Waivers; Cumulative Remedies....................................67 3 16. AGENT; THE LENDER GROUP..................................................67 16.1 Appointment and Authorization of Agent.............................67 16.2 Delegation of Duties...............................................68 16.3 Liability of Agent.................................................68 16.4 Reliance by Agent..................................................69 16.5 Notice of Default or Event of Default..............................69 16.6 Credit Decision....................................................70 16.7 Costs and Expenses; Indemnification................................70 16.8 Agent in Individual Capacity.......................................71 16.9 Successor Agent....................................................71 16.10 Lender in Individual Capacity......................................72 16.11 Withholding Taxes..................................................72 16.12 Collateral Matters.................................................74 16.13 Restrictions on Actions by Lenders; Sharing of Payments............75 16.14 Agency for Perfection..............................................75 16.15 Payments by Agent to the Lenders...................................76 16.16 Concerning the Collateral and Related Loan Documents...............76 16.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information............. 76 16.18 Several Obligations; No Liability................................. 77 17. GENERAL PROVISIONS...................................................... 78 17.1 Effectiveness..................................................... 78 17.2 Section Headings.................................................. 78 17.3 Interpretation.................................................... 78 17.4 Severability of Provisions........................................ 78 17.5 Amendments in Writing............................................. 78 17.6 Counterparts; Telefacsimile Execution............................. 78 17.7 Revival and Reinstatement of Obligations.......................... 78 17.8 Confidentiality................................................... 79 17.9 Integration....................................................... 79 4 EXHIBITS AND SCHEDULES Exhibit A-1 Form of Assignment and Acceptance Exhibit C-1 Form of Compliance Certificate Schedule A-1 Lenders' Accounts Schedule C-1 Revolver Commitments Schedule D-1 Designated Account Schedule P-1 Permitted Liens Schedule R-1 Real Property Collateral Schedule 5.5 Locations of Inventory and Equipment Schedule 5.7(a) States of Organization Schedule 5.7(b) Chief Executive Offices Schedule 5.7(c) FEINs Schedule 5.7(d) Commercial Tort Claims Schedule 5.8(b) Capitalization of Borrower Schedule 5.8(c) Capitalization of Borrower's Subsidiaries Schedule 5.10 Litigation Schedule 5.14 Environmental Matters Schedule 5.16 Intellectual Property Schedule 5.18 Deposit Accounts and Securities Accounts Schedule 5.20 Permitted Indebtedness 5 LOAN AND SECURITY AGREEMENT --------------------------- THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of October 7, 2003, among HUDSON RESPIRATORY CARE INC., a California corporation ("Borrower"), the Lenders referred to herein, and MW POST ADVISORY GROUP, LLC, a Delaware limited liability company, as administrative agent for the Lenders ("Agent"). The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Account" means an account (as that term is defined in the Code), and any and all supporting obligations in respect thereof. "Account Debtor" means any Person who is obligated under, with respect to, or on account of, an Account, chattel paper, or a General Intangible. "Additional Documents" has the meaning set forth in Section 4.4(c). "Advance" means that portion of any Borrowing which is to be provided to the Borrower by any Lender pursuant to its Revolver Commitment. "Affiliate" means, as applied to any Person, any other Person who, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" means the possession, directly or indirectly through one or more intermediaries, of the power to direct the management and policies of a Person, whether through the ownership of Stock, by contract, or otherwise; provided, however, that, for purposes of Section 7.13 hereof: (a) any Person which owns directly or indirectly 10% or more of the Stock having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed an Affiliate of such Person, (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person, and (c) each partnership or joint venture in which a Person is a partner or joint venturer shall be deemed an Affiliate of such Person. "Affiliate Subordination Agreement" means a subordination agreement executed and delivered by each holder of a Subordinated Convertible Note and Agent, the form and substance of which is satisfactory to Agent. 1 "Agent" means MW Post Advisory Group, LLC, a Delaware limited liability company, in its capacity as administrative agent hereunder, and any successor thereto. "Agent-Related Persons" means Agent, together with its Affiliates, officers, directors, employees, attorneys, and agents. "Agent's Liens" means the Liens granted by Borrower or its Subsidiaries to Agent under this Agreement or the other Loan Documents. "Agreement" has the meaning set forth in the preamble to this Agreement. "Applicable Interest Rate" means, as to all Advances, a rate equal to 11%; provided, however, that with respect to any Advances that have been repaid and subsequently reborrowed the higher of the following rates shall apply: a) a fixed rate equal to 11%, or b) a fixed rate equal to the LIBOR Rate (determined as of the date upon which the Advance is re-borrowed) plus 10.0%. "Assignee" has the meaning set forth in Section 14.1(a). "Assignment and Acceptance" means an Assignment and Acceptance Agreement substantially in the form of Exhibit A-1. "Authorized Person" means any officer or employee of Borrower. "Availability" means, as of any date of determination, the amount that Borrower is entitled to borrow as Advances hereunder (after giving effect to all then outstanding Obligations and all sublimits and reserves then applicable hereunder). "Bankruptcy Code" means title 11 of the United States Code, as in effect from time to time. "Base LIBOR Rate" means the rate per annum, determined by Agent in accordance with its customary procedures, and utilizing such electronic or other quotation sources as it considers appropriate (rounded upwards, if necessary, to the next 1/100%), to be the rate at which Dollar deposits (for delivery on the first day of the requested Interest Period) are offered to major banks in the London interbank market 2 Business Days prior to the date of the requested Advance, for a three month term in an amount comparable to the amount of the Loan requested by Borrower in accordance with this Agreement, which determination shall be conclusive in the absence of manifest error. "Benefit Plan" means a "defined benefit plan" (as defined in Section 3(35) of ERISA) for which Borrower or any Subsidiary or ERISA Affiliate of Borrower has been an "employer" (as defined in Section 3(5) of ERISA) within the past six years. "Board of Directors" means the board of directors (or comparable managers) of Borrower or any committee thereof duly authorized to act on behalf of the board of directors (or comparable managers). 2 "Books" means Borrower's and its Subsidiaries' now owned or hereafter acquired books and records (including all of their Records indicating, summarizing, or evidencing their assets (including the Collateral) or liabilities, all of Borrower's or its Subsidiaries' Records relating to their business operations or financial condition, and all of their goods or General Intangibles related to such information). "Borrower" has the meaning set forth in the preamble to this Agreement. "Borrower Collateral" means all of Borrower's now owned or hereafter acquired right, title, and interest in and to each of the following: (a) all of its Accounts, (b) all of its Books, (c) all of its commercial tort claims, (d) all of its Deposit Accounts, (e) all of its Equipment, (f) all of its General Intangibles, (g) all of its Inventory, (h) all of its Investment Property (including all of its securities and Securities Accounts), (i) all of its Negotiable Collateral, (j) money or other assets of Borrower that now or hereafter come into the possession, custody, or control of any member of the Lender Group, and (k) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the foregoing, and any and all Accounts, Books, Deposit Accounts, Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, Real Property, money, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof; provided, however, that Borrower Collateral does not include any Excluded Collateral. "Borrower Preferred Stock" means (a) 300,000 shares of Borrower's 111/2% Senior PIK Preferred Stock due 2010 (liquidation preference $100 per share) and such additional shares of Borrower's 11 1/2% Senior PIK Preferred Stock due 2010 as may be issued in lieu of cash dividends thereon and (b) 3,000 shares of Borrower's 12% Junior Convertible Preferred Stock (liquidation preference $1,000 per share) and such additional 3 shares of Borrower's 12% Junior Convertible Preferred Stock as may be issued in lieu of cash dividends thereon. "Borrowing" means a borrowing hereunder consisting of Advances made on the same day by the Lenders (or Agent on behalf thereof). "Business Day" means any day that is not a Saturday, Sunday,or other day on which banks are authorized or required to close in the state of California, except that, if a determination of a Business Day shall relate to the determination of the Base LIBOR Rate in respect of any Loan, the term "Business Day" also shall exclude any day on which banks are closed for dealings in Dollar deposits in the London interbank market. "Capital Expenditures" means, with respect to any Person for any period, the aggregate of all expenditures by such Person and its Subsidiaries during such period that are capital expenditures as determined in accordance with GAAP, whether such expenditures are paid in cash or financed. "Capital Lease" means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. "Capitalized Lease Obligation" means that portion of the obligations under a Capital Lease that is required to be capitalized in accordance with GAAP. "Cash Equivalents" means (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within 1 year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof maturing within 1 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 Rating Group ("S&P") or Moody's Investors Service, Inc. ("Moody's"), (c) commercial paper maturing no more than 270 days from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's, (d) certificates of deposit or bankers' acceptances maturing within 1 year from the date of acquisition thereof issued by any bank organized under the laws of the United States or any state thereof having at the date of acquisition thereof combined capital and surplus of not less than $250,000,000, (e) demand Deposit Accounts maintained with any bank organized under the laws of the United States or any state thereof so long as the amount maintained with any individual bank is less than or equal to $100,000 and is insured by the Federal Deposit Insurance Corporation, and (f) Investments in money market funds substantially all of whose assets are invested in the types of assets described in clauses (a) through (e) above. "Cash Management Account" has the meaning set forth for such term in the WFF Loan Agreement. 4 "CFC" means a controlled foreign corporation (as that term is defined in the IRC). "Change of Control" means that (a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act), other than Permitted Holders, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 20%, or more, of the Stock of Borrower having the right to vote for the election of members of the Board of Directors, (b) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act), other than Permitted Holders, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 20%, or more, of the Stock of Holding having the right to vote for the election of members of Holding's board of directors, (c) a majority of the members of the Board of Directors do not constitute Continuing Directors, or (d) Borrower ceases to own, directly or indirectly, and control 100% of the outstanding Stock of HRC and each of the Restricted Subsidiaries extant as of the Closing Date. "Closing Date" means the date of the making of the initial Advance (or other extension of credit) hereunder. "Closing Date Business Plan" means the set of Projections of Borrower for the 3 year period following the Closing Date (on a year by year basis, and for the 1 year period following the Closing Date and the full year of 2004, on a quarter by quarter basis), in form and substance (including as to scope and underlying assumptions) satisfactory to Agent. "Code" means the California Uniform Commercial Code, as in effect from time to time. "Collateral" means all assets and interests in assets and proceeds thereof now owned or hereafter acquired by Borrower or the Restricted Subsidiaries in or upon which a Lien is granted under any of the Loan Documents. "Collateral Access Agreement" means a landlord waiver, bailee letter, or acknowledgement agreement of any lessor, warehouseman, processor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in Borrower's or the Restricted Subsidiaries' Books, Equipment, or Inventory, in each case, in form and substance satisfactory to Agent. "Collections" means all cash, checks, notes, instruments, and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds). "Commercial Tort Claim Assignment" has the meaning set forth in Section 4.4(b). "Compliance Certificate" means a certificate substantially in the form of Exhibit C-1 delivered by the chief financial officer of Borrower to Agent. 5 "Continuing Director" means (a) any member of the Board of Directors who was a director (or comparable manager) of Borrower on the Closing Date, and (b) any individual who becomes a member of the Board of Directors after the Closing Date if such individual was appointed or nominated for election to the Board of Directors by a majority of the Continuing Directors, but excluding any such individual originally proposed for election in opposition to the Board of Directors in office at the Closing Date in an actual or threatened election contest relating to the election of the directors (or comparable managers) of Borrower and whose initial assumption of office resulted from such contest or the settlement thereof. "Control Agreement" means a control agreement, in form and substance satisfactory to Agent, executed and delivered by Borrower or one of the Restricted Subsidiaries, Agent, and the applicable securities intermediary (with respect to a Securities Account) or bank (with respect to a Deposit Account). "Daily Balance" means, as of any date of determination and with respect to any Obligation, the amount of such Obligation owed at the end of such day. "Default" means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default. "Deposit Account" means any deposit account (as that term is defined in the Code). "Designated Account" means the Deposit Account of Borrower identified on Schedule D-1. "Designated Account Bank" has the meaning ascribed thereto on Schedule D-1. "Disbursement Letter" means an instructional letter executed and delivered by Borrower to Agent regarding the extensions of credit to be made on the Closing Date, the form and substance of which is satisfactory to Agent. "Dollars" or "$" means United States dollars. "EBITDA" means, with respect to any fiscal period, Borrower's and the Restricted Subsidiaries' consolidated net earnings (or loss), minus extraordinary gains and interest income, plus (a) non-cash extraordinary losses, (b) Interest Expense (including any non-cash interest expense), (c) taxes based on or determined by reference to income, (d) depreciation and amortization, (e) non-recurring charges incurred in Borrower's fiscal year ending December 31, 2003 associated with the financing provided under the Loan Documents and the repayment of Indebtedness under the Existing Credit Agreement, (f) non-recurring charges incurred in Borrower's fiscal year ending December 31, 2003 associated with the operations of Borrower and the Restricted Subsidiaries in an amount not to exceed 6 $2,000,000, and (g) other non-cash charges (including noncash compensation charges), in each case for such period and as determined in accordance with GAAP. "Eligible Transferee" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $250,000,000, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a political subdivision of any such country and which has total assets in excess of $250,000,000, provided that such bank is acting through a branch or agency located in the United States, (c) a finance company, insurance company, or other financial institution or fund that is engaged in making, purchasing, or otherwise investing in commercial loans in the ordinary course of its business and having (together with its Affiliates) total assets in excess of $250,000,000, (d) any Affiliate (other than individuals) of a Lender, (e) so long as no Event of Default has occurred and is continuing, any other Person approved by Agent and Borrower (which approval of Borrower shall not be unreasonably withheld, delayed, or conditioned), and (f) during the continuation of an Event of Default, any other Person approved by Agent. "Environmental Actions" means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter, or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or releases of Hazardous Materials from (a) any assets, properties, or businesses of Borrower, its Subsidiaries, or any of their predecessors in interest, (b) from adjoining properties or businesses, or (c) from or onto any facilities which received Hazardous Materials generated by Borrower, its Subsidiaries, or any of their predecessors in interest. "Environmental Law" means any applicable federal, state, provincial, foreign or local statute, law, rule, regulation, ordinance, code, binding and enforceable guideline, binding and enforceable written policy, or rule of common law now or hereafter in effect and in each case as amended, or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, to the extent binding on Borrower or its Subsidiaries, relating to the environment, employee health and safety, or Hazardous Materials, including CERCLA; RCRA; the Federal Water Pollution Control Act, 33 USC Section 1251 et seq; the Toxic Substances Control Act, 15 USC Section 2601 et seq; the Clean Air Act, 42 USC Section 7401 et seq.; the Safe Drinking Water Act, 42 USC Section 3803 et seq.; the Oil Pollution Act of 1990, 33 USC Section 2701 et seq.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 USC Section 11001 et seq.; the Hazardous Material Transportation Act, 49 USC Section 1801 et seq.; and the Occupational Safety and Health Act, 29 USC Section 651 et seq. (to the extent it regulates occupational exposure to Hazardous Materials); any state and local or foreign counterparts or equivalents, in each case as amended from time to time. "Environmental Liabilities and Costs" means all liabilities, monetary obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts, or consultants, and costs of investigation and feasibility 7 studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand by any Governmental Authority or any third party, and which relate to any Environmental Action. "Environmental Lien" means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs. "Equipment" means equipment (as that term is defined in the Code) and includes machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), computer hardware, tools, parts, and goods (other than consumer goods, farm products, or Inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto. "ERISA Affiliate" means (a) any Person subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower or its Subsidiaries under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower or its Subsidiaries under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which Borrower or any of its Subsidiaries is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any Person subject to ERISA that is a party to an arrangement with Borrower or any of its Subsidiaries and whose employees are aggregated with the employees of Borrower or its Subsidiaries under IRC Section 414(o). "Event of Default" has the meaning set forth in Section 8. "Exchange Act" means the Securities Exchange Act of 1934, as in effect from time to time. "Excluded Collateral" means 33-1/3% of the issued and outstanding Stock of the Mexican Subsidiaries and the proceeds thereof and (b) any licenses, permits, or agreements solely in the event and to the extent that a grant of a Lien on such license, permit, or agreement would result in a breach or termination of the terms of, or constitute a default under, or termination of any such license, permit, or agreement (other than to the extent that any such term would be rendered ineffective pursuant to Section 9-406, 9-407, or 9-408 of the Uniform Commercial Code (or any successor provision or provisions) of any relevant jurisdiction) and, in any event, immediately upon the ineffectiveness, lapse or termination of any such terms or potential default under such license, permit, or agreement, the Excluded Collateral shall not include, and Borrower shall be deemed to have granted a security interest in, all such licenses, permits, and agreements; provided, however, that Excluded Collateral shall not include (and, accordingly, Borrower Collateral shall include) any and all proceeds of any of such assets; provided, further, that, any license, permit, or agreement qualifying as 8 Excluded Collateral no longer shall constitute Excluded Collateral (and instead shall constitute Borrower Collateral) from and after such time as the licensor or other party to such license, permit, or agreement consents to the grant of a Lien in favor of Agent in such license, permit, or agreement. "Existing Agent" means Deutsche Bank Trust Company Americas, as administrative agent for the lenders under the Existing Credit Agreement. "Existing Credit Agreement" means the Amended and Restated Credit Agreement dated May 14, 2002, among Borrower, the lenders party thereto, and Existing Agent, as amended from time to time. "Extraordinary Receipts" means any Collections received by Borrower or any of its Subsidiaries not in the ordinary course of business (and not consisting of proceeds described in Section 2.4(c)(i) hereof), including, (a) foreign, United States, state or local tax refunds, (b) pension plan reversions, (c) proceeds of insurance (including proceeds of the key man life insurance policies) to the extent such proceeds exceed the Dollar amount set forth in Section 6.8(b) and Agent elects to apply such proceeds to payment of the Obligations, (d) judgments, proceeds of settlements or other consideration of any kind in connection with any cause of action other than causes of actions to collect Accounts, (e) condemnation awards (and payments in lieu thereof), (f) indemnity payments and (g) any purchase price adjustment received in connection with any purchase agreement. "Family Member" means, with respect to any individual, any other individual having a relationship by blood (to the second degree of consanguinity), marriage, or adoption to such individual. "Family Trusts" means, with respect to any individual, trusts or other estate planning vehicles established for the benefit of such individual or Family Members of such individual and in respect of which such individual serves as trustee or in a similar capacity. "Fee Letter" means that certain fee letter, dated as of even date herewith, between Borrower and Agent, in form and substance satisfactory to Agent. "FEIN" means Federal Employer Identification Number. "Funding Date" means the date on which a Borrowing occurs. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "General Intangibles" means general intangibles (as that term is defined in the Code), including payment intangibles, contract rights, rights to payment, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trade secrets, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to 9 payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, insurance premium rebates, tax refunds, and tax refund claims, and any and all supporting obligations in respect thereof, and any other personal property other than Accounts, Deposit Accounts, goods, Investment Property, and Negotiable Collateral. "Governing Documents" means, with respect to any Person, the certificate or articles of incorporation, by-laws, or other organizational documents of such Person. "Governmental Authority" means any federal, state, local, or other governmental or administrative body, instrumentality, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body. "Guarantor" means each of (a) Holding and (b) IH Holding. "Guarantor Security Agreement" means the security agreement executed and delivered by each Guarantor in favor of Agent, in each case, in form and substance satisfactory to Agent. "Guaranty" means that certain general continuing guaranty executed and delivered by each Guarantor in favor of Agent, for the benefit of the Lender Group, in form and substance satisfactory to Agent. "Hazardous Materials" means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. "Hedge Agreement" means any and all agreements or documents now existing or hereafter entered into by Borrower or its Subsidiaries that provide for an interest rate, credit, commodity or equity swap, cap, floor, collar, forward foreign exchange transaction, currency swap, cross currency rate swap, currency option, or any combination of, or option with respect to, these or similar transactions, for the purpose of hedging Borrower's or its Subsidiaries' exposure to fluctuations in interest or exchange rates, loan, credit exchange, security, or currency valuations or commodity prices. "Holding" means River Holding Corp., a Delaware corporation. 10 "Holding Preferred Stock" means (a) 300,000 shares of Holding's 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010 (liquidation preference $100 per share) and such additional shares of Holding's 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010 as may be issued in lieu of cash dividends thereon and (b) 3,000 shares of Holding's 12% Junior Convertible Cumulative Preferred Stock due 2010 (liquidation preference $1,000 per share) and such additional shares of Holding's 12% Junior Convertible Cumulative Preferred Stock due 2010 as may be issued in lieu of cash dividends thereon. "Holding Stock Pledge Agreement" means a stock pledge agreement, in form and substance satisfactory to Agent, executed and delivered by Holding and Agent with respect to the pledge of the Stock of Borrower. "HRC" means HRC Holding Inc., a Delaware corporation. "HRC Notes" means those certain Unsecured Senior Promissory Notes due 2004 issued by HRC to certain Affiliates, shareholders, and officers of Borrower in the aggregate principal amount of $10,100,000 and those certain HRC Holding Inc. Promissory Notes issued by HRC to certain Affiliates of Borrower in the aggregate principal amount of $2,264,241. "IH Holding" means IH Holding LLC, a Delaware limited liability company. "Indebtedness" means, without duplication, (a) all obligations for borrowed money, (b) all obligations evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all Capitalized Lease Obligations, (d) all obligations or liabilities of others secured by a Lien on any asset of a Person or its Subsidiaries, irrespective of whether such obligation or liability is assumed, (e) all obligations to pay the deferred purchase price of assets (other than trade payables incurred in the ordinary course of business and repayable in accordance with customary trade practices), (f) all obligations owing under Hedge Agreements, and (g) any obligation guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted, or sold with recourse) any obligation of any other Person that constitutes Indebtedness under any of clauses (a) through (f) above. The amount of Indebtedness attributed to a Person under clause (d) shall be equal to the fair market value of the assets of such Person that are subject to the Lien. "Indemnified Liabilities" has the meaning set forth in Section 11.3. "Indemnified Person" has the meaning set forth in Section 11.3. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other state or federal bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. 11 "Intercompany Subordination Agreement" means a subordination agreement executed and delivered by Borrower, Holding, HRC, the Restricted Subsidiaries and Agent, the form and substance of which is satisfactory to Agent. "Intercreditor Agreement" means that certain intercreditor agreement between WFF and Agent, the form and substance of which is satisfactory to WFF and Agent. "Interest Expense" means, for any period, the aggregate of the interest expense of Borrower and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. "Inventory" means inventory (as that term is defined in the Code). "Investment" means, with respect to any Person, any investment by such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances, or capital contributions (excluding (a) commission, travel, and similar advances to officers and employees of such Person made in the ordinary course of business, and (b) bona fide Accounts arising in the ordinary course of business consistent with past practice), purchases or other acquisitions of Indebtedness, Stock, or all or substantially all of the assets of such other Person (or of any division or business line of such other Person), and any other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "Investment Property" means investment property (as that term is defined in the Code), and any and all supporting obligations in respect thereof. "IRC" means the Internal Revenue Code of 1986, as in effect from time to time. "Lender" and "Lenders" have the respective meanings set forth in the preamble to this Agreement, and shall include any other Person made a party to this Agreement in accordance with the provisions of Section 14.1, and shall include Post at all times, regardless of whether Post at any time has any commitment to lend under this Agreement. "Lender Group" means, individually and collectively, each of the Lenders and Agent. "Lender Group Expenses" means all (a) costs or expenses (including taxes, and insurance premiums) required to be paid by Borrower or its Subsidiaries under any of the Loan Documents that are paid, advanced, or incurred by the Lender Group, (b) fees or charges paid or incurred by Agent in connection with the Lender Group's transactions with Borrower or its Subsidiaries, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, 12 appraisal (including periodic collateral appraisals or business valuations to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement), real estate surveys, real estate title policies and endorsements, and environmental audits, (c) costs and expenses incurred by Agent in the disbursement of funds to Borrower or other members of the Lender Group (by wire transfer or otherwise), (d) charges paid or incurred by Agent resulting from the dishonor of checks, (e) reasonable costs and expenses paid or incurred by the Lender Group to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated, (f) audit fees and expenses of Agent related to audit examinations of the Books to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, (g) reasonable costs and expenses of third party claims or any other suit paid or incurred by the Lender Group in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or the Lender Group's relationship with Borrower or any its Subsidiaries, (h) Agent's reasonable costs and expenses (including attorneys fees) incurred in advising, structuring, drafting, reviewing, administering, syndicating, or amending the Loan Documents; (i) Agent's and each Lender's reasonable costs and expenses (including attorneys, accountants, consultants, and other advisors fees and expenses) incurred in terminating, enforcing (including attorneys, accountants, consultants, and other advisors fees and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning Borrower or its Subsidiaries or in exercising rights or remedies under the Loan Documents), or defending the Loan Documents, irrespective of whether suit is brought, or in taking any Remedial Action concerning the Collateral, and (j) any costs, expenses or other amounts which are chargeable to the Agent pursuant to the Intercreditor Agreement. "Lender-Related Person" means, with respect to any Lender, such Lender, together with such Lender's Affiliates, officers, directors, employees, attorneys, and agents. "Lenders' Accounts" means the Deposit Accounts of the Lenders identified on Schedule A-1. "LIBOR Rate" means, in respect of each relevant Advance, the rate per annum determined by Agent (rounded upwards, if necessary, to the next 1/100%) by dividing (a) the Base LIBOR Rate, by (b) 100% minus the Reserve Percentage. "Lien" means any interest in an asset securing an obligation owed to, or a claim by, any Person other than the owner of the asset, irrespective of whether (a) such interest is based on the common law, statute, or contract, (b) such interest is recorded or perfected, and (c) such interest is contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances. Without limiting the generality of the foregoing, the term "Lien" includes the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, conditional sale or trust receipt, or from a lease, 13 consignment, or bailment for security purposes and also includes reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Real Property. "Loan Account" has the meaning set forth in Section 2.10. "Loan Documents" means this Agreement, the Affiliate Subordination Agreement, the Control Agreements, the Disbursement Letter, the Fee Letter, the Guarantor Security Agreement, the Guaranty, the Holding Stock Pledge Agreement, the Intercompany Subordination Agreement, the Mortgages, the Patent Security Agreement, the Stock Pledge Agreement, the Trademark Security Agreement, any note or notes executed by Borrower in connection with this Agreement and payable to a member of the Lender Group, and any other agreement entered into, now or in the future, by Borrower and the Lender Group in connection with this Agreement. "Material Adverse Change" means (a) a material adverse change in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrower and its Subsidiaries, taken as a whole, (b) a material impairment of Borrower's and its Subsidiaries ability to perform their obligations under the Loan Documents to which they are parties or of the Lender Group's ability to enforce the Obligations or realize upon the Collateral, or (c) a material impairment of the enforceability or priority of the Agent's Liens with respect to the Collateral as a result of an action or failure to act on the part of Borrower or its Subsidiaries. "Maturity Date" has the meaning set forth in Section 3.4. "Mexican Subsidiaries" means Industrias Hudson, S.A. de C.V. and Hudson Respiratory Care Tecate, S. de R.L. de C.V. "Mortgage Policy" has the meaning set forth in Section 3.1(u). "Mortgages" means, individually and collectively, one or more mortgages, deeds of trust, or deeds to secure debt, executed and delivered by Borrower or its Subsidiaries in favor of Agent, in form and substance satisfactory to Agent, that encumber the Real Property Collateral and the related improvements thereto. "Negotiable Collateral" means letters of credit, letter of credit rights, instruments, promissory notes, drafts, documents, and chattel paper (including electronic chattel paper and tangible chattel paper), and any and all supporting obligations in respect thereof. "Net Cash Proceeds" means, with respect to any sale or disposition by any Person or any Subsidiary thereof of property or assets, the amount of Collections received (directly or indirectly) from time to time (whether as initial consideration or through the payment of deferred consideration) by or on behalf of such Person or such Subsidiary, in connection therewith after deducting therefrom only (i) the amount of any Indebtedness 14 secured by any Permitted Lien on any asset (other than (A) Indebtedness owing to Agent or any Lender under this Agreement or the other Loan Documents and (B) Indebtedness assumed by the purchaser of such asset) which is required to be, and is, repaid in connection with such disposition, (ii) reasonable expenses related thereto incurred by such Person or such Subsidiary in connection therewith, (iii) taxes paid or payable to any taxing authorities by such Person or such Subsidiary in connection therewith, in each case to the extent, but only to the extent, that the amounts so deducted are, at the time of receipt of such cash, actually paid or payable to a Person that is not an Affiliate and are properly attributable to such transaction, and (iv) reasonable reserves as determined in accordance with GAAP in respect of (a) liabilities relating to the property or assets sold or disposed of that are retained by such Person and (b) indemnification liabilities relating to the sale or disposition. "Obligations" means all loans, Advances, debts, principal, interest (including any interest that, but for the commencement of an Insolvency Proceeding, would have accrued), premiums, liabilities (including all amounts charged to Borrower's Loan Account pursuant hereto), obligations (including indemnification obligations), fees (including the fees provided for in the Fee Letter), charges, costs, Lender Group Expenses (including any fees or expenses that, but for the commencement of an Insolvency Proceeding, would have accrued), lease payments, guaranties, covenants, and duties of any kind and description owing by Borrower to the Lender Group pursuant to or evidenced by the Loan Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all interest not paid when due and all Lender Group Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. Any reference in this Agreement or in the Loan Documents to the Obligations shall include all extensions, modifications, renewals, or alterations thereof, both prior and subsequent to any Insolvency Proceeding. "Originating Lender" has the meaning set forth in Section 14.1(e). "Participant" has the meaning set forth in Section 14.1(e). "Patent Security Agreement" means a patent security agreement executed and delivered by Borrower and Agent, the form and substance of which is satisfactory to Agent. "Pay-Off Letter" means a letter, in form and substance satisfactory to Agent, from Existing Agent to Agent respecting the amount necessary to repay in full all of the obligations of Borrower and its Subsidiaries owing under the Existing Credit Agreement and obtain a release of all of the Liens existing under the Existing Credit Agreement in and to the assets of Borrower and its Subsidiaries. "Permitted Discretion" means a determination made in the exercise of reasonable (from the perspective of a secured asset-based lender) business judgment. "Permitted Dispositions" means (a) sales or other dispositions of Equipment that is substantially worn, damaged, or obsolete in the ordinary course of business, (b) sales of Inventory to buyers in the ordinary course of business, (c) the use or transfer of money or 15 Cash Equivalents in a manner that is not prohibited by the terms of this Agreement or the other Loan Documents, and (d) the licensing, on a non-exclusive basis, of patents, trademarks, copyrights, and other intellectual property rights in the ordinary course of business. "Permitted Holder" means each of (a) Holding, (b) FS Equity Partners III, L.P., (c) FS Equity Partners IV, LP, and (d) Helen Hudson Lovaas,her Family Members, and her Family Trusts. "Permitted Intercompany Investments" means Investments by Borrower in the Mexican Subsidiaries made in the ordinary course of business in amounts that are consistent with past practices so long as (a) the Mexican Subsidiaries do not conduct any business that is different from that which was conducted as of the Closing Date and (b) neither of the Mexican Subsidiaries has cash on hand at any time for a period of more than 7 days that exceeds $75,000. "Permitted Investments" means (a) Investments in cash and Cash Equivalents, (b) Investments in negotiable instruments for collection, (c) advances made in connection with purchases of goods or services in the ordinary course of business, (d) Investments received in settlement of amounts due to Borrower or any of its Subsidiaries effected in the ordinary course of business or owing to Borrower or any of its Subsidiaries as a result of Insolvency Proceedings involving an Account Debtor or upon the foreclosure or enforcement of any Lien in favor of Borrower or its Subsidiaries, and (e) Permitted Intercompany Investments. "Permitted Liens" means (a) Liens held by Agent, (b) Liens for unpaid taxes that either (i) are not yet delinquent, or (ii) do not constitute an Event of Default hereunder and are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interests of lessors under operating leases, (e) purchase money Liens or the interests of lessors under Capital Leases to the extent that such Liens or interests secure Permitted Purchase Money Indebtedness and so long as such Lien attaches only to the asset purchased or acquired and the proceeds thereof, (f) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of business and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet delinquent, or (ii) are the subject of Permitted Protests, (g) Liens arising from deposits made in compliance with obtaining worker's compensation or other unemployment insurance, (h) Liens or deposits to secure performance of bids, tenders, contracts, or leases incurred in the ordinary course of business and not in connection with the borrowing of money, (i) Liens granted as security for surety, indemnity, or appeal bonds in connection with obtaining such bonds in the ordinary course of business, (j) Liens resulting from any judgment or award that is not an Event of Default hereunder, (k) with respect to any Real Property, easements, rights of way, reservations, zoning and other restrictions on use, and such other charges and encumbrances as do not, in any case, materially interfere with or impair the use or operation thereof, and (l) Liens granted to WFF to secure Indebtedness under the WFF Loan Documents. 16 W02-LA:1CFL1\70612585.9 "Permitted Protest" means the right of Borrower or any of the Restricted Subsidiaries to protest any Lien (other than any Lien that secures the Obligations), taxes (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the Books of Borrower or such Restricted Subsidiary in such amount as is required under GAAP, (b) any such protest is instituted promptly and prosecuted diligently by Borrower or such Restricted Subsidiary, as applicable, in good faith, and (c) Agent is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Agent's Liens. "Permitted Purchase Money Indebtedness" means, as of any date of determination, Purchase Money Indebtedness incurred after the Closing Date in an aggregate principal amount outstanding at any one time not in excess of $2,000,000. "Person" means natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Post" means MW Post Advisory Group, LLC, a Delaware limited liability company. "Prepayment Premium" means, as of any date of determination, an amount equal to (a) during the period from and after the date of the execution and delivery of this Agreement up to the date that is the second anniversary of the Closing Date, 4.0% times the Revolver Maximum Amount, (b) during the period from and including the date that is the second anniversary of the Closing Date up to the date that is the third anniversary of the Closing Date, 3.0% times the Revolver Maximum Amount, and (c) during the period from and including the date that is the third anniversary of the Closing Date up to 45 days prior to the Maturity Date, 2.0% times the Revolver Maximum Amount. "Projections" means Borrower's forecasted (a) balance sheets, (b) profit and loss statements, and (c) cash flow statements, all prepared on a basis consistent with Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. "Pro Rata Share" means, as of any date of determination: (a) with respect to a Lender's obligation to make Advances and receive payments of principal, interest, fees, costs, and expenses with respect thereto, (i) prior to the Revolver Commitments being terminated or reduced to zero, the percentage obtained by dividing (y) such Lender's Revolver Commitment, by (z) the aggregate Revolver Commitments of all Lenders, and (ii) from and after the time that the Revolver Commitments have been terminated or reduced to zero, the percentage obtained by dividing (y) the aggregate outstanding principal amount of such Lender's Advances by (z) the aggregate outstanding principal amount of all Advances, 17 (b) with respect to all other matters as to a particular Lender (including the indemnification obligations arising under Section 16.7), the percentage obtained by dividing (i) such Lender's aggregate amount of Revolver Commitments, by (ii) the aggregate amount of Revolver Commitments of all Lenders; provided, however, that in the event the Revolver Commitments have been terminated or reduced to zero, Pro Rata Share under this clause shall be the percentage obtained by dividing (A) the outstanding principal amount of such Lender's Advances, by (B) the outstanding principal amount of all Advances. "Purchase Money Indebtedness" means Indebtedness (other than the Obligations, but including Capitalized Lease Obligations), incurred at the time of, or within 30 days after, the acquisition of any fixed assets for the purpose of financing all or any part of the acquisition cost thereof. "Qualified Cash" means, as of any date of determination, the amount of unrestricted cash and Cash Equivalents of Borrower and its Subsidiaries that is in Deposit Accounts or in Securities Accounts, or any combination thereof, and which such Deposit Account or Securities Account is the subject of a Control Agreement and is maintained by a branch office of the bank or securities intermediary located within the United States. "Real Property" means any estates or interests in real property now owned or hereafter acquired by Borrower or its Subsidiaries and the improvements thereto. "Real Property Collateral" means the parcel or parcels of Real Property identified on Schedule R-1 and any Real Property hereafter acquired by Borrower or its Subsidiaries. "Record" means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. "Remedial Action" means all actions taken to (a) clean up, remove, remediate, contain, treat, monitor, assess, evaluate, or in any way address Hazardous Materials in the indoor or outdoor environment, (b) prevent or minimize a release or threatened release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform any pre-remedial studies, investigations, or post-remedial operation and maintenance activities, or (d) conduct any other actions authorized by 42 USC Section 9601. "Report" has the meaning set forth in Section 16.17. "Required Lenders" means, at any time, Lenders whose aggregate Pro Rata Shares (calculated under clause (b) of the definition of "Pro Rata Shares") equal or exceed 50.1%. "Reserve Percentage" means, on any day, for any Lender, the maximum percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor Governmental Authority) for determining the reserve requirements (including any 18 basic, supplemental, marginal, or emergency reserves) that are in effect on such date with respect to eurocurrency funding (currently referred to as "eurocurrency liabilities") of that Lender, but so long as such Lender is not required or directed under applicable regulations to maintain such reserves, the Reserve Percentage shall be zero. "Restricted Group" means Borrower and the Restricted Subsidiaries. "Restricted Subsidiary" means any Subsidiary of Borrower other than an Unrestricted Subsidiary. "Revolver Commitment" means, with respect to each Lender, its Revolver Commitment, and, with respect to all Lenders, their Revolver Commitments, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 or in the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1. "Revolver Maximum Amount" means $30,000,000. "Revolver Usage" means, as of any date of determination, the then extant amount of outstanding Advances. "SEC" means the United States Securities and Exchange Commission and any successor thereto. "Securities Account" means a securities account (as that term is defined in the Code). "Senior Notes" means those certain Unsecured Senior Promissory Notes due 2004, issued by Borrower to certain Affiliates, shareholders, and officers of Borrower in the aggregate principal amount of $12,000,000. "Solvent" means, with respect to any Person on a particular date, that, at fair valuations, the sum of such Person's assets is greater than all of such Person's debts. "Specified Locations" means Borrower's business premises located at 900 University, Arlington Heights, Illinois; 800 Mark Street, Elk Grove Village, Illinois; 27731 Diaz Road, Temecula, California; and 28381 Vincent Moraga Drive, Temecula, California. "Stock" means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "Stock Pledge Agreement" means a stock pledge agreement, in form and substance satisfactory to Agent, executed and delivered by Borrower, IH Holding and Agent with respect to the pledge of the Stock of HRC and the Restricted Subsidiaries. 19 "Subordinated Convertible Notes" means those certain Senior Subordinated Convertible Promissory Notes due 2005, issued by Borrower to certain Affiliates, shareholders, and officers of Borrower in the aggregate principal amount of $14,951,250. "Subordinated Notes" means Borrower's 9-1/8% Senior Subordinated Notes due 2008 issued pursuant to the Subordinated Notes Indenture. "Subordinated Notes Indenture" means that certain Indenture dated as of April 7, 1998, among Borrower, Holding, and United States Trust Company of New York, as trustee. "Subsidiary" of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of Stock having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. "Taxes" has the meaning set forth in Section 16.11. "Temecula Mortgage" means a second-priority Mortgage encumbering the Real Property Collateral that is commonly known as 27711 Diaz Road, Temecula, California 92589. "TFQ EBITDA" means, as of any date of determination, EBITDA of Borrower and the Restricted Subsidiaries for the 4 fiscal quarter period most recently ended. "Trademark Security Agreement" means a second-priority trademark security agreement executed and delivered by Borrower and Agent, the form and substance of which is satisfactory to Agent. "UCC Filing Authorization Letter" means a letter duly executed by Borrower and each Guarantor authorizing Agent to file appropriate financing statements on Form UCC-1 without the signature of Borrower or such Guarantor, as applicable, in such office or offices as may be necessary or, in the opinion of Agent, desirable to perfect the security interests purported to be created by the Loan Documents. "Unrestricted Subsidiary" means (a) any Subsidiary of Borrower that at the time of determination is designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (b) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of Borrower (including any newly acquired or newly formed Subsidiary of Borrower) to be an Unrestricted Subsidiary; provided, however, that at the time of such designation and in the case of clauses (x) and (y), at all times thereafter: 20 (x) neither such Subsidiary nor any of its Subsidiaries owns any Stock or Indebtedness of, or owns or holds any Lien on any property of, Borrower or any Restricted Subsidiary of Borrower; (y) neither Holding, Borrower, nor any Restricted Subsidiary has guaranteed any Indebtedness or other obligation of such Subsidiary, and no Indebtedness of such Subsidiary shall constitute Indebtedness of Holding, Borrower, or any Restricted Subsidiary; and (z) except in the case of HRC Holding Inc., Hudson Euro Co. S.a.r.l. and Steamer Holding AB and any of their Subsidiaries, such Subsidiary has total consolidated assets of $1,000 or less, provided that no Person designated as a "Restricted Subsidiary" under the WFF Loan Agreement or otherwise providing any guaranty of the obligations under the WFF Loan Agreement or a lien on any of its assets in support of the WFF Loan Agreement may be an "Unrestricted Subsidiary" under this Agreement. "Unrestricted Subsidiaries EBITDA" means, with respect to any fiscal period, the Unrestricted Subsidiaries' consolidated net earnings (or loss), minus extraordinary gains and interest income, plus (a) non-cash extraordinary losses, (b) Interest Expense (including any non-cash interest expense), (c) taxes based on or determined by reference to income, (d) depreciation and amortization, and (e) other non-cash charges (including noncash compensation charges), in each case for such period and as determined in accordance with GAAP. "Unrestricted Subsidiaries TFQ EBITDA" means as of any date of determination, Unrestricted Subsidiaries EBITDA for the 4 fiscal quarter period most recently ended. "Voidable Transfer" has the meaning set forth in Section 17.7. "WFF" means Wells Fargo Foothill, Inc., a California corporation, its successors and permitted assigns. "WFF Loan Agreement" means the Loan and Security Agreement dated as of even date herewith entered into between WFF, as arranger and administrative agent for the lenders named therein, and Borrower, as at any time amended subject to the terms of the Intercreditor Agreement, and any senior secured credit facility of Borrower which refinances such Loan and Security Agreement and which provides for credit facilities in an aggregate principal amount which does not exceed the stated effective principal amount of the credit facilities under the agreement so refinanced. "WFF Loan Documents" means WFF Loan Agreement and the other "Loan Documents" (as defined in the WFF Loan Agreement). 21 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP; provided that for purposes of construing the accounting terms that compose the definition of "EBITDA", such terms shall be interpreted in accordance with GAAP applied on a basis consistent with the interpretation of such terms used in Borrower's financial statements for its fiscal year ended December 31, 2002. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrower" is used in respect of a financial covenant or a related definition, it shall be understood to mean Borrower and its Subsidiaries on a consolidated basis unless the context clearly requires otherwise. 1.3 Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 1.4 Construction. Unless the context of this Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in the other Loan Documents to any agreement, instrument, or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein). Any reference herein to the payment in full or repayment in full of the Obligations shall mean the payment in full in cash of all Obligations other than contingent indemnification Obligations and contingent expense reimbursement Obligations. Any reference herein to any Person shall be construed to include such Person's successors and assigns. Any requirement of a writing contained herein or in the other Loan Documents shall be satisfied by the transmission of a Record and any Record transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein. 1.5 Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 2. LOAN AND TERMS OF PAYMENT. 2.1 Advances. (a) Subject to the terms and conditions of this Agreement, on the Closing Date each Lender agrees (severally, not jointly or jointly and severally) to make Advances to Borrower in an amount equal to such Lender's Pro Rata Share of $30,000,000. 22 The credit facilities described herein are revolving in nature and, subject to the terms and conditions set forth herein, amounts which are borrowed and repaid may be reborrowed. (b) The Lenders shall have no obligation to make additional Advances hereunder to the extent such additional Advances would cause the Revolver Usage to exceed the Revolver Maximum Amount. (c) Subject to the terms and conditions of this Agreement, any amounts repaid under the Revolver Commitments at any time when no amounts are outstanding under the WFF Loan Agreement may subsequently be reborrowed, provided that, as of the date when such amounts are reborrowed, the entire amount of any then existing lending commitments under the WFF Loan Agreement is outstanding. (d) Anything herein to the contrary notwithstanding, in no event shall any Lender be obligated to make any Advances to Borrower if, after giving effect to such Advances, the aggregate amount of (i) the Indebtedness owing to the lenders under the WFF Loan Documents and (ii) the outstanding Advances hereunder would exceed the amount of Indebtedness permitted under Section 4.03 of the Subordinated Notes Indenture. 2.2 [Intentionally Omitted]. 2.3 Borrowing Procedures. (a) Procedure for Borrowing. Each Borrowing shall be made by an irrevocable written request by an Authorized Person delivered to Agent (which notice must be received by Agent no later than 10:00 a.m. (California time) on the Business Day prior to the date that is the requested Funding Date specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day. In lieu of delivering the above-described written request, any Authorized Person may give Agent telephonic notice of such request by the required time. In such circumstances, Borrower agrees that any such telephonic notice will be confirmed in writing within 24 hours of the giving of such notice and the failure to provide such written confirmation shall not affect the validity of the request. Borrower may request only 1 Borrowing of Advances during any period of 30 consecutive days and each such Borrowing must be in a minimum amount of $2,000,000 and integral multiples of $2,000,000. (b) Making of Loans. (i) Promptly after receipt of a request for a Borrowing pursuant to Section 2.3(a), Agent shall notify the Lenders, not later than 1:00 p.m. (California time) on the Business Day immediately preceding the Funding Date applicable thereto, by telecopy, telephone, or other similar form of transmission, of the requested Borrowing. Each Lender shall make the amount of such Lender's Pro Rata Share of the requested Borrowing available to Agent in immediately available funds not later than 10:00 a.m. (California time) on the Funding Date applicable thereto. After Agent's receipt of the 23 proceeds of such Advances, Agent shall make the proceeds thereof available to Borrower on the applicable Funding Date by transferring immediately available funds equal to such proceeds received by Agent to Borrower's Designated Account; provided, however, that, subject to the provisions of Section 2.3(f), Agent shall not request any Lender to make, and no Lender shall have the obligation to make, any Advance if Agent shall have actual knowledge that (1) one or more of the applicable conditions precedent set forth in Section 3 will not be satisfied on the requested Funding Date for the applicable Borrowing unless such condition has been waived, or (2) the requested Borrowing would exceed the Availability on such Funding Date. (ii) Unless Agent receives notice from a Lender on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, prior to 9:00 a.m. (California time) on the date of such Borrowing, that such Lender will not make available as and when required hereunder to Agent for the account of Borrower the amount of that Lender's Pro Rata Share of the Borrowing, Agent may assume that each Lender has made or will make such amount available to Agent in immediately available funds on the Funding Date and Agent may (but shall not be so required), in reliance upon such assumption, make available to Borrower on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to Agent in immediately available funds and Agent in such circumstances has made available to Borrower such amount, Lender shall on the Business Day following such Funding Date make such amount available to Agent, together with interest at the rate applicable to the Revolving Loans for each day during such period. A notice submitted by Agent to any Lender with respect to amounts owing under this subsection shall be conclusive, absent manifest error. If such amount is so made available, such payment to Agent shall constitute such Lender's Advance on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to Agent on the Business Day following the Funding Date, Agent will notify Borrower of such failure to fund and, upon demand by Agent, Borrower shall pay such amount to Agent for Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Advances composing such Borrowing. The failure of any Lender to make any Advance on any Funding Date shall not relieve any other Lender of any obligation hereunder to make an Advance on such Funding Date, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on any Funding Date. (iii) [Intentionally Omitted] (c) [Intentionally Omitted]. 24 (d) [Intentionally Omitted]. (e) Notation. Each Lender shall record on its books the principal amount of the Advances owing to each Lender, and such records shall, absent manifest error, conclusively be presumed to be correct and accurate. In addition, each Lender is authorized, at such Lender's option, to note the date and amount of each payment or prepayment of principal of such Lender's Advances in its books and records, including computer records. (f) Lenders' Failure to Perform. All Advances shall be made by the Lenders contemporaneously and in accordance with their Pro Rata Shares. It is understood that (i) no Lender shall be responsible for any failure by any other Lender to perform its obligation to make any Advance (or other extension of credit) hereunder, nor shall the Revolver Commitment of any Lender be increased or decreased as a result of any failure by any other Lender to perform its obligations hereunder, and (ii) no failure by any Lender to perform its obligations hereunder shall excuse any other Lender from its obligations hereunder. (g) [Intentionally Omitted]. 2.4 Payments. (a) Payments by Borrower. (i) Except as otherwise expressly provided herein, all payments by Borrower shall be made to the Lenders' Accounts, in each case in the amount then due to each Lender, and shall be made in immediately available funds, no later than 11:00 a.m. (California time) on the date specified herein. Any payment received by any Lender later than 11:00 a.m. (California time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day. (ii) [Intentionally omitted]. (b) Apportionment and Application of Payments. (i) Except as otherwise provided in the Loan Documents,aggregate principal and interest payments and payments of fees and expenses shall be apportioned ratably among the Lenders (according to the unpaid principal balance of the Obligations to which such payments relate held by each Lender). (ii) To the extent Agent receives funds on behalf of the Lenders, Agent promptly shall distribute to each Lender, pursuant to the applicable wire instructions received from each Lender in writing, such funds as it may be entitled to receive. 25 (c) Mandatory Prepayments. (i) Immediately upon any sale or disposition by Borrower or any of the Restricted Subsidiaries of property or assets (other than sales or dispositions of Inventory in the ordinary course of business or a sale of the Stock of HRC), Borrower shall either (a) prepay the outstanding principal amount of the obligations WFF Loan Agreement (and correspondingly reduce the lending commitments thereunder), or (b) prepay the outstanding principal amount of the Advances, in each case in an amount equal to 100% of the Net Cash Proceeds received by such Person in connection with such sales or dispositions to the extent that the aggregate amount of Net Cash Proceeds received by Borrower and the Restricted Subsidiaries (and not paid to WFF or the Agent as a prepayment of either the obligations under the WFF Loan Agreement or of the Advances) for all such sales or dispositions exceeds $50,000 in any fiscal year, provided that (A) if any such sale or disposition is a Permitted Disposition of Equipment that is not subject to a Lien of the type described in clause (e) of the definition of "Permitted Liens", Borrower may elect to use the proceeds of such sale or disposition, up to a maximum of $400,000 during any fiscal year of Borrower, to purchase new Equipment so long as Borrower completes the purchase of such new Equipment within 90 days of such sale or disposition; and (B) if any such sale or disposition is a Permitted Disposition of Equipment that is subject to a Lien of the type described in clause (e) of the definition of "Permitted Liens", Borrower may elect to use the proceeds of such sale or disposition to purchase new Equipment so long as Borrower completes the purchase of such new Equipment within 180 days of such sale or disposition. Nothing contained in this paragraph (i) shall permit Borrower or any of the Restricted Subsidiaries to sell or otherwise dispose of any property or assets other than in accordance with Section 7.4. (ii) Upon the receipt by Borrower or any of the Restricted Subsidiaries of any Extraordinary Receipts, unless the WFF Loan Agreement requires the repayment of the obligations thereunder from such Extraordinary Receipts, Borrower shall prepay the outstanding principal of the Advances in an amount equal to 100% of such Extraordinary Receipts, net of any reasonable expenses incurred in collecting such Extraordinary Receipts, to the extent that the aggregate amount of Extraordinary Receipts (other than proceeds of insurance) received by Borrower and the Restricted Subsidiaries (and not paid to Agent as a prepayment of the Advances) from and after the Closing Date exceeds $300,000. (d) Application of Mandatory Prepayments. [Intentionally Omitted]. 26 (e) Sale of Stock of HRC. Upon any sale or other disposition of the Stock of HRC, Borrower shall use the proceeds of such sale or other disposition a) first, to prepay the Obligations under this Agreement until the same are paid in full (with a corresponding reduction in the Revolver Commitments hereunder) and b) second, in the manner set forth in the Intercreditor Agreement. 2.5 [Intentionally Omitted]. 2.6 Interest Rates: Rates, Payments, and Calculations. (a) Interest Rates. Except as provided in clause (c) below, all Obligations that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof at a per annum rate equal to the Applicable Interest Rate. (b) [Intentionally Omitted]. (c) Default Rate. Upon the occurrence and during the continuation of an Event of Default (and at the election of the Required Lenders), all Obligations that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof at a per annum rate equal to 3 percentage points above the per annum rate otherwise applicable hereunder. (d) Payment. Interest and all other fees payable hereunder shall be due and payable in cash, in arrears, on the first day of each month at any time that Obligations or Revolver Commitments are outstanding. Borrower hereby authorizes Agent, from time to time without prior notice to Borrower, to charge such interest and fees, all Lender Group Expenses (as and when incurred), the fees and costs provided for in Section 2.11 (as and when accrued or incurred), and all other payments as and when due and payable under any Loan Document to Borrower's Loan Account, which amounts thereafter shall constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances. Any interest not paid in cash when due shall be compounded by being charged to Borrower's Loan Account and shall thereafter constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances hereunder. (e) Computation. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed. (f) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrower and the Lender Group, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or 27 manner of payment exceeds the maximum allowable under applicable law, then, ipso facto, as of the date of this Agreement, Borrower is and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrower in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.7 [Intentionally Omitted]. 2.8 Crediting Payments. The receipt of any payment item by any Lender or Agent shall not be considered a payment on account unless such payment item is a wire transfer of immediately available federal funds made to such Lender's Account or, if to Agent, to an account designated by Agent, or unless and until such payment item is honored when presented for payment. Should any payment item not be honored when presented for payment, then Borrower shall be deemed not to have made such payment and interest shall be calculated accordingly. Anything to the contrary contained herein notwithstanding, any payment item shall be deemed received by a Lender or Agent only if it is received into such Lender's Account, or if to Agent, into an account designated by Agent, on a Business Day on or before 11:00 a.m. (California time). If any payment item is received into a Lender's Account or into Agent's designated account on a non-Business Day or after 11:00 a.m. (California time) on a Business Day, it shall be deemed to have been received by such Lender or Agent, as applicable, as of the opening of business on the immediately following Business Day. 2.9 Designated Account. On the Closing Date through WFF in accordance with written instructions from Borrower, and thereafter directly, Agent is authorized to make the Advances under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person or, without instructions, if pursuant to Section 2.6(d). Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrower and made by Agent or the Lenders hereunder. Unless otherwise agreed by Agent and Borrower, any Advance requested by Borrower and made by Agent or the Lenders hereunder shall be made to the Designated Account, provided that the initial Advances hereunder shall be remitted to WFF for further credit to the Borrower or the Borrower's account, pursuant to written instructions delivered by the Borrower. 2.10 Maintenance of Loan Account; Statements of Obligations. Agent shall maintain an account on its books in the name of Borrower (the "Loan Account") on which Borrower will be charged with all Advances made by Agent or the Lenders to Borrower or for Borrower's account, and with all other payment Obligations hereunder or under the other Loan Documents, including, accrued interest, fees and expenses, and Lender Group Expenses. Agent shall render statements regarding the Loan Account to Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Lender Group Expenses owing, and such statements, absent manifest error, shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and the Lender Group unless, within 30 days after receipt thereof by Borrower, 28 Borrower shall deliver to Agent written objection thereto describing the error or errors contained in any such statements. 2.11 Fees. Borrower shall pay to Agent the following fees and charges, which fees and charges shall be non-refundable when paid (irrespective of whether this Agreement is terminated thereafter) and shall be apportioned among the Lenders in accordance with the terms of letter agreements between Agent and individual Lenders: (a) Unused Line Fee - Revolver. On the first day of each calendar quarter during the term of this Agreement, an unused line fee in an amount equal to 0.50% per annum times the result of (i) the Revolver Maximum Amount, less (ii) the average Daily Balance of Advances that were outstanding during the immediately preceding quarter; provided that if this Agreement is terminated on any date that is not the first day of a calendar quarter, the ratable portion of the foregoing fee that has accrued through the date of termination shall be payable on the date of termination, (b) Fee Letter Fees. As and when due and payable under the terms of the Fee Letter, the fees set forth in the Fee Letter, and (c) Audit, Appraisal, and Valuation Charges. To the extent that any audit, appraisal or valuation may be conducted by the Lender Group pursuant to Section 4.6, audit, appraisal, and valuation fees and charges as follows (i) a fee of $850 per day, per auditor, plus out-of-pocket expenses for each financial audit of Borrower performed by personnel employed by Agent, (ii) if implemented, a fee of $850 per day, per applicable individual, plus out-of-pocket expenses for the establishment of electronic collateral reporting systems, (iii) a fee of $1,500 per day per appraiser, plus out-of-pocket expenses, for each appraisal of the Collateral, or any portion thereof, performed by personnel employed by Agent, and (iv) the actual charges paid or incurred by Agent if it elects to employ the services of one or more third Persons to perform financial audits of Borrower or its Subsidiaries, to establish electronic collateral reporting systems, to appraise the Collateral, or any portion thereof, or to assess Borrower's or its Subsidiaries' business valuation. 2.12 [Intentionally Omitted]. 2.13 [Intentionally Omitted] 2.14 [Intentionally Omitted]. 2.15 Designated Senior Debt. The Lender Group and Borrower agree that the Obligations constitute "Designated Senior Debt" as defined in and for all purposes under the Subordinated Notes Indenture. 29 3. CONDITIONS; TERM OF AGREEMENT. 3.1 Conditions Precedent to the Initial Extension of Credit.The obligation of the Lender Group (or any member thereof) to make the initial Advance (or otherwise to extend any credit provided for hereunder), is subject to the fulfillment, to the satisfaction of Agent, of each of the conditions precedent set forth below: (a) the Closing Date shall occur on or before October 10, 2003; (b) Agent shall have received a UCC Filing Authorization Letter, duly executed by Borrower and each Guarantor, together with appropriate financing statements on Form UCC-1 duly filed in such office or offices as may be necessary or, in the opinion of Agent, desirable to perfect the Agent's Liens in and to the Collateral, and Agent shall have received searches reflecting the filing of all such financing statements; (c) Agent shall have received each of the following documents, in form and substance satisfactory to Agent, duly executed, and each such document shall be in full force and effect: (i) the Affiliate Subordination Agreement, (ii) this Agreement, (iii) the Control Agreements, (iv) the Disbursement Letter, (v) (intentionally omitted), (vi) the Guarantor Security Agreement, (vii) the Guaranty, (viii) the Holding Stock Pledge Agreement, together with all certificates representing the shares of Stock pledged thereunder, as well as Stock powers with respect thereto endorsed in blank, (ix) the Intercompany Subordination Agreement, (x) the Intercreditor Agreement, (xi) the Temecula Mortgage, (xii) (intentionally omitted), (xiii) the Patent Security Agreement, 30 (xiv) the Pay-Off Letter, together with UCC termination statements and other documentation evidencing the termination by Existing Lender of its Liens in and to the properties and assets of Borrower and its Subsidiaries (or an agreement by the Existing Agent to deliver such documentation upon receipt of payment in full of the Indebtedness under the Existing Credit Agreement or, in the case of UCC termination statements, authorization for Agent to file UCC termination statements upon receipt of such payment), (xv) the Stock Pledge Agreement, together with all certificates representing the shares of Stock pledged thereunder, as well as Stock powers with respect thereto endorsed in blank, and (xvi) the Trademark Security Agreement; (d) Agent shall have received a certificate from the Secretary of Borrower attesting to the resolutions of Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which Borrower is a party and authorizing specific officers of Borrower to execute the same; (e) Agent shall have received copies of Borrower's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of Borrower; (f) Agent shall have received a certificate of status with respect to Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of Borrower, which certificate shall indicate that Borrower is in good standing in such jurisdiction; (g) Agent shall have received certificates of status with respect to Borrower, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the state of Illinois and the jurisdiction of organization of Borrower) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that Borrower is in good standing in such jurisdictions; (h) Agent shall have received a certificate from the Secretary of each Guarantor attesting to the resolutions of such Guarantor's Board of Directors authorizing its execution, delivery, and performance of the Loan Documents to which such Guarantor is a party and authorizing specific officers of such Guarantor to execute the same; (i) Agent shall have received copies of each Guarantor's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of such Guarantor; (j) Agent shall have received a certificate of status with respect to each Guarantor, dated within 10 days of the Closing Date, such certificate to be issued by the 31 appropriate officer of the jurisdiction of organization of such Guarantor, which certificate shall indicate that such Guarantor is in good standing in such jurisdiction; (k) Agent shall have received certificates of status with respect to each Guarantor, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of such Guarantor) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that such Guarantor is in good standing in such jurisdictions; (l) Agent shall have received a certificate of insurance, together with the endorsements thereto, as are required by Section 6.8, the form and substance of which shall be satisfactory to Agent; (m) Agent shall have received an opinion of Borrower's counsel in form and substance satisfactory to Agent; (n) Agent shall have received satisfactory evidence (including a certificate of the chief financial officer of Borrower) that all tax returns required to be filed by Borrower and its Subsidiaries have been timely filed and all taxes upon Borrower and its Subsidiaries or their properties, assets, income, and franchises (including Real Property taxes, sales taxes, and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; (o) [Intentionally Omitted]. (p) Agent shall have completed its business, legal, and collateral due diligence, including (i) a collateral audit and review of Borrower's and its Subsidiaries books and records and verification of Borrower's representations and warranties to the Lender Group, the results of which shall be satisfactory to Agent, and (ii) an inspection of each of the locations where Borrower's and its Subsidiaries' Inventory is located, the results of which shall be satisfactory to Agent; (q) Agent shall have received completed reference checks with respect to Borrower's senior management, the results of which are satisfactory to Agent in its sole discretion; (r) Agent shall have received an appraisal of the Liquidation Percentage applicable to Borrower's and its Subsidiaries' Inventory and an appraisal of Borrower's and its Subsidiaries' Equipment, the results of which shall be satisfactory to Agent; (s) Agent shall have received Borrower's Closing Date Business Plan; (t) Borrower shall have paid all Lender Group Expenses incurred and billed in connection with the transactions evidenced by this Agreement; 32 (u) Agent shall have received (i) an appraisal of the Real Property Collateral reasonably satisfactory to Agent, and (ii) a mortgagee title insurance policy (or marked commitments to issue the same) for the Real Property Collateral issued by a title insurance company satisfactory to Agent ("Mortgage Policy") in an amount not to exceed the fair market value of the Real Property Collateral assuring Agent that the Temecula Mortgage is a valid and enforceable mortgage Lien on such Real Property Collateral free and clear of all defects and encumbrances except Permitted Liens, and the Mortgage Policy otherwise shall be in form and substance reasonably satisfactory to Agent; (v) Agent shall have received a phase-I environmental report with respect to each parcel composing the Real Property Collateral; the environmental consultants retained for such reports, the scope of the reports, and the results thereof shall be reasonably acceptable to Agent; (w) The Subordinated Convertible Notes shall have been amended or re-issued to extend the maturity date thereof to March 31, 2008, and Agent shall have received copies of such amendments or re-issued notes certified by the chief financial officer of Borrower; (x) The Senior Notes shall have been amended or re-issued to extend the maturity date thereof to March 31, 2008, and Agent shall have received copies of such amendments or re-issued notes certified by the chief financial officer of Borrower; (y) The HRC Notes shall have been amended or re-issued to extend the maturity date thereof to March 31, 2008, and Agent shall have received copies of such amendments or re-issued notes certified by the chief financial officer of Borrower; (z) The agreements governing the Borrower Preferred Stock and the Holding Preferred Stock shall have been amended to extend the period of time within which cash dividends are not paid thereunder in a manner satisfactory to Agent, and Agent shall have received copies of such amendments certified by the chief financial officer of Borrower; (aa) Borrower and each of its Subsidiaries shall have received all licenses, approvals or evidence of other actions required by any Govern mentalAuthority in connection with the execution and delivery by Borrower or its Subsidiaries of the Loan Documents or with the consummation of the transactions contemplated thereby; (bb) The conditions to the initial extension of credit set forth in Section 3.1 of the WFF Loan Agreement shall have been satisfied, and the lenders under the WFF Loan Agreement shall have concurrently funded the initial loans thereunder; and (cc) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Agent. 33 3.2 Conditions Subsequent to the Initial Extension of Credit. Borrower shall use its best efforts to cause the execution and delivery to Agent of a Collateral Access Agreement with respect to the Bonded Logistics warehouse in Charlotte, North Carolina within 90 days of the Closing Date. The obligation of the Lender Group (or any member thereof) to continue to make Advances (or otherwise extend credit hereunder) is subject to the fulfillment, on or before the date applicable thereto, of each of the conditions subsequent set forth below (the failure by Borrower to so perform or cause to be performed constituting an Event of Default): (a) within 30 days of the Closing Date, deliver to Agent certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 6.8, the form and substance of which shall be satisfactory to Agent and its counsel; (b) within 30 days of the Closing Date, Agent shall have received a certificate of status with respect to Borrower issued by the appropriate officer of the state of Illinois which certificate shall indicate that Borrower is in good standing in Illinois; and (c) within 90 days of the Closing Date, Agent shall have received Collateral Access Agreements with respect to the Specified Locations. 3.3 Conditions Precedent to all Extensions of Credit.The obligation of the Lender Group (or any member thereof) to make any Advances hereunder at any time (or to extend any other credit hereunder) shall be subject to the following conditions precedent: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof; (c) no injunction, writ, restraining order, or other order of any nature restricting or prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any Governmental Authority against Borrower, Agent, any Lender, or any of their Affiliates; (d) no Material Adverse Change shall have occurred; and (e) the other conditions precedent to Advances set forth in Section 2.1 shall have been satisfied. 3.4 Term. This Agreement shall continue in full force and effect for a term ending on October 1, 2007 (the "Maturity Date"). The foregoing notwithstanding, the Lender Group, upon the election of the Required Lenders, shall have the right to terminate its 34 obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.5 Effect of Termination. On the date of termination of this Agreement, all Obligations immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrower or its Subsidiaries of their duties, Obligations, or covenants hereunder and the Agent's Liens in the Collateral shall remain in effect until all Obligations have been paid in full and the Lender Group's obligations to provide additional credit hereunder have been terminated. When this Agreement has been terminated and all of the Obligations have been paid in full and the Lender Group's obligations to provide additional credit under the Loan Documents have been terminated irrevocably, Agent will, at Borrower's sole expense, execute and deliver any UCC termination statements, lien releases, mortgage releases, re-assignments of trademarks, discharges of security interests, and other similar discharge or release documents (and, if applicable, in recordable form) as are requested by Borrower to release, as of record, the Agent's Liens and all notices of security interests and liens previously filed by Agent with respect to the Obligations. 3.6 Early Termination by Borrower. Borrower has the option, at any time upon 90 days prior written notice to Agent, to terminate this Agreement by making payment in full to Agent of the Obligations, together with the Prepayment Premium. If Borrower has sent a notice of termination pursuant to the provisions of this Section, then the Revolver Commitments shall terminate and Borrower shall be obligated to repay the Obligations in full, together with the Prepayment Premium, on the date set forth as the date of termination of this Agreement in such notice. In the event of the termination of this Agreement and repayment of the Obligations at any time prior to the Maturity Date, for any other reason, including (a) termination upon the election of the Required Lenders to terminate after the occurrence and during the continuation of an Event of Default, (b) foreclosure and sale of Collateral, (c) sale of the Collateral in any Insolvency Proceeding, or (d) restructure, reorganization, or compromise of the Obligations by the confirmation of a plan of reorganization or any other plan of compromise, restructure, or arrangement in any Insolvency Proceeding, then, in view of the impracticability and extreme difficulty of ascertaining the actual amount of damages to the Lender Group or profits lost by the Lender Group as a result of such early termination, and by mutual agreement of the parties as to a reasonable estimation and calculation of the lost profits or damages of the Lender Group, Borrower shall pay the Prepayment Premium to Agent, measured as of the date of such termination. 4. CREATION OF SECURITY INTERESTS. 4.1 Grant of Security Interests. (a) Borrower hereby grants to Agent, for the benefit of the Lender Group, a continuing security interest in all of its right, title, and interest in all currently existing and hereafter acquired or arising Borrower Collateral in order to secure prompt 35 repayment of any and all of the Obligations in accordance with the terms and conditions of the Loan Documents and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. The Lender Group acknowledges that the grant contained in this Section 4 is subject to subordination in priority of distribution in the manner and to the extent set forth in the Intercreditor Agreement. (b) The Agent's Liens in and to the Borrower Collateral shall attach to all Borrower Collateral without further act on the part of Agent or Borrower. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for Permitted Dispositions, Borrower and its Subsidiaries have no authority, express or implied, to dispose of any item or portion of the Collateral. 4.2 Negotiable Collateral. In the event that any Borrower Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, and if and to the extent that Agent determines that perfection or priority of Agent's security interest is dependent on or enhanced by possession, Borrower, immediately upon the request of Agent, shall endorse and deliver physical possession of such Negotiable Collateral to the Agent or to WFF for the benefit of WFF, Agent and the Lenders under the Intercreditor Agreement. 4.3 Collection of Accounts, General Intangibles,and Negotiable Collateral. At any time after the occurrence and during the continuation of an Event of Default, Agent or Agent's designee may, subject to the terms of the Intercreditor Agreement, (a) notify Account Debtors of Borrower that Borrower's Accounts, chattel paper, or General Intangibles have been assigned to Agent or that Agent has a security interest therein, or (b) collect Borrower's Accounts, chattel paper, or General Intangibles directly and charge the collection costs and expenses to the Loan Account. Borrower agrees that it will hold in trust for WFF, as agent under the WFF Loan Agreement, and for the Agent, as the Lender Group's trustee, any of its or its Subsidiaries' Collections that it receives and immediately will deliver such Collections to WFF in their original form as received by Borrower or its Subsidiaries. 4.4 Filing of Financing Statements; Commercial Tort Claims; Delivery of Additional Documentation Required. (a) Borrower authorizes Agent to file, subject to the Intercreditor Agreement, any financing statement necessary or desirable to effectuate the transactions contemplated by the Loan Documents, and any continuation statement or amendment with respect thereto, in any appropriate filing office without the signature of Borrower where permitted by applicable law. Borrower hereby ratifies the filing of any financing statement filed without the signature of Borrower prior to the date hereof. (b) If Borrower or the Restricted Subsidiaries acquire any commercial tort claims after the date hereof, Borrower shall promptly (but in any event within 3 Business Days after such acquisition) deliver to Agent a written description of such commercial tort claim and shall deliver a written agreement, in form and substance satisfactory to Agent, pursuant to which Borrower or the Restricted Subsidiary, as applicable, shall pledge and 36 collaterally assign all of its right, title and interest in and to such commercial tort claim to Agent, as security for the Obligations (a "Commercial Tort Claim Assignment"). (c) At any time upon the request of Agent, Borrower shall execute or deliver to Agent, and shall cause the Restricted Subsidiaries to execute or deliver to Agent, any and all financing statements, original financing statements in lieu of continuation statements, fixture filings, security agreements, pledges, assignments, Commercial Tort Claim Assignments, endorsements of certificates of title, and all other documents (collectively, the "Additional Documents") that Agent may request in its Permitted Discretion, in form and substance satisfactory to Agent, to create, perfect, and continue perfected or to better perfect the Agent's Liens in the assets of Borrower and the Restricted Subsidiaries (whether now owned or hereafter arising or acquired, tangible or intangible, real or personal), to create and perfect Liens in favor of Agent in any Real Property acquired after the Closing Date, and in order to fully consummate all of the transactions contemplated hereby and under the other Loan Documents. To the maximum extent permitted by applicable law, Borrower authorizes Agent to execute any such Additional Documents in Borrower's name and authorizes Agent to file such executed Additional Documents in any appropriate filing office. In addition, on such periodic basis as Agent shall require, Borrower shall (i) provide Agent with a report of all new material patentable, copyrightable, or trademarkable materials acquired or generated by Borrower or the Restricted Subsidiaries during the prior period, (ii) cause all material patents, copyrights, and trademarks acquired or generated by Borrower or the Restricted Subsidiaries that are not already the subject of a registration with the appropriate filing office (or an application therefor diligently prosecuted) to be registered with such appropriate filing office in a manner sufficient to impart constructive notice of Borrower's or the applicable Restricted Subsidiary's ownership thereof, and (iii) cause to be prepared, executed, and delivered to Agent supplemental schedules to the applicable Loan Documents to identify such patents, copyrights, and trademarks as being subject to the security interests created thereunder. 4.5 Power of Attorney. Borrower hereby irrevocably makes, constitutes, and appoints Agent (and any of Agent's officers, employees, or agents designated by Agent) as Borrower's true and lawful attorney, with power to (a) if Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of Borrower on any of the documents described in Section 4.4, (b) at any time that an Event of Default has occurred and is continuing, sign Borrower's name on any invoice or bill of lading relating to the Borrower Collateral, drafts against Account Debtors, or notices to Account Debtors, (c) send requests for verification of Borrower's or the Restricted Subsidiaries' Accounts, (d) endorse Borrower's name on any of its payment items (including all of its Collections) that may come into the Lender Group's possession, (e) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under Borrower's policies of insurance and make all determinations and decisions with respect to such policies of insurance, and (f) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting Borrower's or the Restricted Subsidiaries' Accounts, chattel paper, or General Intangibles directly with Account Debtors, for amounts and upon terms that Agent determines to be reasonable, and Agent may cause to 37 be executed and delivered any documents and releases that Agent determines to be necessary. The appointment of Agent as Borrower's attorney, and each and every one of its rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and the Lender Group's obligations to extend credit hereunder are terminated. The Lender Group acknowledges that the exercise of the power of attorney granted in this Section may at some times be subject to the provisions of the Intercreditor Agreement. 4.6 Right to Inspect. Agent and each Lender (through any of their respective officers, employees, or agents) shall have the right, from time to time hereafter to inspect the Books and make copies or abstracts thereof and to check, test, and appraise the Collateral, or any portion thereof, in order to verify Borrower's and its Subsidiaries' financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral; provided that so long as no Event of Default has occurred and is continuing,(a) the Agent and the Lenders shall not be permitted to independently audit or appraise the Collateral to the extent that WFF has, within the eight month period prior to the date of any such audit or inspection, conducted an audit or appraisal of the relevant Collateral and has shared the results of the audit or appraisal with the Lender Group (with the understanding that neither WFF, the lenders party to the WFF Loan Agreement, their auditors, appraisers or agents shall have any liability to the Lender Group in respect of any such audit or appraisal or the adequacy or accuracy thereof), (b) in any event, Borrower shall not be required to pay for more than 2 inspections/audits of the Collateral per year (including both inspections/audits conducted by WFF and those conducted by the Agent) and (b) appraisals of the Collateral shall be conducted no more frequently than once per year (including both appraisals conducted by WFF and those conducted by the Agent). 4.7 Control Agreements. Borrower agrees that it will not, and will not permit the Restricted Subsidiaries to, transfer assets out of any of their Deposit Accounts or Securities Accounts; provided, however, that so long as no Event of Default has occurred and is continuing or would result therefrom, Borrower and the Restricted Subsidiaries may use such assets (and the proceeds thereof) to the extent not prohibited by this Agreement or the other Loan Documents and, if the transfer is to another bank or securities intermediary, so long as Borrower (or a Restricted Subsidiary, as applicable), Agent, and the substitute bank or securities intermediary have entered into a Control Agreement. Borrower agrees that it will and will cause the Restricted Subsidiaries to take any or all reasonable steps that Agent requests in order for Agent to obtain control in accordance with Sections 9-104, 9-105, 9-106, and 9-107 of the Code with respect to any of its or their Securities Accounts, Deposit Accounts, electronic chattel paper, Investment Property, and letter-of-credit rights. No arrangement contemplated hereby or by any Control Agreement in respect of any Securities Accounts or other Investment Property shall be modified by Borrower without the prior written consent of Agent. Upon the occurrence and during the continuance of a Default or Event of Default, Agent may notify any bank or securities intermediary to liquidate the applicable Deposit Account or Securities Account or any related Investment Property maintained or held thereby and remit the proceeds thereof to the Agent for the benefit of the Lenders. 38 5. REPRESENTATIONS AND WARRANTIES. In order to induce the Lender Group to enter into this Agreement, Borrower makes the following representations and warranties to the Lender Group which shall be true, correct, and complete, in all material respects, as of the date hereof, and shall be true, correct, and complete, in all material respects, as of the Closing Date, and at and as of the date of the making of each Advance (or other extension of credit) made thereafter, as though made on and as of the date of such Advance (or other extension of credit) (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 5.1 No Encumbrances. Borrower and the Restricted Subsidiaries have good and indefeasible title to their personal property assets and good and marketable title to their Real Property, in each case, free and clear of Liens except for Permitted Liens. 5.2 Usury Exemption. The Obligations are exempt from the usury limitations imposed by the California State Constitution pursuant to Section 25118 of the California Corporations Code. The Borrower represents and warrants to the Lender Group that it has, by reason of its own business and financial experience, and that of its counsel and other professional advisors, the capacity to protect its own interests in connection with the transactions contemplated by this Agreement, and that its acceptance of the interest rates and other pricing components associated with the Obligations has been made in the full exercise of that capacity, and with the advice of its counsel. 5.3 [Intentionally omitted]. 5.4 Equipment. All of the Equipment of Borrower and the Restricted Subsidiaries is used or held for use in their business and is fit for such purposes ordinary wear and tear excepted. 5.5 Location of Inventory and Equipment. The Inventory and Equipment of Borrower and the Restricted Subsidiaries are not stored with a bailee, warehouseman, or similar party and are located only at, or in-transit between, the locations identified on Schedule 5.5 (as such Schedule may be updated pursuant to Section 6.9). 5.6 Inventory Records. Borrower keeps correct and accurate records itemizing and describing the type, quality, and quantity of its and the Restricted Subsidiaries' Inventory and the book value thereof. 5.7 State of Incorporation; Location of Chief Executive Office; FEIN; Organizational ID Number; Commercial Tort Claims. (a) The jurisdiction of organization of Borrower and each of its Subsidiaries is set forth on Schedule 5.7(a). 39 (b) The chief executive office of Borrower and each of its Subsidiaries is located at the address indicated on Schedule 5.7(b) (as such Schedule may be updated pursuant to Section 6.9). (c) Borrower's and each of its Subsidiaries' FEIN and organizational identification number, if any, are identified on Schedule 5.7(c). (d) As of the Closing Date, Borrower and the Restricted Subsidiaries do not hold any commercial tort claims, except as set forth on Schedule 5.7(d). 5.8 Due Organization and Qualification; Subsidiaries. (a) Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its organization and qualified to do business in any state where the failure to be so qualified reasonably could be expected to have a Material Adverse Change; provided that until such time as the condition subsequent set forth in Section 3.2(b) is satisfied, it is hereby acknowledged that Borrower is not qualified to do business in the state of Illinois. (b) Set forth on Schedule 5.8(b), is a complete and accurate description of the authorized capital Stock of Borrower, by class, and, as of the Closing Date, a description of the number of shares of each such class that are issued and outstanding. Other than as described on Schedule 5.8(b), there are no subscriptions, options, warrants, or calls relating to any shares of Borrower's capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. Borrower is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital Stock or any security convertible into or exchangeable for any of its capital Stock. (c) Set forth on Schedule 5.8(c), is a complete and accurate list of Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of their organization, (ii) the number of shares of each class of common and preferred Stock authorized for each of the Restricted Subsidiaries and HRC, and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by Borrower. All of the outstanding capital Stock of each such Subsidiary has been validly issued and is fully paid and non-assessable. (d) Except as set forth on Schedule 5.8(c), there are no subscriptions, options, warrants, or calls relating to any shares of Borrower's Subsidiaries' capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. Neither Borrower nor any of its Subsidiaries is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of Borrower's Subsidiaries' capital Stock or any security convertible into or exchangeable for any such capital Stock. 5.9 Due Authorization; No Conflict. 40 (a) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party have been duly authorized by all necessary action on the part of Borrower. (b) The execution, delivery, and performance by Borrower of this Agreement and the other Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to Borrower, the Governing Documents of Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Permitted Liens, or (iv) require any approval of Borrower's interestholders or any approval or consent of any Person under any material contractual obligation of Borrower, other than consents or approvals that have been obtained and that are still in force and effect. (c) Other than the filing of financing statements and the recordation of the Mortgages, the execution, delivery, and performance by Borrower of this Agreement and the other Loan Documents to which Borrower is a party do not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority, other than consents or approvals that have been obtained and that are still in force and effect. (d) This Agreement and the other Loan Documents to which Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by Borrower will be the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Agent's Liens are validly created, perfected, and first priority (except as contemplated by the Intercreditor Agreement) Liens, subject only to Permitted Liens. (f) The execution, delivery, and performance by each Guarantor of the Loan Documents to which it is a party have been duly authorized by all necessary action on the part of such Guarantor. (g) The execution, delivery, and performance by each Guarantor of the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to such Guarantor, the Governing Documents of such Guarantor, or any order, judgment, or decree of any court or other Governmental Authority binding on such Guarantor, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of such Guarantor, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of such Guarantor, other than Permitted Liens, or (iv) require any approval of such Guarantor's interestholders or any approval or 41 consent of any Person under any material contractual obligation of such Guarantor, other than consents or approvals that have been obtained and that are still in force and effect. (h) Other than the filing of financing statements and the recordation of the Mortgages, the execution, delivery, and performance by each Guarantor of the Loan Documents to which such Guarantor is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority, other than consents or approvals that have been obtained and that are still in force and effect. (i) The Loan Documents to which each Guarantor is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Guarantor will be the legally valid and binding obligations of such Guarantor, enforceable against such Guarantor in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. 5.10 Litigation. Other than those matters disclosed on Schedule 5.10, there are no actions, suits, or proceedings pending or, to the best knowledge of Borrower, threatened against Borrower, or any of its Subsidiaries, as applicable, except for (a) matters that are fully covered by insurance (subject to customary deductibles), and (b) matters arising after the Closing Date that, if decided adversely to Borrower, or any of its Subsidiaries, as applicable, reasonably could not be expected to result in a Material Adverse Change. 5.11 No Material Adverse Change. All financial statements relating to Borrower and its Subsidiaries that have been delivered by Borrower to the Lender Group have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and present fairly in all material respects, Borrower's and its Subsidiaries' financial condition as of the date thereof and results of operations for the period then ended. There has not been a Material Adverse Change since the date of the latest financial statements submitted to the Lender Group on or before the Closing Date. 5.12 Fraudulent Transfer. (a) Borrower and the Restricted Subsidiaries, taken as a whole, are Solvent. (b) No transfer of property is being made by Borrower or its Subsidiaries and no obligation is being incurred by Borrower or its Subsidiaries in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrower or its Subsidiaries. 5.13 Employee Benefits. None of Borrower, any of the Restricted Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan. 42 5.14 Environmental Condition. Except as set forth on Schedule 5.14, (a) to Borrower's knowledge, none of Borrower's or the Restricted Subsidiaries' assets has ever been used by Borrower, the Restricted Subsidiaries, or by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials, where such production, storage, handling, treatment, release or transport was in violation of applicable Environmental Law, except for any such violation that reasonably could not be expected to result in a Material Adverse Change (b) to Borrower's knowledge, none of Borrower's or the Restricted Subsidiaries' properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, (c) neither Borrower nor any of the Restricted Subsidiaries has received notice that a Lien arising under any Environmental Law has attached to any revenues or to any Real Property owned or operated by Borrower or the Restricted Subsidiaries, and (d) neither Borrower nor the Restricted Subsidiaries has received any unresolved summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Borrower or its Subsidiaries resulting in the releasing or disposing of Hazardous Materials into the environment that allegedly is in violation of applicable Environmental Law. 5.15 Brokerage Fees. Neither Borrower nor any of the Restricted Subsidiaries has utilized the services of any broker or finder in connection with Borrower's obtaining financing from the Lender Group under this Agreement and no brokerage commission or finders fee is payable by Borrower or the Restricted Subsidiaries in connection herewith. 5.16 Intellectual Property. Borrower and the Restricted Subsidiaries own, or hold licenses in, all trademarks, trade names, copyrights, patents, patent rights, and licenses that are necessary to the conduct of their business as currently conducted. Attached hereto as Schedule 5.16 (as updated from time to time) is a true, correct, and complete listing of all material patents, patent applications, trademarks, trademark applications, copyrights, and copyright registrations as to which Borrower or one of the Restricted Subsidiaries is the owner or is an exclusive licensee. 5.17 Leases. Borrower and the Restricted Subsidiaries enjoy peaceful and undisturbed possession under all leases material to their business and to which they are parties or under which they are operating. All of such leases are valid and subsisting and no material default by Borrower or the Restricted Subsidiaries exists under any of them. 5.18 Deposit Accounts and Securities Accounts. Set forth on Schedule 5.18 are all of Borrower's and the Restricted Subsidiaries' Deposit Accounts and Securities Accounts, including, with respect to each bank or securities intermediary (i) the name and address of such Person, and (ii) the account numbers of the Deposit Accounts or Securities Accounts maintained with such Person. 5.19 Complete Disclosure. All factual information (taken as a whole) furnished by or on behalf of Borrower or its Subsidiaries in writing to Agent or any Lender (including all information contained in the Schedules hereto or in the other Loan Documents, but excluding 43 any Projections) for purposes of or in connection with this Agreement, the other Loan Documents, or any transaction contemplated herein or therein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of Borrower or its Subsidiaries in writing to Agent or any Lender will be, true and accurate, in all material respects, on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. On the Closing Date, the Closing Date Projections represent, and as of the date on which any other Projections are delivered to Agent, such additional Projections represent Borrower's good faith best estimate of its and its Subsidiaries future performance for the periods covered thereby. 5.20 Indebtedness. Set forth on Schedule 5.20 is a true and complete list of all Indebtedness of Borrower and its Subsidiaries outstanding immediately prior to the Closing Date that is to remain outstanding after the Closing Date and such Schedule accurately reflects the aggregate principal amount of such Indebtedness and the principal terms thereof. 5.21 Subordinated Notes Indenture. The Obligations are "Senior Debt" (as defined in the Subordinated Notes Indenture) and, therefore, the repayment of the Subordinated Notes is subordinated to the prior payment in full in cash of the Obligations to the extent and in the manner provided in Article 10 of the Subordinated Notes Indenture. The Indebtedness owing to the Lender Group under the Loan Documents is "Permitted Debt" (as defined in the Subordinated Notes Indenture). The defined term "Credit Facility" (as defined in the Subordinated Notes Indenture) includes the credit facility evidenced by this Agreement and the other Loan Documents. 5.22 CFCs. As of the Closing Date, none of Borrower's Restricted Subsidiaries that are CFCs could execute and deliver guaranties of the Obligations or grant Liens in their assets to secure the Obligations without creating a tax obligation under Section 956 of the IRC. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, until termination of all of the Revolver Commitments and payment in full of the Obligations, Borrower shall and shall cause each of the Restricted Subsidiaries to do all of the following: 6.1 Accounting System. Maintain a system of accounting that enables Borrower to produce financial statements in accordance with GAAP and maintain records pertaining to the Collateral that contain information as from time to time reasonably may be requested by Agent. Borrower also shall keep an inventory reporting system that shows all additions, sales, claims, returns, and allowances with respect to its and its Subsidiaries' Inventory. 6.2 Collateral Reporting. Upon request by the Agent, provide Agent (and if so requested by Agent, with copies for each Lender) concurrently with delivery to WFF, all reports under Section 6.2 of the WFF Loan Agreement. 44 6.3 Financial Statements, Reports, Certificates. Deliver to Agent, with copies to each Lender: (a) as soon as available, but in any event within 30 days (45 days in the case of a month that is the end of one of Borrower's fiscal quarters) after the end of each month during each of Borrower's fiscal years, (i) a company prepared consolidated balance sheet, income statement, and statement of cash flow covering Borrower's and the Restricted Subsidiaries' operations during such period, (ii) a certificate signed by the chief financial officer of Borrower to the effect that: (A) the financial statements delivered hereunder have been prepared in accordance with GAAP (except for the lack of footnotes and being subject to year-end audit adjustments) and fairly present in all material respects the consolidated financial condition of Borrower and the Restricted Subsidiaries, (B) there does not exist any condition or event that constitutes a Default or Event of Default (or, to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrower has taken, is taking, or proposes to take with respect thereto), and (iii) for each month that is the date on which a financial covenant in Section 7.18 is to be tested, a Compliance Certificate demonstrating, in reasonable detail, compliance at the end of such period with the applicable financial covenants contained in Section 7.18, (b) as soon as available, but in any event within 90 days after the end of each of Borrower's fiscal years, consolidated and consolidating financial statements of Borrower and its Subsidiaries for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Agent and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP (such audited financial statements to include a balance sheet, income statement, and statement of cash flow and, if prepared, such accountants' letter to management), (c) as soon as available, but in any event prior to the start of each of Borrower's fiscal years, copies of Borrower's Projections, in form and substance (including as to scope and underlying assumptions) satisfactory to Agent, in its sole discretion, for the forthcoming fiscal year, month by month, certified by the chief financial officer of Borrower as being such officer's good faith best estimate of the financial performance of Borrower during the period covered thereby, 45 (d) if and when filed by Borrower, (i) Form 10-Q quarterly reports, Form 10-K annual reports, and Form 8-K current reports, (ii) any other filings made by Borrower with the SEC, (iii) copies of Borrower's federal income tax returns, and any amendments thereto, filed with the Internal Revenue Service, and (iv) any other information that is provided by Borrower to its shareholders generally, (e) if and when filed by Borrower or its Subsidiaries and as requested by Agent, satisfactory evidence of payment of applicable excise taxes in each jurisdiction in which (i) Borrower or its Subsidiaries conducts business or is required to pay any such excise tax, (ii) where Borrower's or its Subsidiaries' failure to pay any such applicable excise tax would result in a Lien on the properties or assets of Borrower or its Subsidiaries, or (iii) where Borrower's or its Subsidiaries' failure to pay any such applicable excise tax reasonably could be expected to result in a Material Adverse Change, (f) as soon as Borrower has knowledge of any event or condition that constitutes a Default or an Event of Default, notice thereof and a statement of the curative action that Borrower proposes to take with respect thereto, (g) promptly after the commencement thereof, but in any event within 5 days after the service of process with respect thereto on Borrower or any of its Subsidiaries, notice of all actions, suits, or proceedings brought by or against Borrower or any of its Subsidiaries before any Governmental Authority which, if determined adversely to Borrower or such Subsidiary, reasonably could be expected to result in a Material Adverse Change, (h) promptly after receipt thereof, any notices, complaints, orders, or other communications from the U.S. Food and Drug Administration with respect to any material violation of or non-compliance with regulations applicable to Borrower or its Subsidiaries or permits or licenses held by Borrower or its Subsidiaries, and (i) upon the request of Agent, any other report reasonably requested relating to the financial condition of Borrower or its Subsidiaries. In addition to the financial statements referred to above, Borrower agrees to deliver financial statements prepared on both a consolidated and consolidating basis and agrees that no Subsidiary of Borrower will have a fiscal year different from that of Borrower. Borrower agrees to cooperate with Agent to allow Agent to consult with its independent certified public accountants if Agent reasonably requests the right to do so and that, in such connection, its independent certified public accountants are authorized to communicate with Agent and to release to Agent whatever financial information concerning Borrower or its 46 Subsidiaries Agent reasonably may request, provided, in all cases, that Borrower shall have received notice of any such proposed consultation and have the right to be present at such consultation. 6.4 Guarantor Reports. Cause each Guarantor to deliver its annual financial statements at the time when Borrower provides its audited financial statements to Agent, but only to the extent such Guarantor's financial statements are not consolidated with Borrower's financial statements, and copies of all federal income tax returns as soon as the same are available and in any event no later than 30 days after the same are required to be filed by law. 6.5 Returns. Cause returns and allowances, as between Borrower and the Restricted Subsidiaries and their Account Debtors, to be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement; provided that Borrower may change such customary practices with the written consent of WFF. 6.6 Maintenance of Properties. Maintain and preserve all of its properties which are necessary or useful in the proper conduct to its business in good working order and condition, ordinary wear and tear excepted, and comply at all times with the provisions of all leases to which it is a party as lessee so as to prevent any loss or forfeiture thereof or thereunder. 6.7 Taxes. Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrower, its Subsidiaries, or any of their respective assets to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. Borrower will and will cause its Subsidiaries to make timely payment or deposit of all tax payments and withholding taxes required of it and them by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Agent with proof satisfactory to Agent indicating that Borrower and its Subsidiaries have made such payments or deposits. 6.8 Insurance. (a) At Borrower's expense, maintain insurance respecting its and its Subsidiaries' assets wherever located, covering loss or damage by fire, theft, explosion, and all other hazards and risks as ordinarily are insured against by other Persons engaged in the same or similar businesses. Borrower also shall maintain business interruption, public liability, and product liability insurance, as well as insurance against larceny, embezzlement, and criminal misappropriation. All such policies of insurance involving Borrower or the Restricted Subsidiaries shall be in such amounts and with such insurance companies as are reasonably satisfactory to Agent. Borrower shall deliver copies of all such policies to Agent with a satisfactory lender's loss payable endorsement naming Agent as loss payee or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a 47 clause requiring the insurer to give not less than 30 days prior written notice to Agent in the event of cancellation of the policy for any reason whatsoever. (b) Borrower shall give Agent prompt notice of any loss covered by such insurance. Subject to the last sentence of this clause (b): (i) Agent shall have the exclusive right to adjust any losses claimed under any such insurance policies in excess of $250,000 (or in any amount after the occurrence and during the continuation of an Event of Default), without any liability to Borrower whatsoever in respect of such adjustments; (ii) Any monies received as payment for any loss in an amount that is less than $250,000 under any insurance policy mentioned above (other than liability insurance policies) or as payment of any award or compensation for condemnation or taking by eminent domain, shall be paid over to Agent to be disbursed to Borrower under staged payment terms reasonably satisfactory to Agent for application to the cost of repairs, replacements, or restorations, unless an Event of Default shall have occurred and be continuing in which event, at the option of the Required Lenders, such payment may be applied to the repayment of the Obligations; and (iii) Any monies received as payment for any loss in an amount that is equal to or greater than $250,000 under any insurance policy mentioned above (other than liability insurance policies) or as payment of any award or compensation for condemnation or taking by eminent domain, shall be paid over to Agent to be applied at the option of the Required Lenders either to the prepayment of the Obligations or shall be disbursed to Borrower under staged payment terms reasonably satisfactory to Agent for application to the cost of repairs, replacements, or restorations. Any such repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items of property destroyed prior to such damage or destruction. Notwithstanding clauses (i), (ii) and (iii) above, the rights of the Lender Group under this clause (b) shall not be construed in derogation of the rights of WFF to receive insurance proceeds in respect of the Collateral, and to exclusively adjust and administer any such insurance, to the extent that the Intercreditor Agreement accords priority to WFF in respect of such Collateral. (c) Borrower will not and will not suffer or permit the Restricted Subsidiaries to take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 6.8, unless Agent is included thereon as named insured with the loss payable to Agent under a lender's loss payable endorsement or its equivalent. Borrower immediately shall notify Agent whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and copies of such policies promptly shall be provided to Agent. 48 6.9 Location of Inventory and Equipment. Keep Borrower's and the Restricted Subsidiaries' Inventory and Equipment only at the locations identified on Schedule 5.5 and their chief executive offices only at the locations identified on Schedule 5.7(b); provided, however, that Borrower may amend Schedule 5.5 and Schedule 5.7 so long as such amendment occurs by written notice to Agent not less than 30 days prior to the date on which such Inventory or Equipment is moved to such new location or such chief executive office is relocated, so long as such new location is within the continental United States, and so long as, at the time of such written notification, Borrower provides Agent a Collateral Access Agreement with respect thereto. 6.10 Compliance with Laws. Comply with the requirements of all applicable laws, rules, regulations, and orders of any Governmental Authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Change. 6.11 Leases. Pay when due all rents and other amounts payable under any material leases to which Borrower or any of the Restricted Subsidiaries is a party or by which Borrower's or any such Restricted Subsidiaries' properties and assets are bound, unless such payments are the subject of a Permitted Protest. 6.12 Existence. At all times preserve and keep in full force and effect Borrower's and the Restricted Subsidiaries valid existence and good standing and any rights and franchises material to their businesses. 6.13 Environmental. (a) Keep any property either owned or operated by Borrower or the Restricted Subsidiaries free of any Environmental Liens or post bonds or other financial assurances sufficient to satisfy the obligations or liability evidenced by such Environmental Liens, (b) comply, in all material respects, with Environmental Laws and provide to Agent documentation of such compliance which Agent reasonably requests, (c) promptly notify Agent of any release of a Hazardous Material in any reportable quantity from or onto property owned or operated by Borrower or the Restricted Subsidiaries and take any Remedial Actions required under any applicable Environmental Law to abate such release, and (d) promptly, but in any event within 5 days of its receipt thereof, provide Agent with written notice of any of the following: (i) notice that an Environmental Lien has been filed against any of the real or personal property of Borrower or the Restricted Subsidiaries, (ii) commencement of any Environmental Action or notice that an Environmental Action will be filed against Borrower or the Restricted Subsidiaries, and (iii) notice of a violation, citation, or other administrative order which reasonably could be expected to result in a Material Adverse Change. 6.14 Disclosure Updates. Promptly and in no event later than 5 Business Days after obtaining knowledge thereof, notify Agent if any written information, exhibit, or report furnished to the Lender Group contained any untrue statement of a material fact or omitted to 49 state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which made. The foregoing to the contrary notwithstanding, any notification pursuant to the foregoing provision will not cure or remedy the effect of the prior untrue statement of a material fact or omission of any material fact nor shall any such notification have the affect of amending or modifying this Agreement or any of the Schedules hereto. 6.15 Formation of Subsidiaries. At the time that Borrower or any Guarantor forms any direct or indirect Subsidiary or acquires any direct or indirect domestic Subsidiary after the Closing Date (excluding Unrestricted Subsidiaries), Borrower or such Guarantor shall (a) cause such new Subsidiary to provide to Agent a joinder to the Guaranty and the Guarantor Security Agreement, together with such other security documents (including Mortgages with respect to any Real Property of such new Subsidiary), as well as appropriate UCC-1 financing statements (and with respect to all property subject to a Mortgage, fixture filings), all in form and substance satisfactory to Agent (including being sufficient to grant Agent a first priority Lien (subject to Permitted Liens) in and to the assets of such newly formed or acquired Subsidiary), (b) provide to Agent a pledge agreement and appropriate certificates and powers or UCC-1 financing statements, hypothecating all of the direct or beneficial ownership interest in such new Subsidiary, in form and substance satisfactory to Agent, and (c) provide to Agent all other documentation, including one or more opinions of counsel satisfactory to Agent, which in its opinion is appropriate with respect to the execution and delivery of the applicable documentation referred to above (including policies of title insurance or other documentation with respect to all property subject to a Mortgage). Any document, agreement, or instrument executed or issued pursuant to this Section 6.15 shall be a Loan Document and shall be subject to the terms of the Intercreditor Agreement. 6.16 Amendment of Preferred Stock Cause the agreements governing the Borrower Preferred Stock and the Holding Preferred Stock to be amended on an annual basis, beginning in the first quarter of 2004, to extend the period of time within which cash dividends are not paid thereunder for an additional year. 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, until termination of all of the Revolver Commitments and payment in full of the Obligations, Borrower will not and will not permit any of its Restricted Subsidiaries to do any of the following: 7.1 Indebtedness. Create, incur, assume, suffer to exist, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement and the other Loan Documents, (b) Indebtedness to WFF under the WFF Loan Agreement (but not any refinancings thereof by lenders other than refinancings by WFF or syndicates of lenders of which WFF or Wells Fargo Bank, N.A. holds (as of the date of the consummation thereof) 50 the largest lending commitment of any lender or group of affiliated lenders), and guarantee obligations by the Restricted Subsidiaries with respect thereto in an aggregate principal amount not to exceed $32,000,000, less any permanent reductions to the lending commitments thereunder which hereafter occur (but not any scheduled reductions to the lending commitments thereunder prior to the maturity date thereof). (c) Indebtedness set forth on Schedule 5.20, (d) Permitted Purchase Money Indebtedness, (e) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b) and (c) of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or extensions do not, in Agent's judgment, materially impair the prospects of repayment of the Obligations by Borrower or materially impair Borrower's creditworthiness (this requirement being deemed satisfied if the terms and conditions of any such refinancing, renewal, or extension are the same as or more favorable than the terms in the Indebtedness being refinanced, renewed or extended), (ii) such refinancings, renewals, or extensions do not result in an increase in the then extant principal amount of, or interest rate with respect to, the Indebtedness so refinanced, renewed, or extended, (iii) such refinancings, renewals, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, nor are they on terms or conditions that, taken as a whole, are materially more burdensome or restrictive to Borrower, (iv) if the Indebtedness that is refinanced, renewed, or extended was subordinated in right of payment to the Obligations, then the terms and conditions of the refinancing, renewal, or extension Indebtedness must include subordination terms and conditions that are at least as favorable to the Lender Group as those that were applicable to the refinanced, renewed, or extended Indebtedness, and (v) the Indebtedness that is refinanced, renewed, or extended is not recourse to any Person that is liable on account of the Obligations other than those Persons which were obligated with respect to the Indebtedness that was refinanced, renewed, or extended, (f) endorsement of instruments or other payment items for deposit, (g) Indebtedness composing Permitted Investments, (h) Indebtedness of Borrower evidenced by the Subordinated Notes, (i) Indebtedness of Borrower evidenced by the Subordinated Convertible Notes, (j) Indebtedness of Borrower evidenced by the Senior Notes, (k) Indebtedness of HRC evidenced by the HRC Notes, 51 (l) other unsecured Indebtedness not to exceed $1,500,000 outstanding at any time; provided that, notwithstanding the foregoing provisions of this subsection the Unrestricted Subsidiaries shall not provide any guarantees of the obligations under the WFF Loan Agreement. 7.2 Liens. Create, incur, assume, or suffer to exist, directly or indirectly, any Lien on or with respect to any of its assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced, renewed, or extended under Section 7.1(e) and so long as the replacement Liens only encumber those assets that secured the refinanced, renewed, or extended Indebtedness). 7.3 Restrictions on Fundamental Changes. (a) Enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its Stock. (b) Liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution). (c) Convey, sell, lease, license, assign, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or substantially all of its assets. 7.4 Disposal of Assets. Other than Permitted Dispositions, convey, sell, lease, license, assign, transfer, or otherwise dispose of any of Borrower's or the Restricted Subsidiaries assets. 7.5 Change Name. Change Borrower's or any of the Restricted Subsidiaries' names, FEINs, organizational identification number, state of organization or organizational identity; provided, however, that Borrower or any of the Restricted Subsidiaries may change their names upon at least 30 days prior written notice to Agent of such change and so long as, at the time of such written notification, Borrower or the Restricted Subsidiary provides any financing statements necessary to perfect and continue perfected the Agent's Liens. 7.6 Nature of Business. Make any change in the principal nature of its or their business. 7.7 Prepayments and Amendments. Except in connection with a refinancing permitted by Section 7.1(e), (a) prepay, redeem, defease, purchase, or otherwise acquire any Indebtedness of Borrower or the Restricted Subsidiaries (including without limitation the WFF Loan Agreement and the Subordinated Notes), other than the Obligations in accordance with this Agreement, provided that the obligations under the WFF Loan Agreement (i) may 52 be prepaid and reduced to the extent of any mandatory prepayment obligations described in the WFF Loan Agreement as the same is in effect as of the date of this Agreement, and (ii) may revolve (and be reallocated amongst sublimits) to the extent that any such repayments (or reallocations) do not result in a reduction of the overall lending commitments under the WFF Loan Agreement, and (iii) may reduce the overall commitments under the WFF Loan Agreement as contemplated by Section 2.1(h) thereof to an amount which is not less than $25,000,000. (b) directly or indirectly, amend, modify, alter, increase, or change in any respect that may be adverse to the Lender Group any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under Section 7.1(c), (d), (i), (j), or (k), or amend, modify, alter, increase, change in any respect, waive the provisions of, or otherwise modify the provisions of the Subordinated Notes Indenture without the prior written consent of the Lender Group. 7.8 Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control. 7.9 Consignments. Consign any of its or their Inventory or sell any of its or their Inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale. 7.10 Distributions. Make any distribution or declare or pay any dividends (in cash or other property, other than common Stock or with respect to dividends on Borrower's 111/2% Senior PIK Preferred Stock, such Preferred Stock) on, or purchase, acquire, redeem, or retire any of Borrower's Stock, of any class, whether now or hereafter outstanding. 7.11 Accounting Methods. Modify or change its fiscal year or its method of accounting (other than as may be required to conform to GAAP) or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrower's or the Subsidiaries' accounting records without said accounting firm or service bureau agreeing to provide Agent information regarding Borrower's and the Subsidiaries' financial condition. 7.12 Investments. Except for Permitted Investments, directly or indirectly, make or acquire any Investment or incur any liabilities (including contingent obligations) for or in connection with any Investment; provided, however, that Borrower and the Restricted Subsidiaries shall not have Permitted Investments (other than in the Cash Management Accounts) in Deposit Accounts or Securities Accounts in an aggregate amount in excess of $1,000 at any one time unless Borrower or the Restricted Subsidiary, as applicable, and the applicable securities intermediary or bank have entered into Control Agreements governing such Permitted Investments in order to perfect (and further establish) the Agent's Liens in such Permitted Investments. Subject to the foregoing proviso, Borrower shall not and shall not permit the Restricted Subsidiaries to establish or maintain any Deposit Account or Securities Account unless Agent shall have received a Control Agreement in respect of such Deposit Account or Securities Account. 53 7.13 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms, that are fully disclosed to Agent, and that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-Affiliate. 7.14 Suspension. Suspend or go out of a substantial portion of its or their business. 7.15 [Intentionally Omitted] 7.16 Use of Proceeds. Use the proceeds of the Advances for any purpose other than (a) on the Closing Date, (i) to repay, in full, the outstanding principal, accrued interest, and accrued fees and expenses owing under or pursuant to the Existing Credit Agreement, and (ii) to pay transactional fees, costs, and expenses incurred in connection with this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby, and (b) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted purposes. 7.17 Inventory and Equipment with Bailees. Except as provided on Schedule 5.5, store the Inventory or Equipment of Borrower or the Restricted Subsidiaries at any time now or hereafter with a bailee, warehouseman, or similar party without Agent's prior written consent. 7.18 Financial Covenants. (a) Fail to maintain or achieve: (i) Minimum EBITDA. EBITDA, measured on a quarter-end basis, of at least the required amount set forth in the following table for the applicable period set forth opposite thereto: - ----------------------------------------------------------------------- Applicable Amount Applicable Period - ----------------------------------------------------------------------- $5,000,000 For the 1 quarter period ending September 30, 2003 - ----------------------------------------------------------------------- $10,000,000 For the 2 quarter period ending December 31, 2003 - ----------------------------------------------------------------------- $16,500,000 For the 3 quarter period ending March 31, 2004 - ----------------------------------------------------------------------- $23,000,000 For the 4 quarter period ending June 30, 2004 - ----------------------------------------------------------------------- $24,500,000 For the 4 quarter period ending September 30, 2004 - ----------------------------------------------------------------------- $25,000,000 For the 4 quarter period ending December 31, 2004 and each 4 quarter period ending at the end of a calendar quarter thereafter - ----------------------------------------------------------------------- 54 (b) Make: (i) Capital Expenditures. Capital Expenditures in any fiscal year in excess of the amount set forth in the following table for the applicable period: - --------------------------------------------------------------------------- Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year 2003 2004 2005 2006 2007 - --------------------------------------------------------------------------- $ 6,500,000 $ 9,000,000 $ 10,000,000 $ 11,000,000 $ 11,000,000 - --------------------------------------------------------------------------- ; provided that the foregoing notwithstanding, Borrower may elect to make Capital Expenditures during its 2003 fiscal year that exceed $6,500,000 up to a maximum of $7,500,000, but in such event the amount permitted above for its 2004 fiscal year shall be reduced by an amount equal to the actual amount of Borrower's Capital Expenditures during fiscal year 2003 minus $6,500,000; provided, further, that any unused portion of the amount of Capital Expenditures permitted during any fiscal year may be carried over and added to the maximum amount allowed for the next succeeding fiscal year (but not to any subsequent fiscal year). 7.19 Payments on Affiliate Notes. Make any payments of principal or cash payments of interest to the holders of the Subordinated Convertible Notes, the Senior Notes, or the HRC Notes. 7.20 Limitation on Indebtedness of Unrestricted Subsidiaries. Permit the Unrestricted Subsidiaries to create, incur, assume, or suffer to exist any Indebtedness if, after giving pro forma effect to the incurrence of any such Indebtedness as of the last day of the then most recently ended fiscal quarter for which Borrower has delivered to Agent financial statements with respect to the Unrestricted Subsidiaries, the aggregate principal amount of the Indebtedness of the Unrestricted Subsidiaries would exceed the result of 5 times the Unrestricted Subsidiaries TFQ EBITDA, determined as of such date. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (each, an "Event of Default") under this Agreement: 55 8.1 If Borrower fails to pay when due and payable, or when declared due and payable, all or any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due the Lender Group, reimbursement of Lender Group Expenses, or other amounts constituting Obligations); 8.2 If Borrower fails to perform, keep, or observe any term, provision, condition, covenant, or agreement beyond any specified cure or grace period applicable thereto contained in this Agreement or in any of the other Loan Documents; 8.3 If any material portion of Borrower's or any of the Restricted Subsidiaries' assets is attached, seized, subjected to a writ or distress warrant, levied upon, or comes into the possession of any third Person; 8.4 If an Insolvency Proceeding is commenced by Borrower or any of the Restricted Subsidiaries; 8.5 If an Insolvency Proceeding is commenced against Borrower, or any of the Restricted Subsidiaries, and any of the following events occur: (a) Borrower or such Restricted Subsidiary consents to the institution of such Insolvency Proceeding against it, (b) the petition commencing the Insolvency Proceeding is not timely controverted; provided, however, that, during the pendency of such period, each member of the Lender Group shall be relieved of its obligations to extend credit hereunder, (c) the petition commencing the Insolvency Proceeding is not dismissed within 60 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, each member of the Lender Group shall be relieved of its obligations to extend credit hereunder, (d) an interim trustee is appointed to take possession of all or any substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, Borrower or any of the Restricted Subsidiaries, or (e) an order for relief shall have been entered therein; 8.6 If Borrower or any of the Restricted Subsidiaries is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; 8.7 If a notice of Lien, levy, or assessment is filed of record with respect to any of Borrower's or any of the Restricted Subsidiaries' assets by the United States, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon any of Borrower's or any of the Restricted Subsidiaries' assets and the same is not paid before such payment is delinquent; 8.8 If one or more judgments or other claims involving an aggregate amount of $500,000, or more, becomes a Lien or encumbrance upon any material portion of Borrower's or any Restricted Subsidiary's assets and the same is not released, discharged, bonded against, or stayed pending appeal before the earlier of 30 days after the date it first arises or 5 56 days prior to the date on which such asset is subject to being forfeited by Borrower or such Restricted Subsidiary; 8.9 (a) If there is a default in one or more agreements to which Borrower is a party with one or more third Persons relative to Borrower's Indebtedness involving an aggregate amount of $750,000, or more, and such default (i) occurs at the final maturity of the obligations thereunder, or (ii) results in a right by such third Person(s), irrespective of whether exercised, to accelerate the maturity of Borrower's obligations thereunder, or (b) If there is a default in any other agreement to which Borrower is a party with one or more third Persons and such default results in a right by such third Person(s), irrespective of whether exercised, to terminate such agreement and such termination could reasonably be expected to result in a Material Adverse Change; 8.10 If Borrower or any of the Restricted Subsidiaries makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; 8.11 If any warranty, representation, statement, or Record made to the Lender Group by Borrower, the Restricted Subsidiaries, or any officer, employee, agent, or director of Borrower or any of the Restricted Subsidiaries is inaccurate in any material respect as of the date made or deemed made; 8.12 If the obligation of any Guarantor under the Guaranty is limited or terminated by operation of law or by such Guarantor thereunder; 8.13 If this Agreement or any other Loan Document that purports to create a Lien, shall, for any reason, fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority Lien on or security interest in the Collateral covered hereby or thereby; or 8.14 Any provision of any Loan Document shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by Borrower or the Restricted Subsidiaries, or a proceeding shall be commenced by Borrower or the Restricted Subsidiaries, or by any Governmental Authority having jurisdiction over Borrower or the Restricted Subsidiaries, seeking to establish the invalidity or unenforceability thereof, or Borrower or its Subsidiaries shall deny that Borrower or the Restricted Subsidiaries has any liability or obligation purported to be created under any Loan Document. 9. THE LENDER GROUP'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. Upon the occurrence, and during the continuation, of an Event of Default, the Required Lenders (at their election but without notice of their election and without demand) may, authorize and instruct Agent to do any one or more of the 57 following on behalf of the Lender Group (and Agent, acting upon the instructions of the Required Lenders, shall, subject to the terms of the Intercreditor Agreement, do the same on behalf of the Lender Group), all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, under any of the Loan Documents, or under any other agreement between Borrower and the Lender Group; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of the Lender Group, but without affecting any of the Agent's Liens in the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Borrower's Account Debtors for amounts and upon terms which Agent considers advisable, and in such cases, Agent will credit Borrower's Loan Account with only the net amounts received by Agent in payment of such disputed Accounts after deducting all Lender Group Expenses incurred or expended in connection therewith; (e) Cause Borrower to hold all of its returned Inventory in trust for the Lender Group and segregate all such Inventory from all other assets of Borrower or in Borrower's possession; (f) Without notice to or demand upon Borrower, make such payments and do such acts as Agent considers necessary or reasonable to protect its security interests in the Collateral. Borrower agrees to assemble the Collateral if Agent so requires, and to make the Collateral available to Agent at a place that Agent may designate which is reasonably convenient to both parties. Borrower authorizes Agent to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any Lien that in Agent's determination appears to conflict with the Agent's Liens in and to the Collateral and to pay all expenses incurred in connection therewith and to charge Borrower's Loan Account therefor. With respect to any of Borrower's owned or leased premises, Borrower hereby grants Agent a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of the Lender Group's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to Borrower (such notice being expressly waived), and without constituting an acceptance of any collateral in full or partial satisfaction of an obligation (within the meaning of the Code), set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by the Lender Group, or (ii) Indebtedness at any time owing to or for the credit or the account of Borrower held by the Lender Group; (h) (intentionally omitted) 58 (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Borrower Collateral. Borrower hereby grants to Agent a license or other right to use, without charge, Borrower's labels, patents, copyrights, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Borrower Collateral, in completing production of, advertising for sale, and selling any Borrower Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to the Lender Group's benefit; (j) Sell the Borrower Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Agent determines is commercially reasonable. It is not necessary that the Borrower Collateral be present at any such sale; (k) Agent shall give notice of the disposition of the Borrower Collateral as follows: (i) Agent shall give Borrower a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Borrower Collateral, the time on or after which the private sale or other disposition is to be made; and (ii) The notice shall be personally delivered or mailed, postage prepaid, to Borrower as provided in Section 12, at least 10 days before the earliest time of disposition set forth in the notice; no notice needs to be given prior to the disposition of any portion of the Borrower Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market; (l) Agent, on behalf of the Lender Group, may credit bid and purchase at any public sale; (m) Agent may seek the appointment of a receiver or keeper to take possession of all or any portion of the Borrower Collateral or to operate same and, to the maximum extent permitted by law, may seek the appointment of such a receiver without the requirement of prior notice or a hearing; and (n) The Lender Group shall have all other rights and remedies available at law or in equity or pursuant to any other Loan Document. ; provided, however, that upon the occurrence of any Event of Default described in Section 8.4 or Section 8.5, in addition to the remedies set forth above, without any notice to Borrower or any other Person or any act by the Lender Group, the Revolver Commitments shall automatically terminate and the Obligations then outstanding, together with all accrued and unpaid interest thereon and all fees and all other amounts due under this Agreement and the other Loan Documents, shall automatically and immediately become due and payable, 59 without presentment, demand, protest, or notice of any kind, all of which are expressly waived by Borrower. 9.2 Remedies Cumulative. The rights and remedies of the Lender Group under this Agreement, the other Loan Documents, and all other agreements shall be cumulative. The Lender Group shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by the Lender Group of one right or remedy shall be deemed an election, and no waiver by the Lender Group of any Event of Default shall be deemed a continuing waiver. No delay by the Lender Group shall constitute a waiver, election, or acquiescence by it. 10. TAXES AND EXPENSES. If Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, Agent, in its sole discretion and without prior notice to Borrower, may do any or all of the following: (a) make payment of the same or any part thereof, (b) [[intentionally omitted]], or (c) in the case of the failure to comply with Section 6.8 hereof, obtain and maintain insurance policies of the type described in Section 6.8 and take any action with respect to such policies as Agent deems prudent. Any such amounts paid by Agent shall constitute Lender Group Expenses and any such payments shall not constitute an agreement by the Lender Group to make similar payments in the future or a waiver by the Lender Group of any Event of Default under this Agreement. Agent need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1 Demand; Protest; etc. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of documents, instruments, chattel paper, and guarantees at any time held by the Lender Group on which Borrower may in any way be liable. 11.2 The Lender Group's Liability for Borrower Collateral. Borrower hereby agrees that: (a) so long as Agent complies with its obligations, if any, under the Code, the Lender Group shall not in any way or manner be liable or responsible for: (i) the safekeeping of the Borrower Collateral, (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause, (iii) any diminution in the value thereof, or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person, and (b) all risk of loss, damage, or destruction of the Borrower Collateral shall be borne by Borrower. 60 11.3 Indemnification. Borrower shall pay, indemnify, defend, and hold the Agent-Related Persons, the Lender-Related Persons, and each Participant (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them (a) in connection with or as a result of or related to the execution, delivery, enforcement, performance, or administration (including any restructuring or workout with respect hereto) of this Agreement, any of the other Loan Documents, or the transactions contemplated hereby or thereby or the monitoring of Borrower's and its Subsidiaries' compliance with the terms of the Loan Documents, and (b) with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event, or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). The foregoing to the contrary notwithstanding, Borrower shall have no obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which Borrower was required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by Borrower with respect thereto. WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LIABILITIES WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON. 12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by Borrower or Agent to the other relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, electronic mail (at such email addresses as Borrower or Agent, as applicable, may designate to each other in accordance herewith), or telefacsimile to Borrower or Agent, as the case may be, at its address set forth below: If to Borrower: HUDSON RESPIRATORY CARE, INC. 27711 Diaz Road Temecula, California 92589 Attn: Chief Financial Officer 61 Fax No. (909) 699-8462 with copies to: BINGHAM MCCUTCHEN 355 South Grand Avenue Los Angeles, California 90071-3106 Attn: Roger Lustberg, Esq. Fax No. (213) 680-6499 If to Agent: MW POST ADVISORY GROUP, LLC 11755 Wilshire Blvd., Suite 1400 Los Angeles, California 90025 Attn: Allan Schweitzer, CFA Fax No. (310) 996-9669 with copies to: SHEPPARD, MULLIN, RICHTER & HAMPTON LLP 333 South Hope Street, 48th Floor Los Angeles, California 90071 Attn: William M. Scott IV, Esq. Fax No. (213) 617-4276 Agent and Borrower may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other party. All notices or demands sent in accordance with this Section 12, other than notices by Agent in connection with enforcement rights against the Borrower Collateral under the provisions of the Code, shall be deemed received on the earlier of the date of actual receipt or 3 Business Days after the deposit thereof in the mail. Borrower acknowledges and agrees that notices sent by the Lender Group in connection with the exercise of enforcement rights against Borrower Collateral under the provisions of the Code shall be deemed sent when deposited in the mail or personally delivered, or, where permitted by law, transmitted by telefacsimile or any other method set forth above. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. (a) THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. 62 (b) THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY BORROWER COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE SUCH BORROWER COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWER AND THE LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13(b). (c) BORROWER AND THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS. 14.1 Assignments and Participations. (a) Any Lender may assign and delegate to one or more assignees (each an "Assignee") that are Eligible Transferees all, or any ratable part of all, of the Obligations, the Revolver Commitments and the other rights and obligations of such Lender hereunder and under the other Loan Documents, in a minimum amount of $1,000,000; provided, however, that Borrower and Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses, and related information with respect to the Assignee, have been given to Borrower and Agent by such Lender and the Assignee, (ii) such Lender and its Assignee have delivered to Borrower and Agent an Assignment and Acceptance, and (iii) the assignor Lender or Assignee has paid to Agent for Agent's separate account a processing fee in the amount of $5,000. Anything contained herein to the contrary notwithstanding, the payment of any fees shall not be required and the Assignee need not be an Eligible Transferee if such assignment is in connection with any 63 merger, consolidation, sale, transfer, or other disposition of all or any substantial portion of the business or loan portfolio of the assigning Lender. (b) From and after the date that Agent notifies the assignor Lender (with a copy to Borrower) that it has received an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (except with respect to Section 11.3 hereof) and be released from any future obligations under this Agreement (and in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement and the other Loan Documents, such Lender shall cease to be a party hereto and thereto), and such assignment shall effect a novation between Borrower and the Assignee; provided, however, that nothing contained herein shall release any assigning Lender from obligations that survive the termination of this Agreement, including such assigning Lender's obligations under Article 16 and Section 17.8 of this Agreement. (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (1) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document furnished pursuant hereto, (2) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or the performance or observance by Borrower of any of its obligations under this Agreement or any other Loan Document furnished pursuant hereto, (3) such Assignee confirms that it has received a copy of this Agreement, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance, (4) such Assignee will, independently and without reliance upon Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement, (5) such Assignee appoints and authorizes Agent to take such actions and to exercise such powers under this Agreement as are delegated to Agent, by the terms hereof, together with such powers as are reasonably incidental thereto, and (6) such Assignee agrees that it will perform all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) Immediately upon Agent's receipt of the required processing fee payment and the fully executed Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition 64 of the Assignee and the resulting adjustment of the Revolver Commitments arising therefrom. The Revolver Commitment allocated to each Assignee shall reduce the Revolver Commitment of the assigning Lender pro tanto. (e) Any Lender may at any time, with the written consent of Agent, sell to one or more commercial banks, financial institutions, or other Persons not Affiliates of such Lender (a "Participant") participating interests in its Obligations, the Revolver Commitment of such Lender, and the other rights and interests of that Lender (the "Originating Lender") hereunder and under the other Loan Documents (provided that no written consent of Agent shall be required in connection with any sale of any such participating interests by a Lender to an Eligible Transferee); provided, however, that (i) the Originating Lender shall remain a "Lender" for all purposes of this Agreement and the other Loan Documents and the Participant receiving the participating interest in the Obligations, the Revolver Commitment, and the other rights and interests of the Originating Lender hereunder shall not constitute a "Lender" hereunder or under the other Loan Documents and the Originating Lender's obligations under this Agreement shall remain unchanged, (ii) the Originating Lender shall remain solely responsible for the performance of such obligations, (iii) Borrower, Agent, and the Lenders shall continue to deal solely and directly with the Originating Lender in connection with the Originating Lender's rights and obligations under this Agreement and the other Loan Documents, (iv) no Lender shall transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating, (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating, (C) release all or substantially all of the Collateral or guaranties (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating, (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant through such Lender, or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums, and (v) all amounts payable by Borrower hereunder shall be determined as if such Lender had not sold such participation, except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. The rights of any Participant only shall be derivative through the Originating Lender with whom such Participant participates and no Participant shall have any rights under this Agreement or the other Loan Documents or any direct rights as to the other Lenders, Agent, Borrower, the Collections of Borrower or its Subsidiaries, the Collateral, or otherwise in respect of the Obligations. No Participant shall have the right to participate directly in the making of decisions by the Lenders among themselves. 65 (f) In connection with any such assignment or participation or proposed assignment or participation, a Lender may, subject to the provisions of Section 17.8, disclose all documents and information which it now or hereafter may have relating to Borrower and its Subsidiaries and their respective businesses. (g) Any other provision in this Agreement notwithstanding, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR Section203.24, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 14.2 Successors. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Borrower may not assign this Agreement or any rights or duties hereunder without the Lenders' prior written consent and any prohibited assignment shall be absolutely void ab initio. No consent to assignment by the Lenders shall release Borrower from its Obligations. A Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 14.1 hereof and, except as expressly required pursuant to Section 14.1 hereof, no consent or approval by Borrower is required in connection with any such assignment. 15. AMENDMENTS; WAIVERS. 15.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by Agent at the written request of the Required Lenders) and Borrower and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all of the Lenders affected thereby and Borrower, do any of the following: (a) increase or extend the Revolver Commitment of any Lender, (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees, or other amounts due hereunder or under any other Loan Document, (c) reduce the principal of, or the rate of interest on, any loan or other extension of credit hereunder, or reduce any fees or other amounts payable hereunder or under any other Loan Document, (d) change the percentage of the Revolver Commitments that is required to take any action hereunder, 66 (e) amend or modify this Section or any provision of the Agreement providing for consent or other action by all Lenders, (f) release Collateral other than as permitted by Section 16.12, (g) change the definition of "Required Lenders" or "Pro Rata Share", (h) contractually subordinate any of the Agent's Liens, (i) release Borrower or any Guarantor from any obligation for the payment of money under or pursuant to this Agreement or any other Loan Document, (j) change the definition of Revolver Maximum Amount, or (k) amend any of the provisions of Section 16. and, provided further, however, that no amendment, waiver or consent shall, unless in writing and signed by Agent, affect the rights or duties of Agent under this Agreement or any other Loan Document. The foregoing notwithstanding, any amendment, modification, waiver, consent, termination, or release of, or with respect to, any provision of this Agreement or any other Loan Document that relates only to the relationship of the Lender Group among themselves, and that does not affect the rights or obligations of Borrower, shall not require consent by or the agreement of Borrower. 15.2 [Intentionally Omitted]. 15.3 No Waivers; Cumulative Remedies. No failure by Agent or any Lender to exercise any right, remedy, or option under this Agreement or any other Loan Document, or delay by Agent or any Lender in exercising the same, will operate as a waiver thereof. No waiver by Agent or any Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by Agent or any Lender on any occasion shall affect or diminish Agent's and each Lender's rights thereafter to require strict performance by Borrower of any provision of this Agreement. Agent's and each Lender's rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy that Agent or any Lender may have. 16. AGENT; THE LENDER GROUP. 16.1 Appointment and Authorization of Agent. Each Lender hereby designates and appoints Post as its representative under this Agreement and the other Loan Documents and each Lender hereby irrevocably authorizes Agent to execute and deliver each of the other Loan Documents on its behalf and to take such other action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to Agent by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Agent agrees to act as such on the express conditions contained in this Section 16. The provisions 67 of this Section 16 (other than the proviso to Section 16.11(e))are solely for the benefit of Agent, and the Lenders, and Borrower and its Subsidiaries shall have no rights as a third party beneficiary of any of the provisions contained herein. Any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document notwithstanding, Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Agent; it being expressly understood and agreed that the use of the word "Agent" is for convenience only, that Post is merely the representative of the Lenders, and only has the contractual duties set forth herein. Except as expressly otherwise provided in this Agreement, Agent shall have and may use its sole discretion with respect to exercising or refraining from exercising any discretionary rights or taking or refraining from taking any actions that Agent expressly is entitled to take or assert under or pursuant to this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, or of any other provision of the Loan Documents that provides rights or powers to Agent, Lenders agree that Agent shall have the right to exercise the following powers as long as this Agreement remains in effect: (a) maintain, in accordance with its customary business practices, ledgers and records reflecting the status of the Obligations, the Collateral, the Collections of Borrower and its Subsidiaries, and related matters, (b) execute or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to the Loan Documents, (c) make Advances, for itself or on behalf of Lenders as provided in the Loan Documents, (d) exclusively receive, apply, and distribute the Collections of Borrower and its Subsidiaries as provided in the Loan Documents, (e) open and maintain such bank accounts and cash management arrangements as Agent deems necessary and appropriate in accordance with the Loan Documents for the foregoing purposes with respect to the Collateral and the Collections of Borrower and its Subsidiaries, (f) perform, exercise, and enforce any and all other rights and remedies of the Lender Group with respect to Borrower, the Obligations, the Collateral, the Collections of Borrower and its Subsidiaries, or otherwise related to any of same as provided in the Loan Documents, and (g) incur and pay such Lender Group Expenses as Agent may deem necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to the Loan Documents. 16.2 Delegation of Duties. Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects as long as such selection was made without gross negligence or willful misconduct. 16.3 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any 68 of the Lenders for any recital, statement, representation or warranty made by Borrower or any Subsidiary or Affiliate of Borrower, or any officer or director thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the Books or properties of Borrower or the books or records or properties of any of Borrower's Subsidiaries or Affiliates. 16.4 Reliance by Agent. Agent shall be entitled to rely,and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent, or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrower or counsel to any Lender), independent accountants and other experts selected by Agent. Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless Agent shall first receive such advice or concurrence of the Lenders as it deems appropriate and until such instructions are received, Agent shall act, or refrain from acting, as it deems advisable. If Agent so requests, it shall first be indemnified to its reasonable satisfaction by the Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the requisite Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. 16.5 Notice of Default or Event of Default. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest, fees, and expenses required to be paid to Agent for the account of the Lenders and, except with respect to Events of Default of which Agent has actual knowledge, unless Agent shall have received written notice from a Lender or Borrower referring to this Agreement, describing such Default or Event of Default, and stating that such notice is a "notice of default." Agent promptly will notify the Lenders of its receipt of any such notice or of any Event of Default of which Agent has actual knowledge. If any Lender obtains actual knowledge of any Event of Default, such Lender promptly shall notify the other Lenders and Agent of such Event of Default. Each Lender shall be solely responsible for giving any notices to its Participants, if any. Subject to Section 16.4, Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Lenders in accordance with Section 9; provided, however, that unless and until Agent has received any such request, Agent may (but shall not be 69 obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable. 16.6 Credit Decision. Each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by Agent hereinafter taken, including any review of the affairs of Borrower and its Subsidiaries or Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person party to a Loan Document, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrower. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person party to a Loan Document. Except for notices, reports, and other documents expressly herein required to be furnished to the Lenders by Agent, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrower and any other Person party to a Loan Document that may come into the possession of any of the Agent-Related Persons. 16.7 Costs and Expenses; Indemnification. Agent may incur and pay Lender Group Expenses to the extent Agent reasonably deems necessary or appropriate for the performance and fulfillment of its functions, powers, and obligations pursuant to the Loan Documents, including court costs, attorneys fees and expenses, fees and expenses of financial accountants, advisors, consultants, and appraisers, costs of collection by outside collection agencies, auctioneer fees and expenses, and costs of security guards or insurance premiums paid to maintain the Collateral, whether or not Borrower is obligated to reimburse Agent or Lenders for such expenses pursuant to the Loan Agreement or otherwise. Agent is authorized and directed to deduct and retain sufficient amounts from the Collections of Borrower and its Subsidiaries received by Agent to reimburse Agent for such out-of-pocket costs and expenses prior to the distribution of any amounts to Lenders. In the event Agent is not reimbursed for such costs and expenses from the Collections of Borrower and its Subsidiaries received by Agent, each Lender hereby agrees that it is and shall be obligated to pay to or reimburse Agent for the amount of such Lender's Pro Rata Share thereof. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrower and without limiting the obligation of Borrower to do so), according to their Pro Rata Shares, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to any Agent-Related Person of any portion of such 70 Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct nor shall any Lender be liable for the obligations of any other Lender which fails to make an Advance or other extension of credit hereunder. Without limitation of the foregoing, each Lender shall reimburse Agent upon demand for such Lender's Pro Rata Share of any costs or out-of-pocket expenses (including attorneys, accountants, advisors, and consultants fees and expenses) incurred by Agent in connection with the preparation, execution, delivery, administration, modification, amendment, or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that Agent is not reimbursed for such expenses by or on behalf of Borrower. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of Agent. 16.8 Agent in Individual Capacity. Post and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in, and generally engage in any kind of banking, trust, financial advisory, underwriting, or other business with Borrower and its Subsidiaries and Affiliates and any other Person party to any Loan Documents as though Post were not Agent hereunder, and, in each case, without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, Post or its Affiliates may receive information regarding Borrower or its Affiliates and any other Person party to any Loan Documents that is subject to confidentiality obligations in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver Agent will use its reasonable best efforts to obtain), Agent shall not be under any obligation to provide such information to them. The terms "Lender" and "Lenders" include Post in its individual capacity. 16.9 Successor Agent. Agent may resign as Agent upon 45 days notice to the Lenders. If Agent resigns under this Agreement, the Required Lenders shall appoint a successor Agent for the Lenders. If no successor Agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with the Lenders, a successor Agent. If Agent has materially breached or failed to perform any material provision of this Agreement or of applicable law, the Required Lenders may agree in writing to remove and replace Agent with a successor Agent from among the Lenders. In any such event, upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers, and duties of the retiring Agent and the term "Agent" shall mean such successor Agent and the retiring Agent's appointment, powers, and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 16 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor Agent has accepted appointment as Agent by the date which is 45 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Lenders appoint a successor Agent as provided for above. 71 16.10 Lender in Individual Capacity. Any Lender and its respective Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrower and its Subsidiaries and Affiliates and any other Person party to any Loan Documents as though such Lender were not a Lender hereunder without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, such Lender and its respective Affiliates may receive information regarding Borrower or its Affiliates and any other Person party to any Loan Documents that is subject to confidentiality obligations in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver such Lender will use its reasonable best efforts to obtain), such Lender not shall be under any obligation to provide such information to them. 16.11 Withholding Taxes. (a) If any Lender is a "foreign person" within the meaning of the IRC and such Lender claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the IRC, such Lender agrees with and in favor of Agent and Borrower, to deliver to Agent and Borrower: (i) if such Lender claims an exemption from withholding tax pursuant to its portfolio interest exception, (A) a statement of the Lender, signed under penalty of perjury, that it is not a (I) a "bank" as described in Section 881(c)(3)(A) of the IRC, (II) a 10% shareholder of Borrower (within the meaning of Section 871(h)(3)(B) of the IRC), or (III) a controlled foreign corporation related to Borrower within the meaning of Section 864(d)(4) of the IRC, and (B) a properly completed and executed IRS Form W-8BEN, before the first payment of any interest under this Agreement and at any other time reasonably requested by Agent or Borrower; (ii) if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed and executed IRS Form W-8BEN before the first payment of any interest under this Agreement and at any other time reasonably requested by Agent or Borrower; (iii) if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed and executed copies of IRS Form W-8ECI before the first payment of any interest is due under this Agreement and at any other time reasonably requested by Agent or Borrower; 72 (iv) such other form or forms as may be required under the IRC or other laws of the United States as a condition to exemption from,or reduction of, United States withholding tax. Such Lender agrees promptly to notify Agent and Borrower of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form W-8BEN and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Borrower to such Lender, such Lender agrees to notify Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of Borrower to such Lender. To the extent of such percentage amount, Agent will treat such Lender's IRS Form W-8BEN as no longer valid. (c) If any Lender is entitled to a reduction in the applicable withholding tax, Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to Agent, then Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (d) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify and hold Agent harmless for all amounts paid, directly or indirectly, by Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to Agent under this Section, together with all costs and expenses (including attorneys fees and expenses). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of Agent. (e) All payments made by Borrower hereunder or under any note will be made without setoff, counterclaim, or other defense, except as required by applicable law other than for Taxes (as defined below). All such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction (other than the United States) or by any political subdivision or taxing authority thereof or therein (other than of the United States) with respect to such payments (but excluding, any tax imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein (i) measured by or based on the net income or net profits of a Lender, or (ii) to the extent that such tax results from a change in the circumstances of the Lender, including a change in the residence, place of organization, or principal place of 73 business of the Lender, or a change in the branch or lending office of the Lender participating in the transactions set forth herein) and all interest, penalties or similar liabilities with respect thereto (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any note, including any amount paid pursuant to this Section 16.11(e) after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein; provided, however, that Borrower shall not be required to increase any such amounts payable to Agent or any Lender (i) that is not organized under the laws of the United States, if such Person fails to comply with the other requirements of this Section 16.11, or (ii) if the increase in such amount payable results from Agent's or such Lender's own willful misconduct or gross negligence. Borrower will furnish to Agent as promptly as possible after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by Borrower. 16.12 Collateral Matters. (a) The Lenders hereby irrevocably authorize Agent, at its option and in its sole discretion, to release any Lien on any Collateral (i) upon the termination of the Revolver Commitments and payment in full by Borrower of all Obligations, (ii) constituting property being sold or disposed of if a release is required or desirable in connection therewith and if Borrower certifies to Agent that the sale or disposition is permitted under Section 7.4 of this Agreement or the other Loan Documents (and Agent may rely conclusively on any such certificate, without further inquiry), (iii) constituting property in which Borrower or its Subsidiaries owned no interest at the time the Agent's Lien was granted nor at any time thereafter, or (iv) constituting property leased to Borrower or its Subsidiaries under a lease that has expired or is terminated in a transaction permitted under this Agreement. Except as provided above, Agent will not execute and deliver a release of any Lien on any Collateral without the prior written authorization of (y) if the release is of all or substantially all of the Collateral, all of the Lenders, or (z) otherwise, the Required Lenders. Upon request by Agent or Borrower at any time, the Lenders will confirm in writing Agent's authority to release any such Liens on particular types or items of Collateral pursuant to this Section 16.12; provided, however, that (1) Agent shall not be required to execute any document necessary to evidence such release on terms that, in Agent's opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release of such Lien without recourse, representation, or warranty, and (2) such release shall not in any manner discharge, affect, or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of Borrower in respect of) all interests retained by Borrower, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral. (b) Agent shall have no obligation whatsoever to any of the Lenders to assure that the Collateral exists or is owned by Borrower or is cared for, protected, or insured or has been encumbered, or that the Agent's Liens have been properly or sufficiently or 74 lawfully created, perfected, protected, or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent pursuant to any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or any act, omission, or event related thereto, subject to the terms and conditions contained herein, Agent may act in any manner it may deem appropriate, in its sole discretion given Agent's own interest in the Collateral in its capacity as one of the Lenders and that Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing, except as otherwise provided herein. 16.13 Restrictions on Actions by Lenders; Sharing of Payments. (a) Each of the Lenders agrees that it shall not, without the express written consent of Agent, and that it shall, to the extent it is lawfully entitled to do so, upon the written request of Agent, set off against the Obligations, any amounts owing by such Lender to Borrower or any deposit accounts of Borrower now or hereafter maintained with such Lender. Each of the Lenders further agrees that it shall not, unless specifically requested to do so in writing by Agent, take or cause to be taken any action, including, the commencement of any legal or equitable proceedings, to foreclose any Lien on, or otherwise enforce any security interest in, any of the Collateral. (b) If, at any time or times any Lender shall receive (i) by payment, foreclosure, setoff, or otherwise, any proceeds of Collateral or any payments with respect to the Obligations, except for any such proceeds or payments received by such Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent in excess of such Lender's ratable portion of all such distributions by Agent, such Lender promptly shall (1) turn the same over to Agent, in kind, and with such endorsements as may be required to negotiate the same to Agent, or in immediately available funds, as applicable, for the account of all of the Lenders and for application to the Obligations in accordance with the applicable provisions of this Agreement, or (2) purchase, without recourse or warranty, an undivided interest and participation in the Obligations owed to the other Lenders so that such excess payment received shall be applied ratably as among the Lenders in accordance with their Pro Rata Shares; provided, however, that to the extent that such excess payment received by the purchasing party is thereafter recovered from it, those purchases of participations shall be rescinded in whole or in part, as applicable, and the applicable portion of the purchase price paid therefor shall be returned to such purchasing party, but without interest except to the extent that such purchasing party is required to pay interest in connection with the recovery of the excess payment. 16.14 Agency for Perfection. Agent hereby appoints each other Lender as its agent (and each Lender hereby accepts such appointment) for the purpose of perfecting the Agent's Liens in assets which, in accordance with Article 9 of the Code can be perfected only by possession or control. Should any Lender obtain possession or control of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent's request 75 therefor shall deliver possession or control of such Collateral to Agent or in accordance with Agent's instructions. 16.15 Payments by Agent to the Lenders. All payments to be made by Agent to the Lenders shall be made by bank wire transfer of immediately available funds pursuant to such wire transfer instructions as each party may designate for itself by written notice to Agent. Concurrently with each such payment, Agent shall identify whether such payment (or any portion thereof) represents principal, premium, or interest of the Obligations. 16.16 Concerning the Collateral and Related Loan Documents. Each member of the Lender Group authorizes and directs Agent to enter into this Agreement and the other Loan Documents. Each member of the Lender Group agrees that any action taken by Agent in accordance with the terms of this Agreement or the other Loan Documents relating to the Collateral and the exercise by Agent of its powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders. 16.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information. By becoming a party to this Agreement, each Lender: (a) is deemed to have requested that Agent furnish such Lender, promptly after it becomes available, a copy of each field audit or examination report (each a "Report" and collectively, "Reports"), if any, prepared by Agent, and Agent shall so furnish each Lender with such Reports, (b) expressly agrees and acknowledges that Agent does not (i) make any representation or warranty as to the accuracy of any Report, and (ii) shall not be liable for any information contained in any Report, (c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent or other party performing any audit or examination will inspect only specific information regarding Borrower and will rely significantly upon the Books, as well as on representations of Borrower's personnel, (d) agrees to keep all Reports and other material, non-public information regarding Borrower and its Subsidiaries and their operations, assets, and existing and contemplated business plans in a confidential manner in accordance with Section 17.8, and (e) without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold Agent and any other Lender preparing a Report harmless from any action the indemnifying Lender may take or fail to take or any conclusion the indemnifying Lender may reach or draw from any Report in connection with any loans or other credit accommodations that the indemnifying Lender has made or may make to Borrower, or the indemnifying Lender's participation in, or the 76 indemnifying Lender's purchase of, a loan or loans of Borrower, and (ii) to pay and protect, and indemnify, defend and hold Agent, and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses, and other amounts (including, attorneys fees and costs) incurred by Agent and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender. In addition to the foregoing: (x) any Lender may from time to time request of Agent in writing that Agent provide to such Lender a copy of any report or document provided by Borrower to Agent that has not been contemporaneously provided by Borrower to such Lender, and, upon receipt of such request, Agent promptly shall provide a copy of same to such Lender, (y) to the extent that Agent is entitled, under any provision of the Loan Documents, to request additional reports or information from Borrower, any Lender may, from time to time, reasonably request Agent to exercise such right as specified in such Lender's notice to Agent, whereupon Agent promptly shall request of Borrower the additional reports or information reasonably specified by such Lender, and, upon receipt thereof from Borrower, Agent promptly shall provide a copy of same to such Lender, and (z) any time that Agent renders to Borrower a statement regarding the Loan Account, Agent shall send a copy of such statement to each Lender. 16.18 Several Obligations; No Liability. Notwithstanding that certain of the Loan Documents now or hereafter may have been or will be executed only by or in favor of Agent in its capacity as such, and not by or in favor of the Lenders, any and all obligations on the part of Agent (if any) to make any credit available hereunder shall constitute the several (and not joint) obligations of the respective Lenders on a ratable basis, according to their respective Revolver Commitments, to make an amount of such credit not to exceed, in principal amount, at any one time outstanding, the amount of their respective Revolver Commitments. Nothing contained herein shall confer upon any Lender any interest in, or subject any Lender to any liability for, or in respect of, the business, assets, profits, losses, or liabilities of any other Lender. Each Lender shall be solely responsible for notifying its Participants of any matters relating to the Loan Documents to the extent any such notice may be required, and no Lender shall have any obligation, duty, or liability to any Participant of any other Lender. Except as provided in Section 16.7, no member of the Lender Group shall have any liability for the acts of any other member of the Lender Group. No Lender shall be responsible to Borrower or any other Person for any failure by any other Lender to fulfill its obligations to make credit available hereunder, nor to advance for it or on its behalf in connection with its Revolver Commitment, nor to take any other action on its behalf hereunder or in connection with the financing contemplated herein. 77 17. GENERAL PROVISIONS. 17.1 Effectiveness. This Agreement shall be binding and deemed effective when executed by Borrower, Agent, and each Lender whose signature is provided for on the signature pages hereof. 17.2 Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each Section applies equally to this entire Agreement. 17.3 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed against the Lender Group or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish fairly the purposes and intentions of all parties hereto. 17.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 17.5 Amendments in Writing.This Agreement only can be amended by a writing signed by Agent (on behalf of the requisite Lenders) and Borrower. 17.6 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis. 17.7 Revival and Reinstatement of Obligations.If the incurrence or payment of the Obligations by Borrower or any Guarantor or the transfer to the Lender Group of any property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, or other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if the Lender Group is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender Group is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender Group related thereto, the liability of Borrower and Guarantors automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 78 17.8 Confidentiality. The Agent and the Lenders each individually (and not jointly or jointly and severally) agree that material, non-public information regarding Borrower and its Subsidiaries, their operations, assets, and existing and contemplated business plans shall be treated by Agent and the Lenders in a confidential manner, and shall not be disclosed by Agent and the Lenders to Persons who are not parties to this Agreement, except: (a) to attorneys for and other advisors, accountants, auditors, and consultants to any member of the Lender Group, (b) to Subsidiaries and Affiliates of any member of the Lender Group, provided that any such Subsidiary or Affiliate shall have agreed to receive such information hereunder subject to the terms of this Section 17.8, (c) as may be required by statute, decision, or judicial or administrative order, rule, or regulation, (d) as may be agreed to in advance by Borrower or its Subsidiaries or as requested or required by any Governmental Authority pursuant to any subpoena or other legal process, (e) as to any such information that is or becomes generally available to the public (other than as a result of prohibited disclosure by Agent or the Lenders), (f) in connection with any assignment, prospective assignment, sale, prospective sale, participation or prospective participations, or pledge or prospective pledge of any Lender's interest under this Agreement, provided that any such assignee, prospective assignee, purchaser, prospective purchaser, participant, prospective participant, pledgee, or prospective pledgee shall have agreed in writing to receive such information hereunder subject to the terms of this Section, (g) in connection with any litigation or other adversary proceeding involving parties hereto which such litigation or adversary proceeding involves claims related to the rights or duties of such parties under this Agreement or the other Loan Documents, and (h) to WFF and the lenders under the WFF Loan Agreement. The provisions of this Section 17.8 shall survive for 2 years after the payment in full of the Obligations. Anything contained herein or in any other Loan Document to the contrary notwithstanding, the obligations of confidentiality contained herein and therein, as they relate to the transactions contemplated hereby, shall not apply to the federal tax structure or federal tax treatment of such transactions, and each party hereto (and any employee, representative, or agent of any party hereto) may disclose to any and all Persons, without limitation of any kind, the federal tax structure and federal tax treatment of such transactions (including all written materials related to such tax structure and tax treatment). The preceding sentence is intended to cause the transactions contemplated hereby to not be treated as having been offered under conditions of confidentiality for purposes of Section 1.6011-4(b)(3) (or any successor provision) of the Treasury Regulations promulgated under Section 6011 of the IRC, and shall be construed in a manner consistent with such purpose. In addition, each party hereto acknowledges that it has no proprietary or exclusive rights to the tax structure of the transactions contemplated hereby or any tax matter or tax idea related thereto. Agent and the Lenders may deliver to WFF and the lenders under the WFF Loan Agreement any field audits, examination reports or appraisals with respect to Borrower. 17.9 Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. [Signature pages to follow.] 79 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. HUDSON RESPIRATORY CARE INC., a California corporation By: --------------------------------- Title: MW POST ADVISORY GROUP, LLC, a Delaware limited liability company, as Agent and as a Lender By: --------------------------------- Title: Lawrence Post, Chief Executive Officer Lenders: STATE OF SOUTH DAKOTA RETIREMENT SYSTEM FUND THE OPPORTUNITY FUND, LLC MW POST PORTFOLIO FUND, LTD POST OPPORTUNITY FUND, LP POST BALANCED FUND, LP POST HIGH YIELD, LP MW POST OPPORTUNITY OFFSHORE FUND, LTD POST TOTAL RETURN FUND, LP HFR DS OPPORTUNITY MASTER TRUST DTD 1/15/02 By: --------------------------------- Title: Lawrence Post, as authorized signatory for each Lender Signature Page Loan and Security Agreement Schedule A-1 ------------ Lenders' Accounts The account designated by each Lender from time to time as the account into which Borrower shall make all payments to such Lender. Unless and until any Lender notifies Borrower to the contrary, such Lender's Account shall be that certain deposit account described in Annex I to this Schedule A-1. Schedule A-1 ANNEX I to SCHEDULE A-1 Name of Lender: STATE OF SOUTH DAKOTA RETIREMENT SYSTEM FUND Tax ID: 46-0349112 Wire instructions (all): Citibank/NYC ABA 021 000 089 Citibank DDA #36857348 F/A/O: State of South Dakota Retirement System Fund MW Post Advisory Group, LLC, Citibank, NA Custodian Account #312705 Attn: Stephen Castle (813) 604-1451 All notices to: Allan E. Schweitzer aschweitzer@mwpostllc.com Mark Porrazzo mporrazzo@mwpostllc.com MW Post Advisory Group 11755 Wilshire Boulevard, Suite 1400 Los Angeles, CA 90025 (310) 996-9600 (310) 996-9629 (fax) Stephen Castle Citibank/NA 3800 Citibank Center Tampa, 2/nd/ Floor Tampa, Florida 33612-9122 (813) 604-1451, (813) 604-1291 (fax) Schedule A-1 Name of Lender: THE OPPORTUNITY FUND, LLC Tax ID: 95-4732322 Wire instructions: Citibank/NYC ABA 021 000 089 F/A/O: Bear Stearns Account #0925-3186 Further Credit to Opportunity Fund, LLC Account #102-00600-16 All notices to: Allan E. Schweitzer aschweitzer@mwpostllc.com Mark Porrazzo mporrazzo@mwpostllc.com MW Post Advisory Group 11755 Wilshire Boulevard, Suite 1400 Los Angeles, CA 90025 (310) 996-9600 (310) 996-9629 (fax) Schedule A-1 Name of Lender: MW POST PORTFOLIO FUND, LTD. Tax ID: N/A (offshore) Wire instructions: Citibank/NYC ABA 021 000 089 F/A/O: Bear Stearns Account #0925-3186 Further Credit to MW Post Portfolio Fund Account #102-27468-10 All notices to: Allan E. Schweitzer aschweitzer@mwpostllc.com Mark Porrazzo mporrazzo@mwpostllc.com MW Post Advisory Group 11755 Wilshire Boulevard, Suite 1400 Los Angeles, CA 90025 (310) 996-9600 (310) 996-9629 (fax) D'Angelo Remak Fortis Fund Management 011 5999-463-9341 011-5999-463-9419 (fax) Schedule A-1 Name of Lender: POST OPPORTUNITY FUND, LP Tax ID: 95-4797293 Wire instructions: Citibank/NYC ABA 021 000 089 F/A/O: Bear Stearns Account #0925-3186 Further Credit to Post Opportunity Fund, LP Account #102-22532-13 All notices to: Allan E. Schweitzer aschweitzer@mwpostllc.com Mark Porrazzo mporrazzo@mwpostllc.com MW Post Advisory Group 11755 Wilshire Boulevard, Suite 1400 Los Angeles, CA 90025 (310) 996-9600 (310) 996-9629 (fax) Schedule A-1 Name of Lender: POST BALANCED FUND, LP Tax ID: 95-4331329 Wire instructions: Citibank/NYC ABA 021 000 089 F/A/O: Bear Stearns Account #0925-3186 Further Credit to Post Balanced Fund Account #102-16395-11 All notices to: Allan E. Schweitzer aschweitzer@mwpostllc.com Mark Porrazzo mporrazzo@mwpostllc.com MW Post Advisory Group 11755 Wilshire Boulevard, Suite 1400 Los Angeles, CA 90025 (310) 996-9600 (310) 996-9629 (fax) Schedule A-1 Name of Lender: POST HIGH YIELD, LP Tax ID: 98-0204751 Wire instructions: Citibank/NYC ABA 021 000 089 F/A/O: Bear Stearns Account #0925-3186 Further Credit to Post High Yield Account #102-05740-16 All notices to: Allan E. Schweitzer aschweitzer@mwpostllc.com Mark Porrazzo mporrazzo@mwpostllc.com MW Post Advisory Group 11755 Wilshire Boulevard, Suite 1400 Los Angeles, CA 90025 (310) 996-9600 (310) 996-9629 (fax) Schedule A-1 Name of Lender: MW POST OPPORTUNITY OFFSHORE FUND, LTD Tax ID: N/A (offshore) Wire instructions: Citibank/NYC ABA 021 000 089 F/A/O: Bear Stearns Account #0925-3186 Further Credit to MW Post Opportunity Offshore Fund Account #102-27842-17 All notices to: Allan E. Schweitzer aschweitzer@mwpostllc.com Mark Porrazzo mporrazzo@mwpostllc.com MW Post Advisory Group 11755 Wilshire Boulevard, Suite 1400 Los Angeles, CA 90025 (310) 996-9600 (310) 996-9629 (fax) D'Angelo Remak Fortis Funds Management 011 5999-463-9341 911-5999-463-9419 (fax) Schedule A-1 Name of Lender: POST TOTAL RETURN FUND, LP Tax ID: 95-4581334 Wire instructions: Citibank/NYC ABA 021 000 089 F/A/O: Bear Stearns Account #0925-3186 Further Credit to Post Total Return Fund, LP Account #102-05176-19 All notices to: Allan E. Schweitzer aschweitzer@mwpostllc.com Mark Porrazzo mporrazzo@mwpostllc.com MW Post Advisory Group 11755 Wilshire Boulevard, Suite 1400 Los Angeles, CA 90025 (310) 996-9600 (310) 996-9629 (fax) Schedule A-1 Name of Lender: HFR DS OPPORTUNITY MASTER TRUST DTD 1/15/02 Tax ID: N/A (offshore) Wire instructions: Citibank/NYC ABA 021 000 089 F/A/O: Bear Stearns Account #0925-3186 Further Credit to HFR DS Opportunity Master Trust Account #102-29068-10 All notices to: Allan E. Schweitzer aschweitzer@mwpostllc.com Mark Porrazzo mporrazzo@mwpostllc.com MW Post Advisory Group 11755 Wilshire Boulevard, Suite 1400 Los Angeles, CA 90025 (310) 996-9600 (310) 996-9629 (fax) Manuj Sharma HFR Asset Management, LLC 10 S. Riverside Plz, Ste. 1450 Chicago, IL 60606 Direct Line 312.628.0305 Main Line 312.327.0430 Fax Line 312.327.0435 Schedule A-1 Schedule C-1 ------------ Revolver Commitments =================================================================== Revolver Lender Commitment =================================================================== State of South Dakota Retirement System Fund $ 3,500,000 =================================================================== The Opportunity Fund, LLC $ 4,500,000 =================================================================== MW Post Portfolio Fund, LTD $ 1,100,000 =================================================================== Post Opportunity Fund, LP $ 7,650,000 =================================================================== Post Balanced Fund, LP $ 3,250,000 =================================================================== Post High Yield, LP $ 3,200,000 =================================================================== MW Post Opportunity Offshore Fund, LTD $ 4,300,000 =================================================================== Post Total Return Fund, LP $ 1,750,000 =================================================================== HFR DS Opportunity Master Trust DTD 1/15/02 $ 750,000 =================================================================== All Lenders $ 30,000,000 =================================================================== Schedule C-1 Schedule D-1 ------------ Designated Account Borrower's Hudson RCI Concentration Account, Account number 4726032766, maintained with Borrower's Designated Account Bank, or such other deposit account of Borrower (located within the United States) that has been designed as such, in writing, by Borrower to Agent. "Designated Account Bank" means, as of the Closing Date, Wells Fargo Bank, whose office is located at Carlsbad, California and whose ABA number is 121000248. Schedule D-1 EX-10.24 15 dex1024.txt STOCK PLEDGE AGREEMENT- HOLDING/MW POST Exhibit 10.24 STOCK PLEDGE AGREEMENT ---------------------- (HOLDING) ------- This STOCK PLEDGE AGREEMENT (this "Agreement"), dated as of October 7, 2003, is entered into by and between RIVER HOLDING CORP., a California corporation ("Pledgor"), and MW POST ADVISORY GROUP, LLC, a Delaware limited liability company, as administrative agent for the Lenders (in such capacity, together with its successors, if any, in such capacity, "Agent"), with reference to the following: WHEREAS, Hudson Respiratory Care Inc., a California corporation (the "Borrower"), the Lenders (such Lenders, together with Agent, individually and collectively, the "Lender Group"), and Agent have entered into that certain Loan and Security Agreement, dated as of even date herewith (as amended, restated, modified, supplemented, refinanced, renewed, or extended from time to time, the "Loan Agreement"), pursuant to which the Lender Group has agreed to make certain financial accommodations to Borrower; WHEREAS, contemporaneously herewith, Pledgor has executed and delivered that certain General Continuing Guaranty (the "Guaranty") and that certain Security Agreement (Guarantors) (the "Security Agreement") in favor of Agent respecting certain obligations of the Borrower to the Lender Group in connection with the Loan Agreement; WHEREAS, Pledgor beneficially owns the specified Equity Interests identified as Pledged Interests in the Persons identified as Issuers listed under the name of Pledgor on Schedule A attached hereto (or any addendum thereto); and WHEREAS, to induce the Lender Group to make the financial accommodations provided to the Borrower pursuant to the Loan Agreement, Pledgor desires to pledge, grant, transfer, and assign to Agent, for the benefit of the Lender Group, a security interest in the Pledged Collateral (as hereinafter defined) to secure the Secured Obligations (as hereinafter defined), as provided herein. NOW, THEREFORE, in consideration of the mutual promises, covenants, representations, and warranties set forth herein and for other good and valuable consideration, the parties hereto agree as follows: 1. Definitions And Construction. (a) Definitions. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. The following terms, as used in this Agreement, shall have the following meanings: "Agent" shall have the meaning set forth in the preamble to this Agreement, together with its successors or assigns. "Agreement" has the meaning set forth in the preamble to this Agreement. -1- "Chief Executive Office" shall mean the Chief Executive Office listed on Schedule B. "Equity Interests" shall mean all shares, units, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company, or equivalent entity, whether voting or nonvoting, including general partner partnership interests, limited partner partnership interests, common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and any successor statute. "Excluded Collateral" shall have the meaning ascribed to such term in the Loan Agreement. "Future Rights" shall mean, with respect to each Issuer, (i) all Equity Interests (other than Pledged Interests) of such Issuer, and all securities convertible or exchangeable into, and all warrants, options, or other rights to purchase, Equity Interests of such Issuer; (ii) to the extent of Pledgor's interest therein, all shares of, all securities convertible or exchangeable into, and all warrants, options, or other rights to purchase Equity Interests of any Person in which Pledgor, after the date of this Agreement, acquires a direct equity interest, irrespective of whether such Person is or becomes a Subsidiary of Pledgor; and (iii) the certificates or instruments representing such additional Equity Interests, convertible or exchangeable securities, warrants, and other rights and all dividends, cash, options, warrants, rights, instruments, and other property or proceeds from time to time received, receivable, or otherwise distributed in respect of or in exchange for any or all of such Equity Interests. "Guaranty" shall have the meaning set forth in the recitals to this Agreement. "Holder" and "Holders" shall have the meanings set forth in Section 3 of this Agreement. "Intercreditor Agreement" means that certain intercreditor agreement between WFF and Post dated as of an even date herewith. "Issuers" shall mean each of the Persons identified as an Issuer on Schedule A attached hereto (or any addendum thereto), and any successors thereto, whether by merger or otherwise. "Lender Group" shall have the meaning set forth in the recitals to this Agreement. -2- "Lenders" means, individually and collectively, each of the financial institutions identified on the signature pages of the Loan Agreement, and any other person made a party thereto in accordance with the provisions of Section 14 thereof (together with their respective successors and assigns). "Loan Agreement" shall have the meaning set forth in the recitals to this Agreement. "Pledged Collateral" shall mean the Pledged Interests, the Future Rights, and the Proceeds, collectively but excluding the Excluded Collateral. "Pledged Interests" shall mean with respect to each Issuer, all of the Equity Interests identified as Pledged Interests of such Issuer on Schedule A attached hereto (or any addendum thereto). "Pledgor" has the meaning set forth in the preamble to this Agreement. "Post" means MW Post Advisory Group, LLC, a Delaware limited liability company. "Proceeds" shall mean all proceeds (including proceeds of proceeds) of the Pledged Interests and Future Rights including all: (a) rights, benefits, distributions, premiums, profits, dividends, interest, cash, instruments, documents of title, accounts, contract rights, inventory, equipment, general intangibles, deposit accounts, chattel paper, and other property from time to time received, receivable, or otherwise distributed in respect of or in exchange for, or as a replacement of or a substitution for, any of the Pledged Interests, Future Rights, or proceeds thereof (including any cash, Equity Interests, or other securities or instruments issued after any recapitalization, readjustment, reclassification, merger or consolidation with respect to any Issuer and any security entitlements, as defined in the Code, with respect thereto); (b) "proceeds," as such term is defined in the Code; (c) proceeds of any insurance, indemnity, warranty, or guaranty (including guaranties of delivery) payable from time to time with respect to any of the Pledged Interests, Future Rights, or proceeds thereof; (d) payments (in any form whatsoever) made or due and payable to Pledgor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Pledged Interests, Future Rights, or proceeds thereof; and (e) other amounts from time to time paid or payable under or in connection with any of the Pledged Interests, Future Rights, or proceeds thereof. "SEC" shall mean the United States Securities and Exchange Commission and any successor thereto. "Security Agreement" shall have the meaning set forth in the recitals to this Agreement. -3- "Secured Obligations" shall mean, with respect to Pledgor, all liabilities, obligations, or undertakings owing by Pledgor to the Lender Group of any kind or description arising out of or outstanding under, advanced or issued pursuant to, or evidenced by the Loan Agreement, the Guaranty, the Security Agreement, this Agreement, or any of the other Loan Documents, irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, voluntary or involuntary, whether now existing or hereafter arising, and including all interest (including interest that accrues after the filing of a case under the Bankruptcy Code) and any and all costs, fees (including attorneys fees), and expenses which Pledgor is required to pay pursuant to any of the foregoing, by law, or otherwise. "Securities Act" shall have the meaning set forth in Section 9(c) of this Agreement. "WFF" means Wells Fargo Foothill, Inc., a California corporation, its successors and permitted assigns. (b) Construction. (i) Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular and to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and other similar terms in this Agreement refer to this Agreement as a whole and not exclusively to any particular provision of this Agreement. Article, section, subsection, exhibit, and schedule references are to this Agreement unless otherwise specified. All of the exhibits or schedules attached to this Agreement shall be deemed incorporated herein by reference. Any reference to any of the following documents includes any and all alterations, amendments, restatements, extensions, modifications, renewals, or supplements thereto or thereof, as applicable: this Agreement, the Loan Agreement, the Guaranty, the Security Agreement, or any of the other Loan Documents. (ii) Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Agent or Pledgor, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by each of the parties signatory hereto and their respective counsel and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of the parties hereto. (iii) In the event of any direct conflict between the express terms and provisions of this Agreement and of the Loan Agreement or the Security Agreement, the terms and provisions of the Loan Agreement or the Security Agreement, as applicable, shall control. 2. Pledge. Pledgor hereby pledges, grants, transfers, and assigns to Agent, for the benefit of the Lender Group, a security interest in all of Pledgor's right, title, and interest in -4- and to the Pledged Collateral in order to secure prompt repayment of any and all of the Secured Obligations in accordance with the terms and conditions of the Loan Documents to which Pledgor is a party, and in order to secure prompt performance by Pledgor of its covenants and duties under each Loan Document to which it is a party. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, Pledgor has no authority, express or implied, to dispose of any item or portion of the Pledged Collateral. 3. Delivery and Registration of Pledged Collateral. (a) All certificates or instruments representing or evidencing the Pledged Collateral shall be promptly delivered by Pledgor to Agent or Agent's designee pursuant hereto at a location designated by Agent and shall be held by or on behalf of Agent pursuant hereto, and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to Agent. (b) Upon the occurrence and during the continuance of an Event of Default, Agent shall have the right, at any time in its discretion and without notice to Pledgor, to transfer to or to register on the books of the Issuers (or of any other Person maintaining records with respect to the Pledged Collateral) in the name of Agent or any of its nominees any or all of the Pledged Collateral. In addition, Agent shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations. (c) If, at any time and from time to time, any Pledged Collateral (including any certificate or instrument representing or evidencing any Pledged Collateral) is in the possession of a Person other than Agent (or an agent of Agent) or Pledgor (a "Holder"), then Pledgor shall promptly, at Agent's option, either cause such Pledged Collateral to be delivered into Agent's or Agent's designee's possession, or execute and deliver to such Holder a written notification/instruction, and take all other steps necessary to perfect the security interest of Agent in such Pledged Collateral, including obtaining from such Holder a written acknowledgment that such Holder holds such Pledged Collateral for Agent, all pursuant to the Code or other applicable law governing the perfection of Agent's security interest in the Pledged Collateral in the possession of such Holder. Each such notification/instruction and acknowledgment shall be in form and substance reasonably satisfactory to Agent. (d) Any and all Pledged Collateral (including dividends, interest, and other cash distributions) at any time received or held by Pledgor shall be so received or held in trust for Agent, shall be segregated from other funds and property of Pledgor and shall be forthwith delivered to Agent or Agent's designee in the same form as so received or held, with any necessary endorsements; provided that cash dividends or distributions received by Pledgor, if and to the extent they are not prohibited by the Loan Agreement, may be retained by Pledgor in accordance with Section 4 and used in the ordinary course of Pledgor's business, or as otherwise expressly permitted under the Loan Documents. -5- (e) If at any time and from time to time any Pledged Collateral consists of an uncertificated security or a security in book entry form, then Pledgor shall promptly cause such Pledged Collateral to be registered or entered, as the case may be, in the name of Agent, for the benefit of the Lender Group, or otherwise cause the security interest held by Agent, for the benefit of the Lender Group, to be perfected in accordance with applicable law. 4. Voting Rights and Dividends. (a) So long as no Event of Default shall have occurred and be continuing, Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of the Loan Documents. (b) Upon the occurrence and during the continuance of an Event of Default, at the election of Agent in its Permitted Discretion, upon the receipt by Pledgor of written notice of such election by Agent, all rights of Pledgor to exercise the voting and other consensual rights or receive and retain cash dividends or distributions that it would otherwise be entitled to exercise or receive and retain, as applicable pursuant to Section 4(a), shall cease, and all such rights shall thereupon become vested in Agent, who shall thereupon have the sole right to exercise such voting or other consensual rights and to receive and retain such cash dividends and distributions. Upon the receipt of such written notice, Pledgor shall execute and deliver (or cause to be executed and delivered) to Agent all such proxies and other instruments as Agent may reasonably request for the purpose of enabling Agent to exercise the voting and other rights which it is entitled to exercise and to receive the dividends and distributions that it is entitled to receive and retain pursuant to the preceding sentence. 5. Representations and Warranties. Pledgor represents, warrants, and covenants as follows: (a) Pledgor has taken all steps it deems necessary or appropriate to be informed on a continuing basis of changes or potential changes affecting the Pledged Collateral (including rights of conversion and exchange, rights to subscribe, payment of dividends, reorganizations or recapitalization, tender offers and voting rights), and Pledgor agrees that no member of the Lender Group shall have any responsibility or liability for informing Pledgor of any such changes or potential changes or for taking any action or omitting to take any action with respect thereto; (b) All information herein or contained in or delivered pursuant to the Loan Documents supplied to Agent or any other member of the Lender Group by and prepared by Pledgor or any Subsidiary of Pledgor in writing with respect to the Pledged Collateral is, or in the case of information hereafter supplied will be, accurate and complete in all material respects; (c) Pledgor is and will be the sole legal and beneficial owner of the Pledged Collateral (including the Pledged Interests and all other Pledged Collateral acquired by Pledgor after the date hereof) free and clear of any adverse claim, Lien, or other right, title, or interest of -6- any party, other than the Liens held by Agent for the benefit of the Lender Group and Permitted Liens; (d) This Agreement, and the delivery to Agent of certificates, if any, representing Pledged Collateral (or the delivery to all Holders of such certificates, if any, representing Pledged Collateral of the notification/instruction referred to in Section 3 of this Agreement and the acknowledgement of such Holders referred to in Section 3), creates a valid, perfected, and second priority security interest, junior only to the security interests of WFF to the extent set forth in the Intercreditor Agreement, in one hundred percent (100%) of the Pledged Interests which are in certificated form in favor of Agent securing payment of the Secured Obligations, and all actions necessary to achieve such perfection have been duly taken; (e) Schedule A to this Agreement is true and correct and complete in all material respects as of the date hereof; without limiting the generality of the foregoing, as of the date hereof: (i) except as set forth in Schedule A, all the Pledged Interests are in certificated form, and, except to the extent registered in the name of Agent or its nominee pursuant to the provisions of this Agreement, are registered in the name of Pledgor; and (ii) the Pledged Interests as to each of the Issuers constitute at least the percentage of all the fully diluted issued and outstanding Equity Interests of such Issuer as set forth in Schedule A to this Agreement; (f) the Pledged Interests that are interests in general partnerships, limited partnerships or limited liability companies (i) are not dealt in or traded on securities exchanges or in securities markets, (ii) do not have terms expressly providing that they are securities governed by Article 8 of the Code, and (iii) are not investment company securities, and are not, therefore, "securities" governed by Article 8 of the Code; (g) There are no presently existing Future Rights owned by Pledgor as of the date hereof; (h) The Pledged Interests have been duly authorized and validly issued and are fully paid and nonassessable; and (i) Neither the pledge of the Pledged Collateral pursuant to this Agreement nor the extensions of credit represented by the Secured Obligations violates Regulation T, U or X of the Board of Governors of the Federal Reserve System. 6. Further Assurances. (a) Pledgor agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action that may be necessary or reasonably desirable, or that Agent, on behalf of the Lender Group, may request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Agent, on behalf of the Lender Group, to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) at the request of Agent, mark conspicuously each of its records pertaining to the Pledged Collateral with a legend, in form and substance reasonably satisfactory -7- to Agent, indicating that such Pledged Collateral is subject to the security interest granted hereby; (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or reasonably desirable, or as Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby; (iii) allow inspection of the Pledged Collateral by Agent or Persons designated by Agent; and (iv) appear in and defend any action or proceeding that may affect Pledgor's title to or Agent's security interest in the Pledged Collateral. (b) Pledgor hereby authorizes Agent, on behalf of the Lender Group, to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Pledged Collateral without Pledgor's signature where permitted by law. A carbon, photographic, or other reproduction of this Agreement or any financing statement covering the Pledged Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. (c) Pledgor will furnish to Agent, upon the request of Agent: (i) a certificate executed by an authorized officer of Pledgor, and dated as of the date of delivery to Agent, itemizing in such detail as Agent may request, the Pledged Collateral which, as of the date of such certificate, has been delivered to Agent by Pledgor pursuant to the provisions of this Agreement; and (ii) such statements and schedules further identifying and describing the Pledged Collateral and such other reports in connection with the Pledged Collateral as Agent may request. 7. Covenants of Pledgor. Pledgor shall: (a) Perform each and every covenant in the Loan Documents applicable to Pledgor; (b) At all times keep at least one complete set of its records concerning substantially all of the Pledged Collateral at its Chief Executive Office as set forth in Schedule B hereto, and not change the location of its Chief Executive Office or such records without giving Agent at least thirty (30) days prior written notice thereof; (c) To the extent it may lawfully do so, use its best efforts to prevent the Issuers from issuing Future Rights or Proceeds, except for cash dividends and other distributions, if any, that are not prohibited by the terms of the Loan Agreement to be paid by any Issuer to Pledgor; (d) Upon receipt by Pledgor of any material notice, report, or other communication from any of the Issuers or any Holder relating to all or any part of the Pledged Collateral, deliver such notice, report or other communication to Agent promptly, but in no event later than five (5) days following the receipt thereof by Pledgor; and (e) Not permit any of the Issuers to: (i) authorize the amendment of or amend the Governing Documents of such Issuer that is a general partnership, limited partnership or limited liability company to provide that the Equity Interests of such Issuer is governed by -8- Article 8 of the Code, or (ii) authorize the issuance of or issue certificates evidencing the Equity Interests of such Issuer that is a general partnership, limited partnership or limited liability company. 8. Agent as Pledgor's Attorney-in-Fact. (a) Pledgor hereby irrevocably appoints Agent, on behalf of the Lender Group, as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Agent or otherwise, from time to time at Agent's discretion, to take any action and to execute any instrument that Agent, on behalf of the Lender Group, may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including: (i) upon the occurrence and during the continuance of an Event of Default, to receive, endorse, and collect all instruments made payable to Pledgor representing any dividend, interest payment or other distribution in respect of the Pledged Collateral or any part thereof to the extent permitted hereunder and to give full discharge for the same and to execute and file governmental notifications and reporting forms; (ii) to issue any notifications/instructions Agent deems necessary pursuant to Section 3 of this Agreement; or (iii) to arrange for the transfer of the Pledged Collateral on the books of any of the Issuers or any other Person to the name of Agent or to the name of Agent's nominee. (b) In addition to the designation of Agent as Pledgor's attorney-in-fact in subsection (a), Pledgor hereby irrevocably appoints Agent, on behalf of the Lender Group, as Pledgor's agent and attorney-in-fact to make, execute and deliver any and all documents and writings which may be necessary or appropriate for approval of, or be required by, any regulatory authority located in any city, county, state or country where Pledgor or any of the Issuers engage in business, in order to transfer or to more effectively transfer any of the Pledged Interests or otherwise enforce the rights granted hereunder to the Lender Group. (c) The Agent acknowledges that the exercise of the powers granted in this Section 8 may at some times be subject to the provisions of the Intercreditor Agreement. 9. Remedies upon Default. Upon the occurrence and during the continuance of an Event of Default, subject to the terms of the Intercreditor Agreement: (a) Agent, on behalf of the Lender Group, may exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Code (irrespective of whether the Code applies to the affected items of Pledged Collateral), and Agent, on behalf of the Lender Group, may also without notice (except as specified below) sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Agent may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. To the maximum extent permitted by applicable law, Agent may be the purchaser of any or all of the Pledged Collateral at any such sale and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for -9- all or any portion of the Pledged Collateral sold at any such public sale, to use and apply all or any part of the Secured Obligations as a credit on account of the purchase price of any Pledged Collateral payable at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by law) all rights of redemption, stay, or appraisal that it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten (10) calendar days notice to Pledgor of the time and place of any public sale or the time after which a private sale is to be made shall constitute reasonable notification. Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Subject to subsection (b), to the maximum extent permitted by law, Pledgor hereby waives any claims against Agent arising because the price at which any Pledged Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale, even if Agent accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. (b) Pledgor hereby agrees that any sale or other disposition of the Pledged Collateral conducted in conformity with reasonable commercial practices of banks, insurance companies, or other financial institutions in the City of Los Angeles, State of California in disposing of property similar to the Pledged Collateral shall be deemed to be commercially reasonable. (c) Pledgor hereby acknowledges that the sale by Agent of any Pledged Collateral pursuant to the terms hereof in compliance with the Securities Act of 1933 as now in effect or as hereafter amended, or any similar statute hereafter adopted with similar purpose or effect (the "Securities Act"), as well as applicable "Blue Sky" or other state securities laws may require strict limitations as to the manner in which Agent or any subsequent transferee of the Pledged Collateral may dispose thereof. In light of this, Pledgor acknowledges and agrees that in order to protect Agent's interest it may be necessary to sell the Pledged Collateral at a price less than the maximum price attainable if a sale were delayed or were made in another manner, such as a public offering under the Securities Act. Pledgor has no objection to sale in such a manner and agrees that Agent shall have no obligation to obtain the maximum possible price for the Pledged Collateral as long as any sale is made in a commercially reasonable manner. Without limiting the generality of the foregoing, Pledgor agrees that, upon the occurrence and during the continuation of an Event of Default, Agent may, subject to applicable law, from time to time attempt to sell all or any part of the Pledged Collateral by a private placement, restricting the bidders and prospective purchasers to those who will represent and agree that they are purchasing for investment only and not for distribution. In so doing, Agent may solicit offers to buy the Pledged Collateral or any part thereof for cash, from a limited number of investors deemed by Agent, in its reasonable judgment, to be institutional investors or other responsible parties who might be interested in purchasing the Pledged Collateral. If Agent shall solicit such offers, then Pledgor acknowledges that the acceptance by Agent of one of the offers shall not be -10- deemed per se to not be a commercially reasonable method of disposition of the Pledged Collateral. (d) If Agent shall determine to exercise its right to sell all or any portion of the Pledged Collateral pursuant to this Section, Pledgor agrees that, upon request of Agent, Pledgor will, at no expense to any member of the Lender Group: (i) execute and deliver, and, use commercially reasonably efforts to, cause the Issuers and the directors and officers thereof to execute and deliver, all such instruments and documents, and to do or use commercially reasonably efforts to cause to be done all such other acts and things, as may be necessary or, in the opinion of Agent, advisable to register such Pledged Collateral under the provisions of the Securities Act, and use commercially reasonable efforts to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectuses which, in the opinion of Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (ii) use commercially reasonable efforts to qualify the Pledged Collateral under the state securities laws or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Pledged Collateral, as requested by Agent; (iii) use commercially reasonably efforts to cause the Issuers to make available to their respective security holders, as soon as practicable, an earnings statement which will satisfy the provisions of Section 11(a) of the Securities Act; (iv) execute and deliver, or use commercially reasonably efforts to cause the officers and directors of the Issuers to execute and deliver, to any person, entity or governmental authority as Agent may choose, any and all documents and writings which, in Agent's reasonable judgment, may be necessary or appropriate for approval, or be required by, any regulatory authority located in any city, county, state or country where Pledgor or the Issuers engage in business, in order to transfer or to more effectively transfer the Pledged Interests or otherwise enforce Agent's rights hereunder; and (v) do or cause to be done all such other acts and things as may be commercially reasonable to make such sale of the Pledged Collateral or any part thereof valid and binding and in compliance with applicable law. Pledgor acknowledges that there is no adequate remedy at law for failure by it to comply with the provisions of this Section and that such failure would not be adequately compensable in damages, and therefore agrees that its agreements contained in this Section may be specifically enforced. (e) PLEDGOR EXPRESSLY WAIVES TO THE MAXIMUM EXTENT PERMITTED BY LAW: (i) ANY CONSTITUTIONAL OR OTHER RIGHT TO A JUDICIAL HEARING PRIOR TO THE TIME AGENT DISPOSES OF ALL OR ANY PART OF THE -11- PLEDGED COLLATERAL AS PROVIDED IN THIS SECTION; (ii) ALL RIGHTS OF REDEMPTION, STAY, OR APPRAISAL THAT IT NOW HAS OR MAY AT ANY TIME IN THE FUTURE HAVE UNDER ANY RULE OF LAW OR STATUTE NOW EXISTING OR HEREAFTER ENACTED; AND (iii) EXCEPT AS SET FORTH IN SUBSECTION (a) OF THIS SECTION, ANY REQUIREMENT OF NOTICE, DEMAND, OR ADVERTISEMENT FOR SALE. 10. Application of Proceeds. Upon the occurrence and during the continuance of an Event of Default, any cash held by Agent as Pledged Collateral and all cash proceeds received by Agent in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral pursuant to the exercise by Agent of its remedies as a secured creditor as provided in Section 9 shall be applied from time to time by Agent as provided in the Loan Agreement. 11. Duties of Agent. The powers conferred on Agent hereunder are solely to protect its interests in the Pledged Collateral and shall not impose on it any duty to exercise such powers. Except as provided in Section 9207 of the Code, Agent shall have no duty with respect to the Pledged Collateral or any responsibility for taking any necessary steps to preserve rights against any Persons with respect to any Pledged Collateral. 12. Choice of Law and Venue. THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION OF AGENT, IN ANY OTHER COURT IN WHICH AGENT SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. PLEDGOR AND AGENT WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 12. 13. Amendments; Etc. No amendment or waiver of any provision of this Agreement nor consent to any departure by Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by Agent and Pledgor, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of Agent to exercise, and no delay in exercising any right under this Agreement, any other Loan Document, or otherwise with respect to any of the Secured Obligations, shall operate as a waiver thereof; nor shall any single or partial exercise of any right under this Agreement, any other Loan Document, or otherwise with respect to any of the Secured Obligations preclude any other or further exercise thereof or the exercise of any other right. The remedies provided for in this Agreement or otherwise with respect to any of the Secured Obligations are cumulative and not exclusive of any remedies provided by law. Notwithstanding -12- the foregoing, Pledgor may amend Schedule A to include Subsidiaries formed or acquired as permitted by Section 6.15 of the Loan Agreement by providing a copy thereof to Agent along with a notice complying with the applicable provisions herein with respect thereto. 14. Notices. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and shall be delivered in the manner set forth in the Loan Agreement. 15. Continuing Security Interest. This Agreement shall create a continuing security interest in the Pledged Collateral and shall: (i) remain in full force and effect until the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement; (ii) be binding upon Pledgor and its successors and assigns; and (iii) inure to the benefit of Agent and its successors, transferees, and assigns. Upon the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, the security interests granted herein shall automatically terminate and all rights to the Pledged Collateral shall revert to Pledgor. Upon any such termination, Agent will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination. Such documents shall be prepared by Pledgor. 16. Security Interest Absolute. To the maximum extent permitted by law, all rights of Agent, all security interests hereunder, and all obligations of Pledgor hereunder, shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of any of the Secured Obligations or any other agreement or instrument relating thereto, including any of the Loan Documents; (b) any change in the time, manner, or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from any of the Loan Documents, or any other agreement or instrument relating thereto; (c) any exchange, release, or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty for all or any of the Secured Obligations; or (d) any other circumstances that might otherwise constitute a defense available to, or a discharge of, Pledgor. To the maximum extent permitted by law, Pledgor hereby waives any right to require Agent to: (A) proceed against or exhaust any security held by Pledgor; or (B) pursue any other remedy in Agent's power whatsoever. -13- 17. Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement or be given any substantive effect. 18. Severability. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 19. Counterparts; Telefacsimile Execution. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, or binding effect hereof. 20. Waiver of Marshaling. Pledgor and Agent acknowledge and agree that in exercising any rights under or with respect to the Pledged Collateral: (i) Agent is under no obligation to marshal any Pledged Collateral; (ii) may, in its absolute discretion, realize upon the Pledged Collateral in any order and in any manner it so elects; and (iii) may, in its absolute discretion, apply the proceeds of any or all of the Pledged Collateral to the Secured Obligations in any order and in any manner it so elects. Pledgor and Agent waive any right to require the marshaling of any of the Pledged Collateral. 21. Waiver of Jury Trial. PLEDGOR AND AGENT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. PLEDGOR AND AGENT REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. [Signature page to follow.] -14- IN WITNESS WHEREOF, Pledgor and Agent have caused this Agreement to be duly executed and delivered as of the date first written above. RIVER HOLDING CORP., a Delaware corporation By: ---------------------------------- Name: ---------------------------------- Title: ---------------------------------- MW POST ADVISORY GROUP, LLC, a Delaware limited liability company, as Agent By: ------------------------------------ Name: Lawrence Post Title: Chief Executive Officer Signature Page Stock Pledge Agreement (Holding) SCHEDULE A ---------- TO STOCK PLEDGE AGREEMENT ---------------------- Pledgor: River Holding Corp. Pledged Interests -----------------
Pledgor's Number of Certificate Number Percentage Percentage Jurisdiction of Certificated / Issuer Shares Class (s) Ownership Pledged Organization Uncertificated - ------------------ --------- --------- ------------------- ---------- ---------- --------------- -------------- Hudson Respiratory 13, 14, 15, 16, 85.92% 100% California Certificated Care Inc. 9,154,293 Common 17, 22, 23, 24, 25, 27, Hudson Respiratory Senior 1, 2, ,3, 4, 6, 7, 100% 100% California Certificated Care Inc. 525,938 Preferred 8, 9, 10, 11, 12 Hudson Respiratory Junior 1 100% 100% California Certificated Care Inc. 3,000 Preferred
-1- SCHEDULE B ---------- TO STOCK PLEDGE AGREEMENT ---------------------- Pledgor: River Holding Corp. Address of Chief Executive Office: 27711 Diaz Road Temecula, California 92590 -1-
EX-10.25 16 dex1025.txt STOCK PLEDGE AGREEMENT- HUDSON RCI/IH HOLDING/MW POST Exhibit 10.25 STOCK PLEDGE AGREEMENT ---------------------- (BORROWER) ---------- This STOCK PLEDGE AGREEMENT (this "Agreement"), dated as of October 7, 2003, is entered into by and among HUDSON RESPIRATORY CARE INC., a California corporation ("Borrower"), IH Holding LLC, a Delaware limited liability company ("Guarantor", together with the Borrower, collectively the "Pledgor"), and MW POST ADVISORY GROUP, LLC, a Delaware limited liability company, as administrative agent for the Lenders (in such capacity, together with its successors, if any, in such capacity, "Agent"), with reference to the following: WHEREAS, Borrower, the Lenders (such Lenders, together with Agent, individually and collectively, the "Lender Group"), and Agent have entered into that certain Loan and Security Agreement, dated as of even date herewith (as amended, restated, modified, supplemented, refinanced, renewed, or extended from time to time, the "Loan Agreement"), pursuant to which the Lender Group has agreed to make certain financial accommodations to Pledgor; WHEREAS, contemporaneously herewith, Guarantor has executed and delivered that certain General Continuing Guaranty (the "Guaranty") and that certain Security Agreement (Guarantors) (the "Security Agreement") in favor of Agent respecting certain obligations of the Borrower to the Lender Group in connection with the Loan Agreement. WHEREAS, Pledgor beneficially owns the specified Equity Interests identified as Pledged Interests in the Persons identified as Issuers listed under the name of Pledgor on Schedule A attached hereto (or any addendum thereto); and WHEREAS, to induce the Lender Group to make the financial accommodations provided to the Pledgor pursuant to the Loan Agreement, Pledgor desires to pledge, grant, transfer, and assign to Agent, for the benefit of the Lender Group, a security interest in the Pledged Collateral (as hereinafter defined) to secure the Secured Obligations (as hereinafter defined), as provided herein. NOW, THEREFORE, in consideration of the mutual promises, covenants, representations, and warranties set forth herein and for other good and valuable consideration, the parties hereto agree as follows: 1. Definitions And Construction. (a) Definitions. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. The following terms, as used in this Agreement, shall have the following meanings: "Agent" shall have the meaning set forth in the preamble to this Agreement, together with its successors or assigns. "Agreement" has the meaning set forth in the preamble to this Agreement. -1- "Chief Executive Office" shall mean the Chief Executive Office listed on Schedule B. "Equity Interests" shall mean all shares, units, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company, or equivalent entity, whether voting or nonvoting, including general partner partnership interests, limited partner partnership interests, common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and any successor statute. "Excluded Collateral" shall have the meaning ascribed to such term in the Loan Agreement. "Future Rights" shall mean, with respect to each Issuer, (i) all Equity Interests (other than Pledged Interests) of such Issuer, and all securities convertible or exchangeable into, and all warrants, options, or other rights to purchase, Equity Interests of such Issuer; (ii) to the extent of Pledgor's interest therein, all shares of, all securities convertible or exchangeable into, and all warrants, options, or other rights to purchase Equity Interests of any Person in which Pledgor, after the date of this Agreement, acquires a direct equity interest, irrespective of whether such Person is or becomes a Subsidiary of Pledgor; and (iii) the certificates or instruments representing such additional Equity Interests, convertible or exchangeable securities, warrants, and other rights and all dividends, cash, options, warrants, rights, instruments, and other property or proceeds from time to time received, receivable, or otherwise distributed in respect of or in exchange for any or all of such Equity Interests. "Guarantor" shall have the meaning set forth in the preamble to this Agreement. "Guaranty" shall have the meaning set forth in the recitals to this Agreement. "Holder" and "Holders" shall have the meanings set forth in Section 3 of this Agreement. "HRC Certificates" means the certificates evidencing the capital stock of HRC Holding Inc., a Delaware corporation. "Intercreditor Agreement" means that certain intercreditor agreement between WFF and Post dated as of an even date herewith. -2- "Issuers" shall mean each of the Persons identified as an Issuer on Schedule A attached hereto (or any addendum thereto), and any successors thereto, whether by merger or otherwise. "Lender Group" shall have the meaning set forth in the recitals to this Agreement. "Lenders" means, individually and collectively, each of the financial institutions identified on the signature pages of the Loan Agreement, and any other person made a party thereto in accordance with the provisions of Section 14 thereof (together with their respective successors and assigns). "Loan Agreement" shall have the meaning set forth in the recitals to this Agreement. "Pledged Collateral" shall mean the Pledged Interests, the Future Rights, and the Proceeds, collectively but excluding the Excluded Collateral. "Pledged Interests" shall mean with respect to each Issuer, all of the Equity Interests identified as Pledged Interests of such Issuer on Schedule A attached hereto (or any addendum thereto). "Pledgor" has the meaning set forth in the preamble to this Agreement. "Post" means MW Post Advisory Group, LLC, a Delaware limited liability company. "Proceeds" shall mean all proceeds (including proceeds of proceeds) of the Pledged Interests and Future Rights including all: (a) rights, benefits, distributions, premiums, profits, dividends, interest, cash, instruments, documents of title, accounts, contract rights, inventory, equipment, general intangibles, deposit accounts, chattel paper, and other property from time to time received, receivable, or otherwise distributed in respect of or in exchange for, or as a replacement of or a substitution for, any of the Pledged Interests, Future Rights, or proceeds thereof (including any cash, Equity Interests, or other securities or instruments issued after any recapitalization, readjustment, reclassification, merger or consolidation with respect to any Issuer and any security entitlements, as defined in the Code, with respect thereto); (b) "proceeds," as such term is defined in the Code; (c) proceeds of any insurance, indemnity, warranty, or guaranty (including guaranties of delivery) payable from time to time with respect to any of the Pledged Interests, Future Rights, or proceeds thereof; (d) payments (in any form whatsoever) made or due and payable to Pledgor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Pledged Interests, Future Rights, or proceeds thereof; and (e) other amounts from time to time paid or payable under or in connection with any of the Pledged Interests, Future Rights, or proceeds thereof. -3- "SEC" shall mean the United States Securities and Exchange Commission and any successor thereto. "Secured Obligations" shall mean, with respect to Pledgor, all liabilities, obligations, or undertakings owing by Pledgor to the Lender Group of any kind or description arising out of or outstanding under, advanced or issued pursuant to, or evidenced by the Loan Agreement, the Guaranty, the Security Agreement, this Agreement, or any of the other Loan Documents, irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, voluntary or involuntary, whether now existing or hereafter arising, and including all interest (including interest that accrues after the filing of a case under the Bankruptcy Code) and any and all costs, fees (including attorneys fees), and expenses which Pledgor is required to pay pursuant to any of the foregoing, by law, or otherwise. "Securities Act" shall have the meaning set forth in Section 9(c) of this Agreement. "Security Agreement" shall have the meaning set forth in the recitals to this Agreement. "WFF" means Wells Fargo Foothill, Inc., a California corporation, its successors and permitted assigns. (b) Construction. (i) Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular and to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and other similar terms in this Agreement refer to this Agreement as a whole and not exclusively to any particular provision of this Agreement. Article, section, subsection, exhibit, and schedule references are to this Agreement unless otherwise specified. All of the exhibits or schedules attached to this Agreement shall be deemed incorporated herein by reference. Any reference to any of the following documents includes any and all alterations, amendments, restatements, extensions, modifications, renewals, or supplements thereto or thereof, as applicable: this Agreement, the Loan Agreement, or any of the other Loan Documents. (ii) Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Agent or Pledgor, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by each of the parties signatory hereto and their respective counsel and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of the parties hereto. (iii) In the event of any direct conflict between the express terms and provisions of this Agreement and of the Loan Agreement or the Security Agreement, -4- the terms and provisions of the Loan Agreement or the Security Agreement, as applicable, shall control. 2. Pledge. Pledgor hereby pledges, grants, transfers, and assigns to Agent, for the benefit of the Lender Group, a security interest in all of Pledgor's right, title, and interest in and to the Pledged Collateral in order to secure prompt repayment of any and all of the Secured Obligations in accordance with the terms and conditions of the Loan Documents to which Pledgor is a party, and in order to secure prompt performance by Pledgor of its covenants and duties under each Loan Document to which it is a party. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for Permitted Dispositions, Pledgor has no authority, express or implied, to dispose of any item or portion of the Pledged Collateral. 3. Delivery and Registration of Pledged Collateral. (a) All certificates or instruments representing or evidencing the Pledged Collateral shall be promptly delivered by Pledgor to Agent or Agent's designee pursuant hereto at a location designated by Agent and shall be held by or on behalf of Agent pursuant hereto, and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to Agent. (b) Upon the occurrence and during the continuance of an Event of Default, Agent shall have the right, at any time in its discretion and without notice to Pledgor, to transfer to or to register on the books of the Issuers (or of any other Person maintaining records with respect to the Pledged Collateral) in the name of Agent or any of its nominees any or all of the Pledged Collateral. In addition, Agent shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations. (c) If, at any time and from time to time, any Pledged Collateral (including any certificate or instrument representing or evidencing any Pledged Collateral) is in the possession of a Person other than Agent (or an agent of Agent) or Pledgor (a "Holder"), then Pledgor shall promptly, at Agent's option, either cause such Pledged Collateral to be delivered into Agent's or Agent's designee's possession, or execute and deliver to such Holder a written notification/instruction, and take all other steps necessary to perfect the security interest of Agent in such Pledged Collateral, including obtaining from such Holder a written acknowledgment that such Holder holds such Pledged Collateral for Agent, all pursuant to the Code or other applicable law governing the perfection of Agent's security interest in the Pledged Collateral in the possession of such Holder. Each such notification/instruction and acknowledgment shall be in form and substance reasonably satisfactory to Agent. (d) Any and all Pledged Collateral (including dividends, interest, and other cash distributions) at any time received or held by Pledgor shall be so received or held in trust for Agent, shall be segregated from other funds and property of Pledgor and shall be forthwith delivered to Agent or Agent's designee in the same form as so received or held, with any -5- necessary endorsements; provided that cash dividends or distributions received by Pledgor, if and to the extent they are not prohibited by the Loan Agreement, may be retained by Pledgor in accordance with Section 4 and used in the ordinary course of Pledgor's business, or as otherwise expressly permitted under the Loan Documents. (e) If at any time and from time to time any Pledged Collateral consists of an uncertificated security or a security in book entry form, then Pledgor shall promptly cause such Pledged Collateral to be registered or entered, as the case may be, in the name of Agent, for the benefit of the Lender Group, or otherwise cause the security interest held by Agent, for the benefit of the Lender Group, to be perfected in accordance with applicable law. (f) The Agent acknowledges that the exercise of the powers or rights granted in this Section 3 may at some times be subject to the provisions of the Intercreditor Agreement. 4. Voting Rights and Dividends. (a) So long as no Event of Default shall have occurred and be continuing, Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of the Loan Documents. (b) Upon the occurrence and during the continuance of an Event of Default, at the election of Agent in its Permitted Discretion, upon the receipt by Pledgor of written notice of such election by Agent, all rights of Pledgor to exercise the voting and other consensual rights or receive and retain cash dividends or distributions that it would otherwise be entitled to exercise or receive and retain, as applicable pursuant to Section 4(a), shall cease, and all such rights shall thereupon become vested in Agent, who shall thereupon have the sole right to exercise such voting or other consensual rights and to receive and retain such cash dividends and distributions. Upon the receipt of such written notice, Pledgor shall execute and deliver (or cause to be executed and delivered) to Agent all such proxies and other instruments as Agent may reasonably request for the purpose of enabling Agent to exercise the voting and other rights which it is entitled to exercise and to receive the dividends and distributions that it is entitled to receive and retain pursuant to the preceding sentence. (c) The Agent acknowledges that the exercise of the powers granted in this Section 4 may at some times be subject to the provisions of the Intercreditor Agreement. 5. Representations and Warranties. Pledgor represents, warrants, and covenants as follows: (a) Pledgor has taken all steps it deems necessary or appropriate to be informed on a continuing basis of changes or potential changes affecting the Pledged Collateral (including rights of conversion and exchange, rights to subscribe, payment of dividends, reorganizations or recapitalization, tender offers and voting rights), and Pledgor agrees that no member of the Lender Group shall have any responsibility or liability for informing Pledgor of any such changes or potential changes or for taking any action or omitting to take any action with respect thereto; -6- (b) All information herein or contained in or delivered pursuant to the Loan Documents supplied to Agent or any other member of the Lender Group by and prepared by Pledgor or any Subsidiary of Pledgor in writing with respect to the Pledged Collateral is, or in the case of information hereafter supplied will be, accurate and complete in all material respects; (c) Pledgor is and will be the sole legal and beneficial owner of the Pledged Collateral (including the Pledged Interests and all other Pledged Collateral acquired by Pledgor after the date hereof) free and clear of any adverse claim, Lien, or other right, title, or interest of any party, other than the Liens held by Agent for the benefit of the Lender Group and Permitted Liens; (d) This Agreement, and the delivery to Agent of certificates, if any, representing Pledged Collateral (or the delivery to all Holders of such certificates, if any, representing Pledged Collateral of the notification/instruction referred to in Section 3 of this Agreement and the acknowledgement of such Holders referred to in Section 3), creates a valid, perfected, and second priority security interest, junior only to the security interests of WFF to the extent set forth in the Intercreditor Agreement (except that the security interest in the HRC Certificates shall be a first priority security interest), in one hundred percent (100%) of the Pledged Interests which are in certificated form in favor of Agent securing payment of the Secured Obligations, and all actions necessary to achieve such perfection have been duly taken; (e) Schedule A to this Agreement is true and correct and complete in all material respects as of the date hereof; without limiting the generality of the foregoing, as of the date hereof: (i) except as set forth in Schedule A, all the Pledged Interests are in certificated form, and, except to the extent registered in the name of Agent or its nominee pursuant to the provisions of this Agreement, are registered in the name of Pledgor; and (ii) the Pledged Interests as to each of the Issuers constitute at least the percentage of all the fully diluted issued and outstanding Equity Interests of such Issuer as set forth in Schedule A to this Agreement; (f) the Pledged Interests that are interests in general partnerships, limited partnerships or limited liability companies (i) are not dealt in or traded on securities exchanges or in securities markets, (ii) do not have terms expressly providing that they are securities governed by Article 8 of the Code, and (iii) are not investment company securities, and are not, therefore, "securities" governed by Article 8 of the Code; (g) There are no presently existing Future Rights owned by Pledgor as of the date hereof; (h) The Pledged Interests have been duly authorized and validly issued and, with respect to the HRC Certificates, are fully paid and nonassessable; and (i) Neither the pledge of the Pledged Collateral pursuant to this Agreement nor the extensions of credit represented by the Secured Obligations violates Regulation T, U or X of the Board of Governors of the Federal Reserve System. -7- 6. Further Assurances. (a) Pledgor agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action that may be necessary or reasonably desirable, or that Agent, on behalf of the Lender Group, may request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Agent, on behalf of the Lender Group, to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) at the request of Agent, mark conspicuously each of its records pertaining to the Pledged Collateral with a legend, in form and substance reasonably satisfactory to Agent, indicating that such Pledged Collateral is subject to the security interest granted hereby; (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or reasonably desirable, or as Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby; (iii) allow inspection of the Pledged Collateral by Agent or Persons designated by Agent; and (iv) appear in and defend any action or proceeding that may affect Pledgor's title to or Agent's security interest in the Pledged Collateral. (b) Pledgor hereby authorizes Agent, on behalf of the Lender Group, to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Pledged Collateral without Pledgor's signature where permitted by law. A carbon, photographic, or other reproduction of this Agreement or any financing statement covering the Pledged Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. (c) Pledgor will furnish to Agent, upon the request of Agent: (i) a certificate executed by an authorized officer of Pledgor, and dated as of the date of delivery to Agent, itemizing in such detail as Agent may request, the Pledged Collateral which, as of the date of such certificate, has been delivered to Agent by Pledgor pursuant to the provisions of this Agreement; and (ii) such statements and schedules further identifying and describing the Pledged Collateral and such other reports in connection with the Pledged Collateral as Agent may request. 7. Covenants of Pledgor. Pledgor shall: (a) Perform each and every covenant in the Loan Documents applicable to Pledgor; (b) At all times keep at least one complete set of its records concerning substantially all of the Pledged Collateral at its Chief Executive Office as set forth in Schedule B hereto, and not change the location of its Chief Executive Office or such records without giving Agent at least thirty (30) days prior written notice thereof; (c) To the extent it may lawfully do so, use its best efforts to prevent the Issuers from issuing Future Rights or Proceeds, except for cash dividends and other distributions, -8- if any, that are not prohibited by the terms of the Loan Agreement to be paid by any Issuer to Pledgor; (d) Upon receipt by Pledgor of any material notice, report, or other communication from any of the Issuers or any Holder relating to all or any part of the Pledged Collateral, deliver such notice, report or other communication to Agent promptly, but in no event later than five (5) days following the receipt thereof by Pledgor; and (e) Not permit any of the Issuers to: (i) authorize the amendment of or amend the Governing Documents of such Issuer that is a general partnership, limited partnership or limited liability company to provide that the Equity Interests of such Issuer is governed by Article 8 of the Code, or (ii) authorize the issuance of or issue certificates evidencing the Equity Interests of such Issuer that is a general partnership, limited partnership or limited liability company. 8. Agent as Pledgor's Attorney-in-Fact. (a) Pledgor hereby irrevocably appoints Agent, on behalf of the Lender Group, as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Agent or otherwise, from time to time at Agent's discretion, to take any action and to execute any instrument that Agent, on behalf of the Lender Group, may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including: (i) upon the occurrence and during the continuance of an Event of Default, to receive, endorse, and collect all instruments made payable to Pledgor representing any dividend, interest payment or other distribution in respect of the Pledged Collateral or any part thereof to the extent permitted hereunder and to give full discharge for the same and to execute and file governmental notifications and reporting forms; (ii) to issue any notifications/instructions Agent deems necessary pursuant to Section 3 of this Agreement; or (iii) to arrange for the transfer of the Pledged Collateral on the books of any of the Issuers or any other Person to the name of Agent or to the name of Agent's nominee. (b) In addition to the designation of Agent as Pledgor's attorney-in-fact in subsection (a), Pledgor hereby irrevocably appoints Agent, on behalf of the Lender Group, as Pledgor's agent and attorney-in-fact to make, execute and deliver any and all documents and writings which may be necessary or appropriate for approval of, or be required by, any regulatory authority located in any city, county, state or country where Pledgor or any of the Issuers engage in business, in order to transfer or to more effectively transfer any of the Pledged Interests or otherwise enforce the rights granted hereunder to the Lender Group. (c) The Agent acknowledges that the exercise of the powers granted in this Section 8 may at some times be subject to the provisions of the Intercreditor Agreement. 9. Remedies upon Default. Upon the occurrence and during the continuance of an Event of Default, subject to the terms of the Intercreditor Agreement: (a) Agent, on behalf of the Lender Group, may exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for herein or otherwise -9- available to it, all the rights and remedies of a secured party on default under the Code (irrespective of whether the Code applies to the affected items of Pledged Collateral), and Agent, on behalf of the Lender Group, may also without notice (except as specified below) sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Agent may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. To the maximum extent permitted by applicable law, Agent may be the purchaser of any or all of the Pledged Collateral at any such sale and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply all or any part of the Secured Obligations as a credit on account of the purchase price of any Pledged Collateral payable at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by law) all rights of redemption, stay, or appraisal that it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten (10) calendar days notice to Pledgor of the time and place of any public sale or the time after which a private sale is to be made shall constitute reasonable notification. Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Subject to subsection (b), to the maximum extent permitted by law, Pledgor hereby waives any claims against Agent arising because the price at which any Pledged Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale, even if Agent accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. (b) Pledgor hereby agrees that any sale or other disposition of the Pledged Collateral conducted in conformity with reasonable commercial practices of banks, insurance companies, or other financial institutions in the City of Los Angeles, State of California in disposing of property similar to the Pledged Collateral shall be deemed to be commercially reasonable. (c) Pledgor hereby acknowledges that the sale by Agent of any Pledged Collateral pursuant to the terms hereof in compliance with the Securities Act of 1933 as now in effect or as hereafter amended, or any similar statute hereafter adopted with similar purpose or effect (the "Securities Act"), as well as applicable "Blue Sky" or other state securities laws may require strict limitations as to the manner in which Agent or any subsequent transferee of the Pledged Collateral may dispose thereof. In light of this, Pledgor acknowledges and agrees that in order to protect Agent's interest it may be necessary to sell the Pledged Collateral at a price less than the maximum price attainable if a sale were delayed or were made in another manner, such as a public offering under the Securities Act. Pledgor has no objection to sale in such a manner and agrees that Agent shall have no obligation to obtain the maximum possible price for the Pledged Collateral as long as any sale is made in a commercially reasonable manner. Without limiting the generality of the foregoing, Pledgor agrees that, upon the occurrence and during the -10- continuation of an Event of Default, Agent may, subject to applicable law, from time to time attempt to sell all or any part of the Pledged Collateral by a private placement, restricting the bidders and prospective purchasers to those who will represent and agree that they are purchasing for investment only and not for distribution. In so doing, Agent may solicit offers to buy the Pledged Collateral or any part thereof for cash, from a limited number of investors deemed by Agent, in its reasonable judgment, to be institutional investors or other responsible parties who might be interested in purchasing the Pledged Collateral. If Agent shall solicit such offers, then Pledgor acknowledges that the acceptance by Agent of one of the offers shall not be deemed per se to not be a commercially reasonable method of disposition of the Pledged Collateral. (d) If Agent shall determine to exercise its right to sell all or any portion of the Pledged Collateral pursuant to this Section, Pledgor agrees that, upon request of Agent, Pledgor will, at no expense to any member of the Lender Group: (i) execute and deliver, and, use commercially reasonably efforts to, cause the Issuers and the directors and officers thereof to execute and deliver, all such instruments and documents, and to do or use commercially reasonably efforts to cause to be done all such other acts and things, as may be necessary or, in the opinion of Agent, advisable to register such Pledged Collateral under the provisions of the Securities Act, and use commercially reasonable efforts to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectuses which, in the opinion of Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (ii) use commercially reasonable efforts to qualify the Pledged Collateral under the state securities laws or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Pledged Collateral, as requested by Agent; (iii) use commercially reasonably efforts to cause the Issuers to make available to their respective security holders, as soon as practicable, an earnings statement which will satisfy the provisions of Section 11(a) of the Securities Act; (iv) execute and deliver, or use commercially reasonably efforts to cause the officers and directors of the Issuers to execute and deliver, to any person, entity or governmental authority as Agent may choose, any and all documents and writings which, in Agent's reasonable judgment, may be necessary or appropriate for approval, or be required by, any regulatory authority located in any city, county, state or country where Pledgor or the Issuers engage in business, in order to transfer or to more effectively transfer the Pledged Interests or otherwise enforce Agent's rights hereunder; and (v) do or cause to be done all such other acts and things as may be commercially reasonable to make such sale of the Pledged Collateral or any part thereof valid and binding and in compliance with applicable law. -11- Pledgor acknowledges that there is no adequate remedy at law for failure by it to comply with the provisions of this Section and that such failure would not be adequately compensable in damages, and therefore agrees that its agreements contained in this Section may be specifically enforced. (e) PLEDGOR EXPRESSLY WAIVES TO THE MAXIMUM EXTENT PERMITTED BY LAW: (i) ANY CONSTITUTIONAL OR OTHER RIGHT TO A JUDICIAL HEARING PRIOR TO THE TIME AGENT DISPOSES OF ALL OR ANY PART OF THE PLEDGED COLLATERAL AS PROVIDED IN THIS SECTION; (ii) ALL RIGHTS OF REDEMPTION, STAY, OR APPRAISAL THAT IT NOW HAS OR MAY AT ANY TIME IN THE FUTURE HAVE UNDER ANY RULE OF LAW OR STATUTE NOW EXISTING OR HEREAFTER ENACTED; AND (iii) EXCEPT AS SET FORTH IN SUBSECTION (a) OF THIS SECTION, ANY REQUIREMENT OF NOTICE, DEMAND, OR ADVERTISEMENT FOR SALE. 10. Application of Proceeds. Upon the occurrence and during the continuance of an Event of Default, any cash held by Agent as Pledged Collateral and all cash proceeds received by Agent in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral pursuant to the exercise by Agent of its remedies as a secured creditor as provided in Section 9 shall be applied from time to time by Agent as provided in the Loan Agreement. 11. Duties of Agent. The powers conferred on Agent hereunder are solely to protect its interests in the Pledged Collateral and shall not impose on it any duty to exercise such powers. Except as provided in Section 9207 of the Code, Agent shall have no duty with respect to the Pledged Collateral or any responsibility for taking any necessary steps to preserve rights against any Persons with respect to any Pledged Collateral. 12. Choice of Law and Venue. THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION OF AGENT, IN ANY OTHER COURT IN WHICH AGENT SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. PLEDGOR AND AGENT WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 12. 13. Amendments; Etc. No amendment or waiver of any provision of this Agreement nor consent to any departure by Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by Agent and Pledgor, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which -12- given. No failure on the part of Agent to exercise, and no delay in exercising any right under this Agreement, any other Loan Document, or otherwise with respect to any of the Secured Obligations, shall operate as a waiver thereof; nor shall any single or partial exercise of any right under this Agreement, any other Loan Document, or otherwise with respect to any of the Secured Obligations preclude any other or further exercise thereof or the exercise of any other right. The remedies provided for in this Agreement or otherwise with respect to any of the Secured Obligations are cumulative and not exclusive of any remedies provided by law. Notwithstanding the foregoing, Pledgor may amend Schedule A to include Subsidiaries formed or acquired as permitted by Section 6.15 of the Loan Agreement by providing a copy thereof to Agent along with a notice complying with the applicable provisions herein with respect thereto. 14. Notices. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and shall be delivered in the manner set forth in the Loan Agreement. 15. Continuing Security Interest. This Agreement shall create a continuing security interest in the Pledged Collateral and shall: (i) remain in full force and effect until the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement; (ii) be binding upon Pledgor and its successors and assigns; and (iii) inure to the benefit of Agent and its successors, transferees, and assigns. Upon the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, the security interests granted herein shall automatically terminate and all rights to the Pledged Collateral shall revert to Pledgor. Upon any such termination, Agent will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination. Such documents shall be prepared by Pledgor. 16. Security Interest Absolute. To the maximum extent permitted by law, all rights of Agent, all security interests hereunder, and all obligations of Pledgor hereunder, shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of any of the Secured Obligations or any other agreement or instrument relating thereto, including any of the Loan Documents; (b) any change in the time, manner, or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from any of the Loan Documents, or any other agreement or instrument relating thereto; (c) any exchange, release, or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty for all or any of the Secured Obligations; or -13- (d) any other circumstances that might otherwise constitute a defense available to, or a discharge of, Pledgor. To the maximum extent permitted by law, Pledgor hereby waives any right to require Agent to: (A) proceed against or exhaust any security held by Pledgor; or (B) pursue any other remedy in Agent's power whatsoever. 17. Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement or be given any substantive effect. 18. Severability. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 19. Counterparts; Telefacsimile Execution. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, or binding effect hereof. 20. Waiver of Marshaling. Pledgor and Agent acknowledge and agree that in exercising any rights under or with respect to the Pledged Collateral: (i) Agent is under no obligation to marshal any Pledged Collateral; (ii) may, in its absolute discretion, realize upon the Pledged Collateral in any order and in any manner it so elects; and (iii) may, in its absolute discretion, apply the proceeds of any or all of the Pledged Collateral to the Secured Obligations in any order and in any manner it so elects. Pledgor and Agent waive any right to require the marshaling of any of the Pledged Collateral. 21. Waiver of Jury Trial. PLEDGOR AND AGENT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. PLEDGOR AND AGENT REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. [Signature page to follow.] -14- IN WITNESS WHEREOF, Pledgor and Agent have caused this Agreement to be duly executed and delivered as of the date first written above. HUDSON RESPIRATORY CARE INC., a California corporation By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- IH HOLDING LLC, a Delaware limited liability company By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- MW POST ADVISORY GROUP, LLC, a Delaware limited liability company, as Agent By: ------------------------------------- Name: Lawrence Post Title: Chief Executive Officer Signature Page Stock Pledge Agreement (Borrower) SCHEDULE A ---------- TO STOCK PLEDGE AGREEMENT ---------------------- Pledgor: Hudson Respiratory Care Inc. Pledged Interests -----------------
Number Pledgor's Jurisdication of Certificate Percentage Percentage of Certificated / Issuer Shares Class Number(s) Ownership Pledged Organization Uncertificated - --------------------------- ------- ---------- ----------- ---------- ---------- ------------- -------------- HRC Holding Inc. 100 Common 1 100% 100% Delaware Certificated IH Holding LLC n/a membership -- 100% 0 Delaware Uncertificated interests Industrias Hudson, S.A. de C.V. 990 Common 16, 17 99% 66-2/3% Mexico Certificated Hudson Respiratory Care Tecate, S.de R.L. de C.V. n/a membership 1 99.9% 66-2/3% Mexico Certificated interests
Pledgor: IH Holding LLC Pledged Interests -----------------
Number Pledgor's Jurisdication of Certificate Percentage Percentage of Certificated / Issuer Shares Class Number(s) Ownership Pledged Organization Uncertificated - --------------------------- ------- ---------- ----------- ---------- ---------- ------------- -------------- Industrias Hudson, S.A. de C.V. 10 Common 18 1% 0 Mexico Certificated Hudson Respiratory Care Tecate, S. de R.L. de C.V. n/a membership 2 0.1% 0 Mexico Certificated interests
-1- SCHEDULE B ---------- TO STOCK PLEDGE AGREEMENT ---------------------- Pledgor:Hudson Respiratory Care Inc. Address of Chief Executive Office: 27711 Diaz Road Temecula, California 92590 -1-
EX-10.26 17 dex1026.txt SECURITY AGREEMENT- HUDSON RCI/MW POST EXHIBIT 10.26 SECURITY AGREEMENT (GUARANTORS) This SECURITY AGREEMENT (this "Agreement"), is entered into as of October 7, 2003, is executed and delivered by and among each of the undersigned Affiliates of HUDSON RESPIRATORY CARE INC., a California corporation ("Borrower") (each such Affiliate individually a "Guarantor", and individually and collectively, jointly and severally, the "Guarantors") and MW POST ADVISORY GROUP, LLC, a Delaware limited liability company, as administrative agent for the Lenders (in such capacity, together with its successors and assigns, if any, in such capacity, "Agent"), in light of the following: WHEREAS, Borrower, the Lenders (such Lenders, together with Agent, individually and collectively, jointly and severally, the "Lender Group"), and Agent are entering into that certain Loan and Security Agreement of even date herewith (as amended, restated, modified, renewed or extended from time to time, the "Loan Agreement"); WHEREAS, each Guarantor has executed that certain General Continuing Guaranty, of even date herewith, in favor of Agent (the "Guaranty"), respecting the Obligations of Borrower owing to the Lender Group under the Loan Agreement; WHEREAS, each Guarantor desires to secure its obligations under the Loan Documents to which it is party (including the Guaranty) by granting to Agent, for the benefit of the Lender Group, security interests in the Collateral as set forth herein; and WHEREAS, each Guarantor is an Affiliate of Borrower, and will benefit by virtue of the financial accommodations from the Lender Group to Borrower. NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and each intending to be bound hereby, Agent and each Guarantor agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1. Definitions. All capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. As used in this Agreement, the following terms shall have the following definitions: "Account" means any "account" (as that term is defined in the Code), and any and all supporting obligations in respect thereof. "Additional Documents" has the meaning set forth in Section 2.4(c) of this Agreement. "Agent" has the meaning set forth in the preamble to this Agreement. -1- "Agent's Liens" means the Liens granted by a Guarantor to Agent under this Agreement or the other Loan Documents to which such Guarantor is a party. "Agreement" means this Security Agreement and any extensions, riders, supplements, notes, amendments, or modifications to or in connection with this Security Agreement. "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C. Section 101, et seq.), as amended, and any successor statute. "Borrower" has the meaning set forth in the preamble to this Agreement. "Code" means the California Uniform Commercial Code as in effect from time to time. "Collateral" means, with respect to each Guarantor, all of such Guarantor's now owned or hereafter acquired right, title, and interest in and to each of the following: all of its Accounts; all of its Commercial Tort Claims; all of its Books; all of its Deposit Accounts; Real Property; all of its Equipment; all of its General Intangibles; all of its Inventory; all of its Investment Property (including all securities and Securities Accounts); all of its Negotiable Collateral; any money or other assets of such Guarantor which now or hereafter come into the possession, custody, or control of Agent; and the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, Commercial Tort Claims, Books, Deposit Accounts, Real Property, Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, money, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof, but excluding the Excluded Collateral. "Commercial Tort Claim Assignment" has the meaning set forth in Section 2.4(b) of this Agreement. "Commercial Tort Claims" means a commercial tort claim (as that term is defined in the Code). "Control Agreement" means a control agreement, in form and substance satisfactory to Agent, executed and delivered by Borrower or a Guarantor, Agent, and the applicable securities intermediary (with respect to a Securities Account) or bank (with respect to a Deposit Account) in form and substance satisfactory to Agent. "Equipment" means "equipment" (as that term is defined in the Code), and includes machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), tools, parts, and goods (other than consumer goods, farm products, or Inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. -2- "Excluded Collateral" shall have the meaning ascribed to such term in the Loan Agreement. "Guarantor" and "Guarantors" have the meanings ascribed to such terms in the preamble to this Agreement. "Guarantor's Books" means the applicable Guarantor's now owned or hereafter acquired books and records (including all of its Records indicating, summarizing, or evidencing its assets (including the Collateral) or liabilities, all of its Records relating to its business operations or financial condition, and all of its goods or General Intangibles related to such information). "General Intangibles" means "general intangibles" (as that term is defined in the Code). "Guaranty" has the meaning set forth in the recitals to this Agreement. "Inventory" means "inventory" (as that term is defined in the Code). "Investment Property" means "investment property" (as that term is defined in the Code), and any and all supporting obligations in respect thereof. "Lender Group" has the meaning set forth in the recitals to this Agreement. "Lenders" means, individually and collectively, each of the lenders identified on the signature pages of the Loan Agreement, and any other person made a party thereto in accordance with the provisions of Section 14 thereof (together with their respective successors and assigns). "Loan Agreement" has the meaning set forth in the recitals to this Agreement. "Negotiable Collateral" means letters of credit, letter of credit rights, instruments, promissory notes, drafts, documents, and chattel paper (including electronic chattel paper and tangible chattel paper), and any and all supporting obligations in respect thereof. "Secured Obligations" means the Guarantied Obligations, as defined in the Guaranty. "Voidable Transfer" has the meaning set forth in Section 11.8 to this Agreement. 1.2. Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 1.3. Construction. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise -3- indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Section, subsection, clause, schedule, and exhibit references are to this Agreement unless otherwise specified. Any reference in this Agreement or in any of the other Loan Documents to this Agreement or any of the other Loan Documents shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, and supplements, thereto and thereof, as applicable. In the event of a direct conflict between the terms and provisions of this Agreement and the Loan Agreement, it is the intention of the parties hereto that both such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of the Loan Agreement shall control and govern; provided, however, that the inclusion herein of additional obligations on the part of each Guarantor and supplemental rights and remedies in favor of Agent, in each case in respect of the Collateral, shall not be deemed a conflict with the Loan Agreement. 1.4. Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 2. CREATION OF SECURITY INTEREST. 2.1. Grant of Security Interest. Each Guarantor hereby grants to Agent, for the benefit of the Lender Group, a continuing security interest in all of its right, title, and interest in all currently existing and hereafter acquired or arising Collateral to secure prompt repayment of any and all of the Secured Obligations in accordance with the terms and conditions of the Loan Documents and to secure prompt performance by each Guarantor of each such Guarantor's covenants and duties under the Loan Documents. Agent's Liens in and to the Collateral shall attach to all Collateral without further act on the part of Agent or any Guarantor. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for Permitted Dispositions, no Guarantor has any authority, express or implied, to dispose of any item or portion of the Collateral. 2.2. Negotiable Collateral. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, and if and to the extent that Agent determines that perfection or priority of Agent's security interest is dependent on or enhanced by possession, the applicable Guarantor, promptly upon the request of Agent, shall endorse and deliver physical possession of such Negotiable Collateral to Agent. 2.3. Collection of Accounts, General Intangibles, Negotiable Collateral. At any time after the occurrence and during the continuation of an Event of Default, Agent or Agent's designee may (a) notify Account Debtors of any Guarantor that such Guarantor's Accounts, chattel paper, or General Intangibles have been assigned to Agent or that Agent has a security interest therein, or (b) collect such Guarantor's Accounts, chattel paper, or General Intangibles directly and charge the collection costs and expenses to the Loan Account. Each Guarantor agrees that it will hold in trust for Agent, as Agent's trustee, any Collections that -4- it receives and promptly will deliver such Collections to Agent in their original form as received by the applicable Guarantor. 2.4. Filing of Financing Statements; Commercial Tort Claims; Delivery of Additional Documentation Required. (a) Each Guarantor authorizes Agent to file any financing statement necessary or desirable to effectuate the transactions contemplated herein and by the other Loan Documents, and any continuation statement or amendment with respect thereto, in any appropriate filing office without the signature of such Guarantor where permitted by applicable law. Each Guarantor hereby ratifies the filing of any financing statement filed without the signature of such Guarantor prior to the date hereof. (b) If any Guarantor acquires any Commercial Tort Claim after the date hereof, such Guarantor shall promptly (but in any event within 10 days after a financial officer of Guarantor having knowledge thereof) deliver to Agent a written description of such Commercial Tort Claim and shall, upon request of Agent, promptly deliver a written agreement, in form and substance satisfactory to Agent, pursuant to which such Guarantor to the extent not prohibited by law, grants a security interest in such Commercial Tort Claim to Agent, as security for the Obligations (a "Commercial Tort Claim Assignment"). (c) At any time upon the request of Agent each Guarantor shall execute and deliver to Agent, any and all financing statements, original financing statements in lieu of continuation statements, fixture filings, security agreements, pledges, assignments, Commercial Tort Claim Assignments, endorsements of certificates of title, and all other documents (collectively, the "Additional Documents") that Agent may request in its Permitted Discretion, in form and substance satisfactory to Agent, to create, perfect, and continue perfected or to better perfect the Agent's Liens in the assets of such Guarantor (whether now owned or hereafter arising or acquired, tangible or intangible, real or personal), to create and perfect Liens in favor of Agent in any owned Real Property acquired by any Guarantor after the Closing Date, and in order to fully consummate all of the transactions contemplated hereby and under the other Loan Documents. To the maximum extent permitted by applicable law, if any Guarantor has not executed any Additional Document Agent is entitled to obtain hereunder after Agent has made an appropriate request therefor, each Guarantor authorizes Agent to execute any such Additional Documents in such Guarantor's name and authorizes Agent to file such executed Additional Documents in any appropriate filing office. In addition, on such periodic basis as Agent shall require, each Guarantor shall (i) provide Agent with a report of all new patents, trademarks, or copyrights (or applications therefor) acquired or generated by such Guarantor during the prior period, (ii) cause all material patents, copyrights and trademarks acquired or generated by such Guarantor that are not already the subject of a registration with the appropriate filing office (or an application therefor diligently prosecuted) to be registered with such appropriate filing office in a manner sufficient to impart constructive notice of such Guarantor's ownership thereof, and (iii) cause to be prepared, executed, and delivered to Agent supplemental schedules to the -5- applicable Loan Documents to identify such patents, copyrights, and trademarks as being subject to the security interests created thereunder. 2.5. Power of Attorney. Each Guarantor hereby irrevocably makes, constitutes, and appoints Agent (and any of Agent's officers, employees, or agents designated by Agent) as such Guarantor's true and lawful attorney, with power to: (a) if such Guarantor refuses to, or fails timely to execute and deliver any of the documents described in Section 2.4, sign the name of such Guarantor on any of the documents described in Section 2.4; (b) at any time that an Event of Default has occurred and is continuing, sign such Guarantor's name on any invoice or bill of lading relating to the Collateral, drafts against Account Debtors, or notices to Account Debtors; (c) send requests for verification of such Guarantor's Accounts; (d) endorse such Guarantor's name on any of its payment items (including all of its Collections) that may come into Agent's possession; (e) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under such Guarantor's policies of insurance and make all determinations and decisions with respect to such policies of insurance; and (f) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting such Guarantor's Accounts, chattel paper, or General Intangibles directly with Account Debtors, for amounts and upon terms that Agent determines to be reasonable, and Agent may cause to be executed and delivered any documents and releases that Agent determines to be necessary. The appointment of Agent as each Guarantor's attorney, and each and every one of Agent's rights and powers, being coupled with an interest, is irrevocable until all of the Secured Obligations have been fully and finally repaid and performed and the Lender Group's obligation to extend credit under the Loan Agreement is terminated. The Agent acknowledges that the exercise of the powers granted in this Section 2.5 may at some times be subject to the provisions of the Intercreditor Agreement. 2.6. Right to Inspect. Agent and each Lender (through any of their respective officers, employees, or agents) shall have the right, from time to time hereafter to inspect the Books and make copies or abstracts thereof and to check, test, and appraise the Collateral, or any portion thereof, in order to verify Guarantor's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral; provided that so long as no Event of Default has occurred, (a) Guarantor shall not be required to pay for more than 2 inspections/audits of the Collateral per year and (b) appraisals of the Collateral shall be conducted no more frequently than once per year. 2.7. Control Agreements. Each Guarantor agrees that it will not, and will not permit its Subsidiaries, if any, to, transfer assets out of any of their Deposit Accounts or Securities Accounts; provided, however, that so long as no Event of Default has occurred that is continuing or would result therefrom, each Guarantor and its respective Subsidiaries, if any, may use such assets (and the proceeds thereof) to the extent not prohibited by this Agreement or the other Loan Documents and, if the transfer is to another bank or securities intermediary, so long as such Guarantor (or its Subsidiary, as applicable), Agent, and the substitute bank or securities intermediary have entered into a Control Agreement if required by Section 7.12 of the Loan Agreement. Each Guarantor agrees that it will and will cause its Subsidiaries, if any, to take any -6- or all reasonable steps that Agent requests to obtain control in accordance with Sections 9-104, 9-105, 9-106, and 9-107 of the Code with respect to any of its or their Securities Accounts, Deposit Accounts, electronic chattel paper, Investment Property, and letter-of-credit rights. No arrangement contemplated hereby or by any Control Agreement in respect of any Securities Accounts or other Investment Property shall be modified by any Guarantor without the prior written consent of Agent. Upon the occurrence and during the continuance of an Event of Default, Agent may notify any bank or securities intermediary to liquidate the applicable Deposit Account or Securities Account or any related Investment Property maintained or held thereby and remit the proceeds thereof to the Agent's Account. 3. REPRESENTATIONS AND WARRANTIES. Each Guarantor makes the representations and warranties which are set forth in Section 5 of the Loan Agreement as if such Guarantor were a party thereto and to the extent the same are applicable to such Guarantor. 4. AFFIRMATIVE COVENANTS. Each Guarantor shall comply with each of the affirmative covenants which are set forth in Section 6 of the Loan Agreement as if such Guarantor were a party thereto and to the extent the same are applicable to such Guarantor. 5. NEGATIVE COVENANTS. Each Guarantor shall comply with each of the negative covenants which are set forth in Section 7 of the Loan Agreement as if such Guarantor were a party thereto and to the extent the same are applicable to such Guarantor. 6. AGENT'S RIGHTS AND REMEDIES. 6.1. Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, the security hereby constituted shall become enforceable and, in addition to all other rights and remedies available to Agent as provided hereafter, Agent may, without notice of its election and without demand, do any one or more of the following, subject to the terms of the Intercreditor Agreement, all of which are authorized by each Guarantor: (a) Proceed directly and at once, without notice, against any Guarantor to collect and recover the full amount or any portion of the Secured Obligations, without first proceeding against Borrower, or against any security or collateral for the Secured Obligations; (b) Without notice to any Guarantor and regardless of the acceptance of any security or collateral for the payment hereof, appropriate and apply toward the payment of the Secured Obligations (i) any indebtedness due or to become due from Agent to any Guarantor and -7- (ii) any moneys, credits or other property belonging to a Guarantor at any time held by or coming into the possession of Agent; (c) Exercise in respect of the Collateral, in addition to other rights and remedies provided for herein and in the Guaranty or otherwise available to it, all the rights and remedies available to it at law (including those of a secured party under the Code) or in equity; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms that Agent considers advisable, and in such cases, Agent will credit the Loan Account with only the net amounts received by Agent in payment of such disputed Accounts after deducting all Lender Group Expenses incurred or expended in connection therewith; (e) Cause each Guarantor to hold all returned Inventory in trust for Agent, segregate all returned Inventory from all other property of such Guarantor or in such Guarantor's possession and conspicuously label said returned Inventory as the property of Agent for the benefit thereof; (f) Without notice or demand upon any Guarantor, make such payments and do such acts as Agent considers necessary or reasonable to protect its security interest in the Collateral. Each Guarantor agrees to assemble the Collateral if Agent so requires, and to make the Collateral available to Agent as Agent may designate. Each Guarantor authorizes Agent to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Agent's determination appears to conflict with the Agent's Liens in and to the Collateral and to pay all expenses incurred in connection therewith. With respect to any of the Guarantors' owned premises, each Guarantor hereby grants Agent a license to enter into possession of such premises and to occupy the same, without charge, for up to one hundred twenty (120) days to exercise any of Agent's rights or remedies provided herein, at law, in equity, or otherwise; (g) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Agent is hereby granted a license or other right to use, without charge, each Guarantor's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of advertising for sale and selling any Collateral, and each Guarantor's rights under all licenses and all franchise agreements shall inure to Agent's benefit; (h) Sell all or any part of the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including a Guarantor's premises) as Agent determines is commercially reasonable. It is not necessary that the Collateral be present at any such sale; (i) Agent shall give notice of the disposition of the Collateral as follows: -8- (i) Agent shall give the applicable Guarantor a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Collateral, then the time on or after which the private sale or other disposition is to be made; and (ii) The notice shall be personally delivered or mailed, postage prepaid, to the applicable Guarantor as provided in Section 9, at least ten (10) days before the earliest time of disposition set forth in the notice; no notice needs to be given prior to the disposition of any portion of the Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market; (j) Agent, on behalf of the Lender Group, may credit bid and purchase at any public sale; (k) Agent may seek the appointment of a receiver or keeper to take possession of all or any portion of the Collateral or to operate same and, to the maximum extent permitted by law, may seek the appointment of such a receiver or keeper without the requirement of prior notice or a hearing; (l) Agent, on behalf of the Lender Group, shall have all other rights and remedies available at law or in equity or pursuant to any other Loan Document; and (m) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by the Guarantors. Any excess will be returned, without interest and subject to the rights of third Persons, by Agent to the applicable Guarantor. 6.2. Remedies Cumulative. Agent's rights and remedies under this Agreement, the other Loan Documents, and all other agreements shall be cumulative. Agent shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Agent of one right or remedy shall be deemed an election, and no waiver by any member of the Lender Group of any Event of Default on a Guarantor's part shall be deemed a continuing waiver. No delay by any member of the Lender Group shall constitute a waiver, election, or acquiescence by it. 7. TAXES AND EXPENSES REGARDING THE COLLATERAL. If any Guarantor fails to pay any monies (whether taxes, rents, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, Agent, in its sole discretion and without prior notice to any Guarantor, may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves in the Loan Account as Agent deems necessary to protect the Lender Group from the exposure created by such failure; or (c) in the case of the failure to comply with Section 6.8 of the Loan Agreement, obtain and maintain -9- insurance policies insuring each Guarantor's ownership and use of the Collateral, and take any action with respect to such policies as Agent deems prudent. Any amounts paid or deposited by Agent shall constitute Lender Group Expenses, shall immediately become additional Secured Obligations, shall bear interest at the applicable rate described in the Loan Agreement, and shall be secured by the Collateral. Any payments made by Agent shall not constitute an agreement by Agent, or any member of the Lender Group, to make similar payments in the future or a waiver by the Lender Group, or Agent on behalf thereof, of any Event of Default under this Agreement. Agent need not inquire as to, or contest the validity of, any such expense, tax, security interest, encumbrance, or lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. Agent shall use its best efforts to provide notice to the applicable Guarantor of any action taken by it under this Section 7. 8. WAIVERS; INDEMNIFICATION. 8.1. Demand; Protest; Etc. Except as otherwise specifically and explicitly set forth in this Agreement, the Loan Agreement, or the other Loan Documents, and to the extent permitted by law, each Guarantor waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by the Lender Group, or Agent on behalf thereof, on which such Guarantor may in any way be liable. 8.2. Lender Group's Liability for Collateral. So long as the Lender Group complies with its obligations, if any, under the Code and no willful misconduct or gross negligence occurs, Agent shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person. All risk of loss, damage, or destruction of the Collateral shall be borne by the Guarantors. 8.3. Indemnification. Each Guarantor agrees to defend, indemnify, save, and hold the Agent-Related Persons, the Lender-Related Persons with respect to each Lender, and each Participant (each an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them: (a) in connection with or as a result of or related to the execution, delivery, enforcement, performance, or administration (including any restructuring or workout with respect hereto) of this Agreement, any of the other Loan Documents, or the transactions contemplated hereby or thereby or the monitoring of each Guarantor's compliance with the terms of the Loan Documents, and (b) with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any -10- act, omission, event, or circumstance in any manner related thereto (all of the foregoing, collectively, the "Indemnified Liabilities"). The foregoing to the contrary notwithstanding, no Guarantor shall have any obligation to any Indemnified Person under this Section 8.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Secured Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which any Guarantor was required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by such Guarantor with respect thereto. WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LIABILITIES WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON (OTHER THAN TO THE EXTENT IT IS FINALLY DETERMINED TO HAVE RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY INDEMNIFIED PERSON). 9. NOTICES. All notices and other communications hereunder to Agent shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement and all notices and other communications hereunder to a Guarantor shall be in writing and shall be mailed, sent or delivered in care of Borrower in accordance with the Loan Agreement. 10. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE CALIFORNIA STATE COURTS AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. EACH GUARANTOR AND AGENT WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT SUCH PARTY MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 10. -11- EACH GUARANTOR AND AGENT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH GUARANTOR AND AGENT REPRESENT THAT EACH SUCH PARTY HAS REVIEWED THIS WAIVER AND EACH SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 11. GENERAL PROVISIONS. 11.1. Effectiveness. This Agreement shall be binding and deemed effective when executed by each Guarantor and accepted and executed by Agent. 11.2. Successors and Assigns. This Agreement shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of the successors and assigns of each member of the Lender Group; provided, however, no Guarantor shall assign this Agreement or delegate any of its duties hereunder without Agent's prior written consent and any assignment by a Guarantor without Agent's consent shall be absolutely void. In the event of any assignment or other transfer of rights by any member of the Lender Group, the rights and benefits herein conferred upon each member of the Lender Group shall automatically extend to and be vested in such assignee or other transferee. Subject to the provisions of the Loan Agreement, Agent may assign this Agreement and its rights and duties hereunder and no consent or approval by any Guarantor is required in connection with any such assignment 11.3. Section Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement or be given any substantive effect. 11.4. Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against any member of the Lender Group or any Guarantor, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 11.5. Severability of Provisions. Any provision of this Agreement that is prohibited or unenforceable under applicable law shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. 11.6. Amendments in Writing. This Agreement can only be amended by a writing signed by Agent and each Guarantor. -12- 11.7. Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. 11.8. Revival and Reinstatement of Obligations. If the incurrence or payment of the Secured Obligations by a Guarantor or the transfer by a Guarantor to Agent of any property of a Guarantor should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, and other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if Agent is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that Agent is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys' fees of Agent related thereto, the liability of each of the Guarantors automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 11.9. Termination. Upon the indefeasible final payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, this Agreement shall terminate, and Agent shall execute and deliver such documents and instruments and take such further action reasonably requested by Guarantors, at Guarantors' expense, as shall be necessary to evidence termination of the security interests granted by Guarantors to Agent for the benefit of the Lender Group. [Signature page follows] -13- IN WITNESS WHEREOF, each of the undersigned has executed and delivered this Agreement as of the date first above written. RIVER HOLDING CORP., a Delaware corporation By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- IH HOLDINGS LLC, a Delaware limited liability company By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- MW POST ADVISORY GROUP, LLC, a Delaware limited liability company, as Agent By: ------------------------------------- Name: Lawrence Post Title: Chief Executive Officer Signature Page Security Agreement (Guarantors) EX-10.33 18 dex1033.txt PATENT SECURITY AGREEMENT- HUDSON RCI/MW POST Exhibit 10.33 PATENT SECURITY AGREEMENT ------------------------- This PATENT SECURITY AGREEMENT (this "Agreement"), dated as of October 7, 2003, is executed and delivered by and between HUDSON RESPIRATORY CARE INC., a California corporation ("Debtor"), and MW POST ADVISORY GROUP, LLC, a Delaware limited liability company, as administrative agent for the Lenders (in such capacity, together with its successors and assigns, if any, in such capacity, "Agent"), with reference to the following: WHEREAS, Debtor, the Lenders (such Lenders, together with Agent, individually and collectively, the "Lender Group"), and Agent have entered into that certain Loan and Security Agreement, dated as of even date herewith (as amended, restated, modified, supplemented, refinanced, renewed, or extended from time to time, the "Loan Agreement"), pursuant to which the Lender Group has agreed to make certain financial accommodations to Debtor, and pursuant to which Debtor has granted to Agent for the benefit of the Lender Group security interests in (among other things) all general intangibles of Debtor; and WHEREAS, to induce the Lender Group to make the financial accommodations provided to Debtor pursuant to the Loan Agreement, Debtor has agreed to execute and deliver this Agreement to Agent for filing with the PTO and with any other relevant recording systems in any domestic or foreign jurisdiction, and as further evidence of and to effectuate Agent's existing security interests in the patents and other general intangibles described herein. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which is hereby acknowledged, Debtor hereby agrees in favor of Agent, for the benefit of the Lender Group, as follows: 1. Definitions; Interpretation. (a) Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Agent" has the meaning ascribed to such term in the preamble to this Agreement. "Agreement" has the meaning ascribed to such term in the preamble to this Agreement. "Debtor" has the meaning ascribed to such term in the preamble to this Agreement. "Debtor's Patents" has the meaning set forth in Section 4. -1- "Event of Default" means any Event of Default under the Loan Agreement. "Excluded Collateral" has the meaning ascribed to such term in the Loan Agreement. "Lender Group" has the meaning ascribed to such term in the recitals to this Agreement. "Lenders" means, individually and collectively, each of the lenders identified on the signature pages of the Loan Agreement, and any other person made a party thereto in accordance with the provisions of Section 14 thereof (together with their respective successors and assigns). "Loan Agreement" has the meaning ascribed to such term in the recitals to this Agreement. "Patent Collateral" has the meaning ascribed to such term in Section 2. "Patents" has the meaning ascribed to such term in Section 2. "Proceeds" means whatever is receivable or received from or upon the sale, lease, license, collection, use, exchange or other disposition, whether voluntary or involuntary, of any Patent Collateral, including "proceeds" as defined in the UCC, and all proceeds of proceeds. Proceeds shall include (i) any and all accounts, chattel paper, instruments, general intangibles, cash and other proceeds, payable to or for the account of Debtor, from time to time in respect of any of the Patent Collateral, (ii) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to or for the account of Debtor from time to time with respect to any of the Patent Collateral, (iii) any and all claims and payments (in any form whatsoever) made or due and payable to Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Patent Collateral by any Person acting under color of governmental authority, and (iv) any and all other amounts from time to time paid or payable under or in connection with any of the Patent Collateral or for or on account of any damage or injury to or conversion of or infringement of rights in any Patent Collateral by any Person. "PTO" means the United States Patent and Trademark Office and any successor thereto. "Secured Obligations" means all liabilities, obligations (including the Obligations), or undertakings owing by Debtor to the Lender Group of any kind or description arising out of or outstanding under, advanced or issued pursuant to, or evidenced by the Loan Agreement, this Agreement, or any of the other Loan Documents, irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, voluntary or involuntary, whether now existing or hereafter arising, and including all interest, costs, fees (including attorneys fees), and expenses (including interest, costs, fees, and expenses -2- that, but for the provisions of the Bankruptcy Code, would have accrued) and any and all other amounts which Debtor is required to pay pursuant to any of the foregoing, by law, or otherwise. "UCC" shall mean the Uniform Commercial Code as in effect from time to time in the State of California. "United States" and "U.S." shall each mean the United States of America. (b) Terms Defined in UCC. Where applicable and except as otherwise defined herein, terms used in this Agreement shall have the meanings ascribed to them in the UCC. (c) Interpretation. In this Agreement, except to the extent the context otherwise requires: (i) Any reference to a Section or a Schedule is a reference to a section hereof, or a schedule hereto, respectively, and to a subsection or a clause is, unless otherwise stated, a reference to a subsection or a clause of the Section or subsection in which the reference appears. (ii) The words "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement as a whole and not merely to the specific Section, subsection, paragraph or clause in which the respective word appears. (iii) The meaning of defined terms shall be equally applicable to both the singular and plural forms of the terms defined. (iv) The words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation." (v) References to agreements and other contractual instruments shall be deemed to include all subsequent permitted amendments, restatements, supplements, refinancings, renewals, extensions, and other modifications thereto and thereof. (vi) References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation referred to. (vii) Any captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. (viii) Capitalized words not otherwise defined herein shall have the respective meanings assigned to them in the Loan Agreement. -3- (ix) In the event of a direct conflict between the terms and provisions of this Agreement and the Loan Agreement, it is the intention of the parties hereto that such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict between this Agreement and the Loan Agreement, that cannot be resolved as aforesaid, the terms and provisions of the Loan Agreement shall control and govern; provided, however, that the inclusion herein of additional obligations on the part of the Debtor and supplemental rights and remedies in favor of Agent (whether under federal law or applicable California law), in each case in respect of the Patent Collateral, shall not be deemed a conflict with the Loan Agreement. 2. Security Interest. (a) Assignment and Grant of Security Interests. As security for the prompt payment and performance of the Secured Obligations, Debtor hereby grants, assigns, transfers, and conveys to Agent, for the benefit of the Lender Group, continuing security interests in all of such Debtor's right, title and interest in, to and under the following property, whether now existing or hereafter acquired or arising and whether registered or unregistered (collectively, the "Patent Collateral"): (i) all letters patent of the U.S. or any other country, all registrations and recordings thereof, and all applications for letters patent of the U.S. or any other country, owned, held, or used by Debtor in whole or in part, including all existing U.S. patents and patent applications of Debtor which are described on Schedule A hereto, as the same may be amended or supplemented pursuant hereto from time to time, and together with and including all patent licenses held by Debtor, including such patent licenses which are described on Schedule A hereto, together with all reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof and the inventions disclosed therein, and all rights corresponding thereto throughout the world, including the right to make, use, lease, sell and otherwise transfer the inventions disclosed therein, and all proceeds thereof, including all license royalties and proceeds of infringement suits (collectively, the "Patents"); (ii) all claims, causes of action and rights to sue for past, present and future infringement or unconsented use of any of the Patents and all rights arising therefrom and pertaining thereto; (iii) all general intangibles and all intangible intellectual or other similar property of Debtor of any kind or nature, whether now owned or hereafter acquired or developed, associated with or arising out of any of the Patents and not otherwise described above; and (iv) all products and Proceeds of any and all of the foregoing; provided, however, that Patent Collateral shall not include Excluded Collateral. -4- (b) Continuing Security Interests. Debtor agrees that this Agreement shall create continuing security interests in the Patent Collateral which shall remain in effect until terminated in accordance with Section 17. (c) Incorporation into Loan Agreement. This Agreement shall be fully incorporated into the Loan Agreement and all understandings, agreements and provisions contained in the Loan Agreement shall be fully incorporated into this Agreement. Without limiting the foregoing, the Patent Collateral described in this Agreement shall constitute part of the Collateral in the Loan Agreement. (d) Licenses. Debtor may grant licenses of the Patent Collateral in the ordinary course of business in accordance with the terms of the Loan Agreement. 3. Further Assurances; Appointment of Agent as Attorney-in-Fact. Debtor at its expense shall execute and deliver, or cause to be executed and delivered, to Agent any and all documents and instruments, in form and substance satisfactory to Agent, and take any and all action, which Agent, in the exercise of its discretion, may request from time to time, to perfect and continue perfected, maintain the priority of or provide notice of Agent's security interests in the Patent Collateral and to accomplish the purposes of this Agreement. If Debtor refuses to execute and deliver, or fails timely to execute and deliver, any of the documents it is requested to execute and deliver by Agent in accordance with the foregoing, Agent shall have the right to, in the name of Debtor, or in the name of Agent or otherwise, without notice to or assent by Debtor, and Debtor hereby irrevocably constitutes and appoints Agent (and any of Agent's officers or employees or agents designated by Agent) as Debtor's true and lawful attorney-in-fact with full power and authority, (i) to sign the name of Debtor on all or any of such documents or instruments, and perform all other acts, that Agent, in its reasonable discretion, deems necessary or advisable in order to perfect or continue perfected, maintain the priority or enforceability of or provide notice of Agent's security interests in, the Patent Collateral, and (ii) to execute any and all other documents and instruments, and to perform any and all acts and things for and on behalf of Debtor, which Agent, in its reasonable discretion, may deem necessary or advisable to maintain, preserve and protect the Patent Collateral and to accomplish the purposes of this Agreement, including (A) upon the occurrence and during the continuance of any Event of Default, to defend, settle, adjust or institute any action, suit or proceeding with respect to any Patent Collateral, (B) upon the occurrence and during the continuance of any Event of Default, to assert or retain any rights under any license agreement for any Patent Collateral, including any rights of Debtor arising under Section 365(n) of the Bankruptcy Code, and (C) upon the occurrence and during the continuance of any Event of Default, to execute any and all applications, documents, papers and instruments for Agent to use any Patent Collateral, to grant or issue any exclusive or non-exclusive license with respect to any Patent Collateral, and to assign, convey or otherwise transfer title in or dispose of the Patent Collateral. The power of attorney set forth in this Section 3, being coupled with an interest, is irrevocable so long as this Agreement shall not have terminated in accordance with Section 17; provided that the foregoing power of attorney shall terminate when all of the Secured Obligations have been fully and finally repaid and performed and the Lender Group's obligation to extend credit under the Loan -5- Agreement is terminated. The Agent acknowledges that the exercise of the powers granted in this Section 3 may at some times be subject to the provisions of the Intercreditor Agreement. 4. Representations and Warranties. Debtor represents and warrants to each member of the Lender Group, in each case, to the best of its knowledge, information, and belief, as follows: (a) No Other Patents. A true and correct list of all Patents owned by Debtor, in whole or in part, is set forth on Schedule A (collectively, the "Debtor's Patents"). Schedule A also sets forth a true and correct list of all of the Patents that Debtor holds (by reason of license or otherwise) from a third party. (b) Validity. Each of the Debtor's Patents listed on Schedule A is subsisting and has not been adjudged invalid or unenforceable, in whole or in part, all maintenance fees required to be paid on account of any Patents have been timely paid for maintaining such Patents in force, and, to the best of Debtor's knowledge, each of the Patents is valid and enforceable. (c) Title. (i) Debtor has rights in and good and defensible title to the Patent Collateral in respect of the Patents it owns, (ii) Debtor is the sole and exclusive owner of such Patent Collateral, free and clear of any Liens and rights of others (other than Permitted Liens), including licenses (other than licenses entered into as permitted herein), shop rights and covenants by Debtor not to sue third persons and (iii) with respect to any Patent for which Debtor is either a licensor or a licensee pursuant to a license or licensee agreement regarding such Patent, each such license or licensing agreement is in full force and effect, such Debtor is not in material default of any of its obligations thereunder and no other Person is known by such Debtor to have any rights in or to any of the Patent Collateral, other than (A) the parties to such licenses or licensing agreements, or (B) in the case of any non-exclusive license or license agreement entered into by Debtor or any such licensor regarding such Patent Collateral, the parties to any other such non-exclusive licenses or license agreements entered into by Debtor or any such licensor with any other Person. (d) No Infringement. To the best of Debtor's knowledge, (i) no material infringement or unauthorized use presently is being made of any of the Patent Collateral by any Person, and (ii) neither the past nor the present use of the Patent Collateral by Debtor has or does infringe upon or violate any right, privilege or license agreement of or with any other Person or give such Person the right to terminate any such license agreement. (e) Powers. Debtor has the unqualified right, power and authority to pledge and to grant to Agent, for the benefit of the Lender Group, security interests in all of the Patent Collateral pursuant to this Agreement, and to execute, deliver and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other Person except as already obtained. 5. Covenants. Debtor covenants that so long as this Agreement shall be in effect, Debtor shall: -6- (a) comply with all of the covenants, terms and provisions of this Agreement, the Loan Agreement, and the other Loan Documents; (b) promptly give Agent written notice of the occurrence of any event that could have a material adverse effect on any of the Patents or the Patent Collateral (except as to such Patent or Patents, which alone or in the aggregate, the absence of which would not reasonably be expected to materially impair the conduct of the business), including any petition under the Bankruptcy Code filed by or against any licensor of any of the Patents for which Debtor is a licensee, provided, however, that Debtor shall not be required to preserve, protect and maintain, and may abandon, in whole or in part, any Patent as Debtor deems appropriate in the exercise of Debtor's reasonable business judgment, so long as the absence of such Patent or Patents, alone or in the aggregate, would not reasonably be expected to materially impair the conduct of Debtor's business or the Patent Collateral; (c) on a continuing basis, make, execute, acknowledge and deliver, and file and record in the proper filing and recording places, all such instruments and documents, including appropriate financing and continuation statements and security agreements, and take all such action as may be necessary or advisable or may be requested by Agent, in the exercise of its Permitted Discretion, to carry out the intent and purposes of this Agreement, or for assuring, confirming or protecting the grant or perfection of the security interests granted or purported to be granted hereby, to ensure Debtor's compliance with this Agreement or to enable Agent to exercise and enforce its rights and remedies hereunder with respect to the Patent Collateral. Without limiting the generality of the foregoing sentence, Debtor: (i) hereby authorizes Agent in its sole discretion if Debtor refuses to execute and deliver, or fails timely to execute and deliver, any of the documents it is requested to execute and deliver by Agent, to modify this Agreement without first obtaining Debtor's approval of or signature to such modification by amending Schedule A hereof to include a reference to any right, title or interest in any existing Patent Collateral or Patent Collateral acquired or developed by Debtor after the execution hereof, or to delete any reference to any right, title or interest in any Patent Collateral in which Debtor no longer has or claim any right, title or interest; and (ii) hereby authorizes Agent, in its sole discretion, to file one or more financing or continuation statements, or if Debtor refuses to execute and deliver, or fails timely to execute and deliver, any such amendment thereto it is requested to execute and deliver by Agent, any amendments thereto, relative to all or any portion of the Patent Collateral, without the signature of Debtor where permitted by law; (d) comply, in all material respects, with all applicable statutory and regulatory requirements in connection with any and all Patent Collateral and give such notice of patent, prosecute such material claims, and do all other acts and take all other measures which, in Debtor's reasonable business judgment, may be necessary or desirable to preserve, protect and maintain Patent Collateral and all of Debtor's rights therein, including the diligent prosecution of any patent application pending as of the date of this Agreement or thereafter; -7- (e) comply with each of the terms and provisions of this Agreement, and not enter into any agreement (for example, a license agreement) which is inconsistent with the obligations of Debtor under this Agreement without Agent's prior written consent, which consent shall not be unreasonably withheld or delayed; and (f) not permit the inclusion in any contract to which Debtor becomes a party of any provision that could or might impair or prevent the creation of a security interest in favor of Agent (for the benefit of the Lender Group) in Debtor's rights and interest in any property included within the definition of Patent Collateral acquired under such contracts. 6. Future Rights. If and when Debtor shall obtain rights to any new patentable inventions, or become entitled to the benefit of any Patent, or any reissue, division, continuation, renewal, extension or continuation-in-part of any Patent or Patent Collateral or any improvement thereof (whether pursuant to any license or otherwise), the provisions of this Agreement shall automatically apply thereto and Debtor shall give to Agent prompt notice thereof, within 20 days after obtaining such rights, reissuance, division, continuation, renewal, extension or any improvement thereof. Debtor shall do all things deemed necessary or advisable by Agent, in its discretion, to ensure the validity, perfection, priority and enforceability of the security interests of Agent in such future acquired Patent Collateral. Debtor hereby authorizes Agent to modify, amend or supplement the Schedules hereto and to re-execute this Agreement from time to time on Debtor's behalf and as its attorney-in-fact to include any future patents which are or become Patent Collateral and to cause such re-executed Agreement or such modified, amended or supplemented Schedules to be filed with the PTO. 7. Events of Default. The occurrence of any "Event of Default" under the Loan Agreement shall constitute an Event of Default hereunder. 8. Remedies. Upon the occurrence and during the continuance of an Event of Default, and subject to the Intercreditor Agreement, Agent shall have all rights and remedies available to it under the Loan Agreement and applicable law (which rights and remedies are cumulative) with respect to the security interests in any of the Patent Collateral or any other Collateral. Debtor agrees that such rights and remedies include the right of Agent as an Agent to sell or otherwise dispose of its Collateral after default, pursuant to the UCC. Debtor agrees that Agent shall at all times have such non-exclusive, royalty free licenses, to the extent permitted by law, for any Patent Collateral that is reasonably necessary to permit the exercise of any of Agent's rights or remedies upon the occurrence and during the continuation of an Event of Default with respect to (among other things) any tangible asset of Debtor in which Agent has a security interest, including Agent's rights to sell inventory, tooling or packaging which is acquired by Debtor (or its successor, assignee or trustee in bankruptcy). In addition to and without limiting any of the foregoing, upon the occurrence and during the continuance of an Event of Default, Agent shall have the right but shall in no way be obligated to bring suit, or to take such other action as Agent, in its discretion, deems necessary or advisable, in the name of Debtor or Agent, to enforce or protect any of the Patent Collateral, in which event Debtor shall, at the request of Agent, do any and all lawful acts and execute any and all documents required by Agent in aid of such enforcement. To the extent that Agent shall elect not to bring suit to enforce -8- such Patent Collateral, upon the occurrence and during the continuation of an Event of Default, Debtor, in the exercise of its reasonable business judgment, agrees to use all reasonable measures and diligent efforts, whether by action, suit, proceeding or otherwise, to prevent the infringement, misappropriation or violations thereof by others and for that purpose agrees diligently to maintain any action, suit or proceeding against any Person necessary to prevent such infringement, misappropriation or violation. 9. Binding Effect. This Agreement shall be binding upon, inure to the benefit of and be enforceable by Debtor and Agent for the benefit of the Lender Group and their respective successors and assigns. 10. Notices. All notices and other communications hereunder shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement. 11. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, except to the extent that the validity or perfection of the security interests hereunder in respect of the Patent Collateral are governed by federal law, in which case such choice of California law shall not be deemed to deprive Agent of such rights and remedies as may be available under federal law. 12. Entire Agreement; Amendment. This Agreement and the other Loan Documents, together with the Schedules hereto and thereto, contain the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior drafts and communications relating to such subject matter. Neither this Agreement nor any provision hereof may be modified, amended or waived except by the written agreement of the parties, as provided in the Loan Agreement. Notwithstanding the foregoing, Agent may re-execute this Agreement or modify, amend or supplement the Schedules hereto as provided in Section 6 hereof. 13. Severability. If one or more provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect in any jurisdiction or with respect to any party, such invalidity, illegality or unenforceability in such jurisdiction or with respect to such party shall, to the fullest extent permitted by applicable law, not invalidate or render illegal or unenforceable any such provision in any other jurisdiction or with respect to any other party, or any other provisions of this Agreement. 14. Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement -9- 15. Loan Documents. Debtor acknowledges that the rights and remedies of Agent with respect to the security interests in the Patent Collateral granted hereby are more fully set forth in the Loan Agreement and the other Loan Documents and all such rights and remedies are cumulative. 16. No Inconsistent Requirements. Debtor acknowledges that this Agreement and the other Loan Documents may contain covenants and other terms and provisions variously stated regarding the same or similar matters, and Debtor agrees that all such covenants, terms and provisions are cumulative and all shall be performed and satisfied in accordance with their respective terms. 17. Termination. Upon the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, this Agreement shall terminate and Agent shall execute and deliver such documents and instruments and take such further action reasonably requested by Debtor and at Debtor's expense as shall be necessary to evidence termination of the security interests granted by Debtor to Agent for the benefit of the Lender Group hereunder, including cancellation of this Agreement by written notice from Agent to the PTO. 18. Duties of Agent and the Lender Group. Notwithstanding any provision contained in this Agreement, none of Agent or any other member of the Lender Group shall have any duty to exercise any of the rights, privileges or powers afforded to it and shall not be responsible to Debtor for any failure to do so or delay in doing so. Except for the accounting for moneys actually received by Agent, any other member of the Lender Group, hereunder or in connection herewith, none of Agent or any other member of the Lender Group, shall have any duty to exercise or preserve any rights, privileges or powers pertaining to the Patent Collateral. [Signature page follows] -10- IN WITNESS WHEREOF, the parties have duly executed this Agreement, as of the date first above written. HUDSON RESPIRATORY CARE INC., a California corporation By: -------------------------------------- Title: MW POST ADVISORY GROUP, LLC, a Delaware limited liability company, as Agent By: -------------------------------------- Name: Lawrence Post Title: Chief Executive Officer [Signature Page to Patent Security Agreement] SCHEDULE A Patents and Patent Applications ------------------------------- [see attached] -1- Patent Licenses --------------- None -2- EX-10.34 19 dex1034.txt TRADEMARK SECURITY AGREEMENT- HUDSON RCI/MW POST Exhibit 10.34 TRADEMARK SECURITY AGREEMENT ---------------------------- This TRADEMARK SECURITY AGREEMENT (this "Agreement"), dated as of October 7, 2003, is executed and delivered by and between HUDSON RESPIRATORY CARE INC., a California corporation ("Debtor"), and MW POST ADVISORY GROUP, LLC, a Delaware limited liability company, as administrative agent for the Lenders (in such capacity, together with its successors and assigns, if any, in such capacity, "Agent"), with reference to the following: WHEREAS, Debtor, the Lenders (such Lenders, together with Agent, individually and collectively, the "Lender Group"), and Agent have entered into that certain Loan and Security Agreement, dated as of even date herewith (as amended, restated, modified, supplemented, refinanced, renewed, or extended from time to time, the "Loan Agreement"), pursuant to which the Lender Group has agreed to make certain financial accommodations to Debtor, and pursuant to which Debtor has granted to Agent for the benefit of the Lender Group security interests in (among other things) all general intangibles of Debtor; and WHEREAS, to induce the Lender Group to make the financial accommodations provided to Debtor pursuant to the Loan Agreement, Debtor has agreed to execute and deliver this Agreement to Agent for filing with the PTO and with any other relevant recording systems in any domestic or foreign jurisdiction, and as further evidence of and to effectuate Agent's existing security interests in the trademarks and other general intangibles described herein. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which is hereby acknowledged, Debtor hereby agrees in favor of Agent, for the benefit of the Lender Group, as follows: 1. Definitions; Interpretation. (a) Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Agent" has the meaning ascribed to such term in the preamble to this Agreement. "Agreement" has the meaning ascribed to such term in the preamble hereto. "Debtor" has the meaning ascribed to such term in the preamble to this Agreement. "Debtor's Trademarks" has the meaning set forth in Section 4. "Event of Default" has the meaning ascribed to such term in the Loan Agreement. "Excluded Collateral" has the meaning ascribed to such term in the Loan Agreement. -1- "Lender Group" has the meaning ascribed to such term in the recitals to this Agreement. "Lenders" means, individually and collectively, each of the lenders identified on the signature pages of the Loan Agreement, and any other person made a party thereto in accordance with the provisions of Section 14 thereof (together with their respective successors and assigns). "Loan Agreement" has the meaning ascribed to such term in the recitals to this Agreement. "Proceeds" means whatever is receivable or received from or upon the sale, lease, license, collection, use, exchange or other disposition, whether voluntary or involuntary, of any Trademark Collateral, including "proceeds" as such term is defined in the UCC, and all proceeds of proceeds. Proceeds shall include (i) any and all accounts, chattel paper, instruments, general intangibles, cash and other proceeds, payable to or for the account of Debtor, from time to time in respect of any of the Trademark Collateral, (ii) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to or for the account of Debtor from time to time with respect to any of the Trademark Collateral, (iii) any and all claims and payments (in any form whatsoever) made or due and payable to Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Trademark Collateral by any Person acting under color of governmental authority, and (iv) any and all other amounts from time to time paid or payable under or in connection with any of the Trademark Collateral or for or on account of any damage or injury to or conversion of or infringement of rights in any Trademark Collateral by any Person. "PTO" means the United States Patent and Trademark Office and any successor thereto. "Secured Obligations" means all liabilities, obligations, or undertakings owing by Debtor to the Lender Group of any kind or description arising out of or outstanding under, advanced or issued pursuant to, or evidenced by the Loan Agreement, this Agreement, or any of the other Loan Documents, irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, voluntary or involuntary, whether now existing or hereafter arising, and including all interest, costs, fees (including attorneys fees), and expenses (including interest, costs, fees, and expenses that, but for the provisions of the Bankruptcy Code, would have accrued) and any and all other amounts which Debtor is required to pay pursuant to any of the foregoing, by law, or otherwise. "Trademark Collateral" has the meaning set forth in Section 2. "Trademarks" has the meaning set forth in Section 2. "UCC" means the Uniform Commercial Code as in effect from time to time in the State of California. "United States" and "U.S." each mean the United States of America. -2- (b) Terms Defined in UCC. Where applicable and except as otherwise defined herein, terms used in this Agreement shall have the meanings ascribed to them in the UCC. (c) Interpretation. In this Agreement, except to the extent the context otherwise requires: (i) Any reference to a Section or a Schedule is a reference to a section hereof, or a schedule hereto, respectively, and to a subsection or a clause is, unless otherwise stated, a reference to a subsection or a clause of the Section or subsection in which the reference appears. (ii) The words "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement as a whole and not merely to the specific Section, subsection, paragraph or clause in which the respective word appears. (iii) The meaning of defined terms shall be equally applicable to both the singular and plural forms of the terms defined. (iv) The words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation." (v) References to agreements and other contractual instruments shall be deemed to include all subsequent permitted amendments, restatements, supplements, refinancings, renewals, extensions, and other modifications thereto and thereof. (vi) References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation referred to. (vii) Any captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. (viii) Capitalized words not otherwise defined herein shall have the respective meanings ascribed to them in the Loan Agreement. (ix) In the event of a direct conflict between the terms and provisions of this Agreement and the Loan Agreement,it is the intention of the parties hereto that such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of the Loan Agreement shall control and govern; provided, however, that the inclusion herein of additional obligations on the part of Debtor and supplemental rights and remedies in favor of Agent (whether under federal law or applicable state law), in each case in respect of the Trademark Collateral, shall not be deemed a conflict with the Loan Agreement. 2. Security Interest. -3- (a) Assignment and Grant of Security in respect of the Secured Obligations. To secure the prompt payment and performance of the Secured Obligations, Debtor hereby grants, assigns, transfers and conveys to Agent, for the benefit of the Lender Group, a continuing security interest in all of Debtor's right, title and interest in and to the following property, whether now existing or hereafter acquired or arising and whether registered or unregistered (collectively, the "Trademark Collateral"): (i) all state(including common law)and federal trademarks, service marks and trade names, corporate names, company names, business names, fictitious business names, trade styles, trade dress, logos, other source or business identifiers, designs and general intangibles of like nature, now existing or hereafter adopted or acquired, together with and including all licenses therefor held by Debtor, and all registrations and recordings thereof, and all applications filed or to be filed in connection therewith, including registrations and applications in the PTO, any State of the United States (but excluding each application to register any trademark, service mark, or other mark prior to the filing under applicable law of a verified statement of use (or the equivalent) for such trademark or service mark) and all extensions or renewals thereof, including without limitation any of the foregoing identified on Schedule A hereto (as the same may be amended, modified or supplemented from time to time), and the right (but not the obligation) to register claims under any state or federal trademark law or regulation and to apply for, renew and extend any of the same, to sue or bring opposition or cancellation proceedings in Debtor's name or in the name of Agent for past, present or future infringement or unconsented use thereof, and all rights arising therefrom throughout the world (collectively, the "Trademarks"); (ii) all claims, causes of action and rights to sue for past, present or future infringement or unconsented use of any Trademarks and all rights arising therefrom and pertaining thereto; (iii) all general intangibles related to or arising out of any of the Trademarks and all the goodwill of Debtor's business symbolized by the Trademarks or associated therewith; and (iv) all Proceeds of any and all of the foregoing; provided, however, that Trademark Collateral shall not include any Excluded Collateral. (b) Continuing Security Interest. Debtor hereby agrees that this Agreement shall create a continuing security interest in the Trademark Collateral which shall remain in effect until terminated in accordance with Section 18. (c) Incorporation into Loan Agreement. This Agreement shall be fully incorporated into the Loan Agreement and all understandings, agreements and provisions contained in the Loan Agreement shall be fully incorporated into this Agreement. Without limiting the foregoing, the Trademark Collateral described in this Agreement shall constitute part of the Collateral in the Loan Agreement. -4- (d) Licenses. Debtor may grant licenses of the Trademark Collateral in the ordinary course of business in accordance with the terms of the Loan Agreement. 3. Further Assurances; Appointment of Agent as Attorney-in-Fact. Debtor at its expense shall execute and deliver, or cause to be executed and delivered, to Agent any and all documents and instruments, in form and substance reasonably satisfactory to Agent, and take any and all action, which Agent, in the exercise of its discretion, may request from time to time, to perfect and continue the perfection or to maintain the priority of, or provide notice of the security interest in the Trademark Collateral held by Agent for the benefit of the Lender Group and to accomplish the purposes of this Agreement. If Debtor refuses to execute and deliver, or fails timely to execute and deliver, any of the documents it is requested to execute and deliver by Agent in accordance with the foregoing, Agent shall have the right, in the name of Debtor, or in the name of Agent or otherwise, without notice to or assent by Debtor, and Debtor hereby irrevocably constitutes and appoints Agent (and any of Agent's officers or employees or agents designated by Agent) as Debtor's true and lawful attorney-in-fact with full power and authority, (i) to sign the name of Debtor on all or any of such documents or instruments and perform all other acts that Agent in the exercise of its discretion deems necessary in order to perfect or continue the perfection of, maintain the priority or enforceability of or provide notice of the security interest in the Trademark Collateral held by Agent for the benefit of the Lender Group, and (ii) to execute any and all other documents and instruments, and to perform any and all acts and things for and on behalf of Debtor, that Agent, in the exercise of its discretion, may deem necessary or advisable to maintain, preserve and protect the Trademark Collateral and to accomplish the purposes of this Agreement, including (A) after the occurrence and during the continuance of any Event of Default, to defend, settle, adjust or institute any action, suit or proceeding with respect to the Trademark Collateral, (B) after the occurrence and during the continuation of any Event of Default, to assert or retain any rights under any license agreement for any of the Trademark Collateral, and (C) after the occurrence and during the continuance of any Event of Default, to execute any and all applications, documents, papers and instruments for Agent to use the Trademark Collateral, to grant or issue any exclusive or non-exclusive license with respect to any Trademark Collateral, and to assign, convey or otherwise transfer title in or dispose of the Trademark Collateral. The power of attorney set forth in this Section 3, being coupled with an interest, is irrevocable so long as this Agreement shall not have terminated in accordance with Section 18; provided that the foregoing power of attorney shall terminate when all of the Secured Obligations have been fully and finally repaid and performed and the Lender Group's obligation to extend credit under the Loan Agreement is terminated. The Agent acknowledges that the exercise of the powers granted in this Section 3 may at some times be subject to the provisions of the Intercreditor Agreement. 4. Representations and Warranties. Debtor represents and warrants to each member of the Lender Group, in each case to the best of its knowledge, information, and belief, as follows: (a) No Other Trademarks. Schedule A sets forth a true and correct list of all of Debtor's existing Trademarks that are registered, or for which any application for registration has been filed with the PTO or any corresponding or similar trademark office of any other U.S. jurisdiction, and that are owned or held and used by Debtor (collectively, the -5- "Debtor's Trademarks"). Schedule A also sets forth a true and correct list of all of the Trademarks Debtor holds by reason of license from a third party. (b) Trademarks Subsisting. Each of Debtor's Trademarks is subsisting and has not been adjudged invalid or unenforceable, in whole or in part, and, to the best of Debtor's knowledge, each of the Trademarks set forth on Schedule A is valid and enforceable. (c) Ownership of Trademark Collateral; No Violation. (i) Debtor has rights in and good and defensible title to the Trademark Collateral in respect of the Trademarks that it owns, (ii) Debtor is the sole and exclusive owner of such Trademark Collateral, free and clear of any Liens and rights of others (other than Permitted Liens), including licenses (other than licenses entered into as permitted herein), registered user agreements and covenants by Debtor not to sue third persons, and (iii) with respect to any Trademarks for which Debtor is either a licensor or a licensee pursuant to a license or licensing agreement regarding such Trademark, each such license or licensing agreement is in full force and effect, Debtor is not in material default of any of its obligations thereunder and, to the best of Debtor's knowledge other than (A) the parties to such licenses or licensing agreements, or (B) in the case of any non-exclusive license or license agreement entered into by Debtor or any such licensor regarding such Trademark, the parties to any other such non-exclusive licenses or license agreements entered into by Debtor or any such licensor with any other Person, no other Person has any rights in or to any of such Trademark Collateral, other than licenses entered into as permitted herein. To the best of Debtor's knowledge, neither the past nor the present use of the Trademark Collateral by Debtor has or does infringe upon or violate any right, privilege or license agreement of or with any other Person or give any such Person the right to terminate any such right, privilege or license agreement. (d) No Infringement. To the best of Debtor's knowledge, (i) no material infringement or unauthorized use presently is being made of any of the Trademark Collateral by any Person, and (ii) neither the past nor the present use of the Trademark Collateral by Debtor has or does infringe upon or violate any right, privilege, or license arrangement of or with any other Person or give such Person the right to terminate any such license arrangement. (e) Powers. Debtor has the unqualified right, power and authority to pledge and to grant to Agent, for the benefit of the Lender Group, security interests in the Trademark Collateral pursuant to this Agreement, and to execute, deliver and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other Person except as already obtained. 5. Covenants. So long as any of the Secured Obligations remain unsatisfied, Debtor agrees: (i) that it will comply in all material respects with all of the covenants, terms and provisions of this Agreement, and (ii) that it will promptly give Agent written notice of the occurrence of any event that could have a material adverse effect on any of the Trademarks and the Trademark Collateral (except as to such Trademark or Trademarks, which alone or in the aggregate, the absence of which would not reasonably be expected to materially impair the conduct of the business), including any petition under the Bankruptcy Code filed by or against any licensor of any of the Trademarks for which Debtor is a licensee, provided, however, that Debtor shall not be required to preserve, protect and maintain, and may abandon, in whole or in -6- part, any Trademark as Debtor deems appropriate in the exercise of Debtor's reasonable business judgment, so long as the absence of such Trademark or Trademarks, alone or in the aggregate, would not reasonably be expected to materially impair the conduct of Debtor's business or the Trademark Collateral. 6. Future Rights. For so long as any of the Secured Obligations shall remain outstanding, or, if earlier, until Agent shall have released or terminated, in whole but not in part, its interest in the Trademark Collateral, if and when Debtor shall obtain rights to any new Trademarks, or any reissue, renewal or extension of any Trademarks, the provisions of Section 2 shall automatically apply thereto and Debtor shall give to Agent prompt notice thereof, within 20 days after obtaining such rights, reissuance, renewal, or extension. Debtor shall do all things reasonably deemed necessary by Agent in the exercise of its discretion to ensure the validity, perfection, priority and enforceability of the security interests of Agent in such future acquired Trademark Collateral. If Debtor refuses to execute and deliver, or fails timely to execute and deliver, any of the documents it is requested to execute and deliver by Agent in connection herewith, Debtor hereby authorizes Agent to modify, amend or supplement the Schedules hereto and to re-execute this Agreement from time to time on Debtor's behalf and as its attorney-in-fact to include any future Trademarks which are or become Trademark Collateral and to cause such re-executed Agreement or such modified, amended or supplemented Schedules to be filed with the PTO. 7. Duties of Agent and the Lender Group. Notwithstanding any provision contained in this Agreement, none of Agent or any other member of the Lender Group shall have any duty to exercise any of the rights, privileges or powers afforded to it and shall not be responsible to Debtor for any failure to do so or delay in doing so. Except for the accounting for moneys actually received by Agent, any other member of the Lender Group hereunder or in connection herewith, none of Agent or any other member of the Lender Group shall have any duty to exercise or preserve any rights, privileges or powers pertaining to the Trademark Collateral. 8. Events of Default. The occurrence of any "Event of Default" under the Loan Agreement shall constitute an Event of Default hereunder. 9. Remedies. From and after the occurrence and during the continuation of an Event of Default, and subject to the Intercreditor Agreement, Agent shall have all rights and remedies available to it under the Loan Agreement, the other Loan Documents, and applicable law (which rights and remedies are cumulative) with respect to the security interests in any of the Trademark Collateral. Debtor hereby agrees that such rights and remedies include the right of Agent as a secured party to sell or otherwise dispose of the Trademark Collateral after default, pursuant to the UCC. Debtor hereby agrees that Agent shall at all times have such royalty-free licenses, to the extent permitted by law and the other Loan Documents, for any Trademark Collateral that is reasonably necessary to permit the exercise of any of Agent's rights or remedies upon or after the occurrence of (and during the continuance of) an Event of Default with respect to (among other things) any tangible asset of Debtor in which Agent has a security interest, including Agent's rights to sell inventory, tooling or packaging which is acquired by Debtor (or their successor, assignee or trustee in bankruptcy). In addition to and without limiting any of the foregoing, upon the occurrence and during the continuance of an Event of Default, Agent shall -7- have the right but shall in no way be obligated to bring suit, or to take such other action as Agent, in the exercise of its discretion, deems necessary, in the name of Debtor or Agent, to enforce or protect any of the Trademark Collateral, in which event Debtor shall, at the request of Agent, do any and all lawful acts and execute any and all documents required by Agent in aid of such enforcement. To the extent that Agent shall elect not to bring suit to enforce such Trademark Collateral, Debtor, in the exercise of its reasonable business judgment, agrees to use all reasonable measures and its diligent efforts, whether by action, suit, proceeding or otherwise, to prevent the infringement, misappropriation or violation thereof by others and for that purpose agrees diligently to maintain any action, suit or proceeding against any Person necessary to prevent such infringement, misappropriation or violation. 10. Binding Effect. This Agreement shall be binding upon, inure to the benefit of and be enforceable by Debtor and Agent for the benefit of the Lender Group and their respective successors and assigns. 11. Notices. All notices and other communications hereunder shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement. 12. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, except to the extent that the validity or perfection of the security interests hereunder in respect of the Trademark Collateral are governed by federal law, in which case such choice of California law shall not be deemed to deprive Agent of such rights and remedies as may be available under federal law. 13. Entire Agreement; Amendment. This Agreement and the other Loan Documents, together with the Schedules hereto and thereto, contains the entire agreement of the parties with respect to the subject matter hereof and supersede all prior drafts and communications relating to such subject matter. Neither this Agreement nor any provision hereof may be modified, amended or waived except by the written agreement of the parties to this Agreement. Notwithstanding the foregoing, Agent may reexecute this Agreement or modify, amend or supplement the Schedules hereto as provided in Section 6 hereof. 14. Severability. If one or more provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect in any jurisdiction or with respect to any party, such invalidity, illegality or unenforceability in such jurisdiction or with respect to such party shall, to the fullest extent permitted by applicable law, not invalidate or render illegal or unenforceable any such provision in any other jurisdiction or with respect to any other party, or any other provisions of this Agreement. 15. Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original -8- executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. 16. Loan Documents. Debtor acknowledges that the rights and remedies of Agent with respect to the security interest in the Trademark Collateral granted hereby are more fully set forth in the Loan Agreement and the other Loan Documents and all such rights and remedies are cumulative. 17. No Inconsistent Requirements. Debtor acknowledges that this Agreement, the Loan Agreement, and the other Loan Documents may contain covenants and other terms and provisions variously stated regarding the same or similar matters, and Debtor agrees that all such covenants, terms and provisions are cumulative and all shall be performed and satisfied in accordance with their respective terms. 18. Termination. Upon the indefeasible payment and performance in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, this Agreement shall terminate, and Agent shall execute and deliver such documents and instruments and take such further action reasonably requested by Debtor, at Debtor's expense, as shall be necessary to evidence termination of the security interest granted by Debtor to Agent for the benefit of the Lender Group hereunder, including cancellation of this Agreement by written notice from Agent to the PTO. [Signature page follows] -9- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, as of the date first above written. HUDSON RESPIRATORY CARE INC., a California corporation By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- MW POST ADVISORY GROUP, LLC, a Delaware limited liability company, as Agent By: ------------------------------------- Name: Lawrence Post Title: Chief Executive Officer Signature Page Trademark Security Agreement SCHEDULE A ---------- Trademarks of Debtor -------------------- [see attached] -1- Trademark Licenses ------------------ None -2- EX-10.35 20 dex1035.txt GENERAL CONTINUING GUARANTY- HUDSON RCI/MW POST Exhibit 10.35 GENERAL CONTINUING GUARANTY --------------------------- This GENERAL CONTINUING GUARANTY (this "Guaranty"), dated as of October 7, 2003, is executed and delivered by and among each of the undersigned Affiliates of HUDSON RESPIRATORY CARE INC., a California corporation ("Borrower") (each such Affiliate individually a "Guarantor", and individually and collectively, jointly and severally, the "Guarantors"), and MW POST ADVISORY GROUP, LLC, a Delaware limited liability company, as administrative agent for the Lenders (in such capacity, together with its successors and assigns, if any, in such capacity, "Agent"), in light of the following: WHEREAS, Borrower and the Lender Group are, contemporaneously herewith, entering into the Loan Agreement; WHEREAS, in order to induce the Lender Group to extend financial accommodations to Borrower pursuant to the Loan Agreement, and in consideration thereof, and in consideration of any loans or other financial accommodations heretofore or hereafter extended by the Lender Group to Borrower, whether pursuant to the Loan Agreement or otherwise, each Guarantor has agreed to guaranty the Guarantied Obligations; and WHEREAS, each Guarantor is an Affiliate of Borrower, and will benefit by virtue of the financial accommodations from the Lender Group to Borrower. NOW, THEREFORE, in consideration of the foregoing, each Guarantor and Agent hereby agrees, as follows: 1. Definitions and Construction. (a) Definitions. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. The following terms, as used in this Guaranty, shall have the following meanings: "Agent" has the meaning set forth in the preamble to this Guaranty. "Borrower" has the meaning set forth in the preamble to this Guaranty. "Guarantied Obligations" means, the Obligations, as defined in the Loan Agreement. "Guarantor" and "Guarantors" have the respective meanings set forth in the preamble to this Guaranty. "Guaranty" has the meaning set forth in the preamble to this Guaranty. "Indebtedness" shall mean any and all obligations (including the Obligations), indebtedness, or liabilities of any kind or character owed by Borrower and arising directly or indirectly out of or in connection with the Loan Agreement or the other Loan Documents, including all such obligations, indebtedness, or liabilities, whether for -1- principal, interest (including any and all interest which, but for the application of the provisions of the Bankruptcy Code, would have accrued on such amounts), premium, reimbursement obligations, fees, costs, expenses (including attorneys fees), or indemnity obligations, whether heretofore, now, or hereafter made, incurred, or created, whether voluntarily or involuntarily made, incurred, or created, whether secured or unsecured (and if secured, regardless of the nature or extent of the security), whether absolute or contingent, liquidated or unliquidated, or determined or indeterminate, whether Borrower is liable individually or jointly with others, and whether recovery is or hereafter becomes barred by any statute of limitations or otherwise becomes unenforceable for any reason whatsoever, including any act or failure to act by any member of the Lender Group. "Lender Group" means, individually and collectively, each of the Lenders and Agent. "Lenders" means, individually and collectively, each of the lenders identified on the signature pages of the Loan Agreement, and any other person made a party thereto in accordance with the provisions of Section 14 thereof (together with their respective successors and assigns). "Loan Agreement" shall mean that certain Loan and Security Agreement, of even date herewith, entered into among Borrower, the Lenders, and Agent. (b) Construction.Unless the context of this Guaranty clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the part includes the whole, the terms "include" and "including" are not limiting, and the term "or" has the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and other similar terms refer to this Guaranty as a whole and not to any particular provision of this Guaranty. Any reference in this Guaranty to any of the following documents includes any and all permitted alterations, amendments, restatements, extensions, modifications, renewals, or supplements thereto or thereof, as applicable: the Loan Agreement, any of the Loan Documents, or this Guaranty. Neither this Guaranty nor any uncertainty or ambiguity herein shall be construed or resolved against Agent, the Lenders, or any Guarantor, whether under any rule of construction or otherwise. On the contrary, this Guaranty has been reviewed by Guarantors, Agent, the Lenders, and their respective counsel, and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of Agent, the Lenders and Guarantors. 2. Guarantied Obligations. Each Guarantor, jointly and severally, hereby irrevocably and unconditionally guaranties to Agent, for the benefit of the Lender Group, as and for its own debt, until final and indefeasible payment thereof has been made, (a) the payment of the Guarantied Obligations, in each case when and as the same shall become due and payable, whether at maturity, pursuant to a mandatory prepayment requirement, by acceleration, or otherwise; it being the intent of such Guarantor that the guaranty set forth herein shall be a guaranty of payment and not a guaranty of collection; and (b) the punctual and faithful performance, keeping, observance, and fulfillment by Borrower of all of the agreements, conditions, covenants, and obligations of Borrower contained in the Loan Agreement and under each of the other Loan Documents. -2- 3. Continuing Guaranty. This Guaranty includes Guarantied Obligations arising under successive transactions continuing, compromising, extending, increasing, modifying, releasing, or renewing the Guarantied Obligations, changing the interest rate, payment terms, or other terms and conditions thereof, or creating new or additional Guarantied Obligations after prior Guarantied Obligations have been satisfied in whole or in part. To the maximum extent permitted by law, each Guarantor hereby waives any right to revoke this Guaranty as to future Indebtedness. If such a revocation is effective notwithstanding the foregoing waiver, each Guarantor acknowledges and agrees that (a) no such revocation shall be effective until written notice thereof has been received by Agent, (b) no such revocation shall apply to any Guarantied Obligations in existence on such date (including any subsequent continuation, extension, or renewal thereof, or change in the interest rate, payment terms, or other terms and conditions thereof), (c) no such revocation shall apply to any Guarantied Obligations made or created after such date to the extent made or created pursuant to a legally binding commitment of Agent in existence on the date of such revocation, (d) no payment by any Guarantor, Borrower, or from any other source, prior to the date of such revocation shall reduce the maximum obligation of such Guarantor hereunder, and (e) any payment by Borrower or from any source other than such Guarantor subsequent to the date of such revocation shall first be applied to that portion of the Guarantied Obligations as to which the revocation is effective and which is not, therefore, guarantied hereunder, and to the extent so applied shall not reduce the maximum obligation of such Guarantor hereunder. 4. Performance Under this Guaranty. In the event that Borrower fails to make any payment of any Guarantied Obligations, on or before the due date thereof, or if Borrower shall fail to perform, keep, observe, or fulfill any other obligation referred to in clause (b) of Section 2 hereof in the manner provided in the Loan Agreement or the other Loan Documents, as applicable (and subject to any applicable grace or notice periods expressly provided for in the Loan Agreement), each Guarantor immediately shall cause such payment to be made or each of such obligations to be performed, kept, observed, or fulfilled. 5. Primary Obligations.This Guaranty is a primary and original obligation of each Guarantor, is not merely the creation of a surety relationship, and is an absolute, unconditional, and continuing guaranty of payment and performance that shall remain in full force and effect without respect to future changes in conditions. Each Guarantor hereby agrees that it is directly, jointly and severally with any other guarantor of the Guarantied Obligations, liable to Agent for the benefit of the Lender Group, that the obligations of such Guarantor hereunder are independent of the obligations of Borrower or any other guarantor, and that a separate action may be brought against such Guarantor, whether such action is brought against Borrower or any other guarantor or whether Borrower or any other guarantor is joined in such action. Each Guarantor hereby agrees that its liability hereunder shall be immediate and shall not be contingent upon the exercise or enforcement by the Lender Group of whatever remedies they may have against Borrower or any other guarantor, or the enforcement of any lien or realization upon any security the Lender Group may at any time possess. Each Guarantor hereby agrees that any release that may be given by Agent on behalf of the Lender Group to Borrower or any other guarantor shall not release such Guarantor. Each Guarantor consents and agrees that no member of the Lender Group shall be under any obligation to marshal any property or assets of Borrower -3- or any other guarantor in favor of such Guarantor, or against or in payment of any or all of the Guarantied Obligations. 6. Waivers. (a) To the fullest extent permitted by applicable law, each Guarantor hereby waives: (i) notice of acceptance hereof; (ii) notice of any loans or other financial accommodations made or extended under the Loan Agreement, or the creation or existence of any Guarantied Obligations; (iii) notice of the amount of the Guarantied Obligations, subject, however, to such Guarantor's right to make inquiry of Agent to ascertain the amount of the Guarantied Obligations at any reasonable time; (iv) notice of any adverse change in the financial condition of Borrower or of any other fact that might increase such Guarantor's risk hereunder; (v) notice of presentment for payment, demand, protest, and notice thereof as to any instrument among the Loan Documents; (vi) notice of any Default or Event of Default under the Loan Agreement; and (vii) all other notices (except if such notice is specifically required to be given to such Guarantor under this Guaranty or any other Loan Documents to which such Guarantor is a party) and demands to which such Guarantor might otherwise be entitled. (b) To the fullest extent permitted by applicable law, each Guarantor hereby waives the right by statute or otherwise to require the Lender Group to institute suit against Borrower or to exhaust any rights and remedies that the Lender Group has or may have against Borrower. In this regard, each Guarantor agrees that it is bound to the payment of each and all Guarantied Obligations, whether now existing or hereafter arising, as fully as if the Guarantied Obligations were directly owing to the Lender Group or its Affiliates, as applicable, by such Guarantor. Each Guarantor further waives any defense arising by reason of any disability or other defense (other than the defense that the Guarantied Obligations shall have been performed and indefeasibly paid in cash, to the extent of any such payment) of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower in respect thereof. (c) To the fullest extent permitted by applicable law, each Guarantor hereby waives: (i) any rights to assert against the Lender Group any defense (legal or equitable), set-off, counterclaim, or claim that such Guarantor may now or at any time hereafter have against Borrower or any other party liable to the Lender Group; (ii) any defense, set-off, counterclaim, or claim, of any kind or nature, arising directly or indirectly from the present or future lack of perfection, sufficiency, validity, or enforceability of the Guarantied Obligations or any security therefor; (iii) any defense arising by reason of any claim or defense based upon an election of remedies by the Lender Group, including any defense based upon an election of remedies by the Lender Group under the provisions of Sections 580d and 726 of the California Code of Civil Procedure, or any similar law of any other jurisdiction; (iv) the benefit of any statute of limitations affecting such Guarantor's liability hereunder or the enforcement thereof, and any act that shall defer or delay the operation of any statute of limitations applicable to the Guarantied Obligations shall similarly operate to defer or delay the operation of such statute of limitations applicable to such Guarantor's liability hereunder. (d) Until such time as all of the Guarantied Obligations have been fully and finally paid in full in cash, each Guarantor hereby postpones and agrees not to assert any right (i) of subrogation such Guarantor has or may have against Borrower with respect to the Guarantied -4- Obligations, including, without limitation, under any one or more of California Civil Code Sections 2847, 2848, and 2849 or any similar law of any other jurisdiction; (ii) to proceed against Borrower or any other Person, now or hereafter, for contribution, indemnity, reimbursement, or any other suretyship rights and claims (irrespective of whether direct or indirect, liquidated or contingent), with respect to the Guarantied Obligations; and (iii) to proceed or to seek recourse against or with respect to any property or asset of Borrower. (e) If any of the Guarantied Obligations at any time are secured by a mortgage or deed of trust upon real property, the Lender Group may elect in its sole discretion, upon a default with respect to the Guarantied Obligations, to foreclose such mortgage or deed of trust judicially or nonjudicially in any manner permitted by law, before or after enforcing this Guaranty, without diminishing or affecting the liability of any Guarantor hereunder. Each Guarantor understands that (a) by virtue of the operation of California's antideficiency law applicable to nonjudicial foreclosures or any similar laws of any other jurisdiction, an election by the Lender Group nonjudicially to foreclose such a mortgage or deed of trust probably would have the effect of impairing or destroying rights of subrogation, reimbursement, contribution, or indemnity of such Guarantor against Borrower or other guarantors or sureties, and (b) absent the waiver given by such Guarantor herein, such an election would estop the Lender Group from enforcing this Guaranty against such Guarantor. Understanding the foregoing, and understanding that the Guarantors hereby are relinquishing a defense to the enforceability of this Guaranty, each Guarantor hereby waives any right to assert against the Lender Group any defense to the enforcement of this Guaranty, whether denominated "estoppel" or otherwise, based on or arising from an election by the Lender Group nonjudicially to foreclose any such mortgage or deed of trust. Each Guarantor understands that the effect of the foregoing waiver may be that such Guarantor may have liability hereunder for amounts with respect to which such Guarantor may be left without rights of subrogation, reimbursement, contribution, or indemnity against Borrower or other guarantors or sureties. Each Guarantor also agrees that the "fair market value" provisions of Section 580a of the California Code of Civil Procedure or any similar laws of any other jurisdiction shall have no applicability with respect to the determination of such Guarantor's liability under this Guaranty. (f) Without limiting the generality of any other waiver or other provision set forth in this Guaranty, each Guarantor waives all rights and defenses that such Guarantor may have if Borrower's debt is secured by real property. This means, among other things: (i) The Lender Group may collect from any Guarantor without first foreclosing on any real or personal property collateral that may be pledged by Borrower. (ii) If the Lender Group foreclose(s) on any real property collateral that may be pledged by Borrower: (1) the amount of the debt may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price. -5- (2) the Lender Group may collect from any Guarantor even if the Lender Group, by foreclosing on the real property collateral, has/have destroyed any right any Guarantor may have to collect from Borrower. This is an unconditional and irrevocable waiver of any rights and defenses each Guarantor may have if Borrower's debt is secured by real property. These rights and defenses are based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure or any similar laws of any other jurisdiction. (G) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS GUARANTY, EACH GUARANTOR HEREBY WAIVES, TO THE MAXIMUM EXTENT SUCH WAIVER IS PERMITTED BY LAW, ANY AND ALL BENEFITS OR DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE Sections 2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2838, 2839, 2845, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE Sections 580a, 580b, 580c, 580d, AND 726, AND CHAPTER 2 OF TITLE 14 OF THE CALIFORNIA CIVIL CODE OR ANY SIMILAR LAWS OF ANY OTHER JURISDICTION. (H) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS GUARANTY, EACH GUARANTOR WAIVES ALL RIGHTS AND DEFENSES ARISING OUT OF AN ELECTION OF REMEDIES BY THE LENDER GROUP, EVEN THOUGH THAT ELECTION OF REMEDIES, SUCH AS A NONJUDICIAL FORECLOSURE WITH RESPECT TO SECURITY FOR A GUARANTIED OBLIGATION, HAS DESTROYED SUCH GUARANTOR'S RIGHTS OF SUBROGATION AND REIMBURSEMENT AGAINST BORROWER BY THE OPERATION OF SECTION 580d OF THE CALIFORNIA CODE OF CIVIL PROCEDURE OR OTHERWISE. 7. Releases. Each Guarantor consents and agrees that,without notice to or by such Guarantor and without affecting or impairing the obligations of such Guarantor hereunder, the Lender Group may, by action or inaction, compromise or settlement, extend the period of duration or the time for the payment, or discharge the performance of, or may refuse to, or otherwise not enforce, or may, by action or inaction, release all or any one or more parties to, any one or more of the terms and provisions of the Loan Agreement or any of the other Loan Documents or may grant other indulgences to Borrower in respect thereof, or may amend or modify in any manner and at any time (or from time to time) any one or more of the Loan Agreement or any of the other Loan Documents, or may, by action or inaction, release or substitute any other guarantor, if any, of the Guarantied Obligations, or may enforce, exchange, release, or waive, by action or inaction, any security for the Guarantied Obligations or any other guaranty of the Guarantied Obligations, or any portion thereof. 8. No Election. The Lender Group shall have the right to seek recourse against any Guarantor to the fullest extent provided for herein and no election by the Lender Group to proceed in one form of action or proceeding, or against any party, or on any obligation, shall constitute a waiver of the Lender Group's right to proceed in any other form of action or proceeding or against other parties unless Agent on behalf of the Lender Group has expressly -6- waived such right in writing. Specifically, but without limiting the generality of the foregoing, no action or proceeding by the Lender Group under any document or instrument evidencing the Guarantied Obligations shall serve to diminish the liability of the Guarantors under this Guaranty except to the extent that the Lender Group finally and unconditionally shall have realized indefeasible payment by such action or proceeding. 9. Indefeasible Payment.The Guarantied Obligations shall not be considered indefeasibly paid for purposes of this Guaranty unless and until all payments to the Lender Group are no longer subject to any right on the part of any person whomsoever, including Borrower, Borrower as a debtor in possession, or any trustee (whether appointed under the Bankruptcy Code or otherwise) of Borrower's assets to invalidate or set aside such payments or to seek to recoup the amount of such payments or any portion thereof, or to declare same to be fraudulent or preferential. In the event that, for any reason, all or any portion of such payments to the Lender Group is set aside or restored, whether voluntarily or involuntarily, after the making thereof, the obligation or part thereof intended to be satisfied thereby shall be revived and continued in full force and effect as if said payment or payments had not been made and the Guarantors shall be liable for the full amount the Lender Group is required to repay plus any and all reasonable costs and expenses (including reasonable attorneys fees) paid by the Lender Group in connection therewith. 10. Financial Condition of Borrower.Each Guarantor represents and warrants to the Lender Group that it is currently informed of the financial condition of Borrower and of all other circumstances that a diligent inquiry would reveal and that bear upon the risk of nonpayment of the Guarantied Obligations. Each Guarantor further represents and warrants to the Lender Group that it has read and understands the terms and conditions of the Loan Agreement and the other Loan Documents. Each Guarantor hereby covenants that it will continue to keep itself informed of Borrower's financial condition, the financial condition of other guarantors, if any, and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the Guarantied Obligations. 11. Payments; Application. All payments to be made hereunder by any Guarantor shall be made in lawful money of the United States of America at the time of payment, shall be made in immediately available funds, and shall be made without deduction (whether for taxes or otherwise) or offset. All payments made by any Guarantor hereunder shall be applied as follows: first, to all reasonable costs and expenses (including reasonable attorneys fees) incurred by the Lender Group in enforcing this Guaranty or in collecting the Guarantied Obligations; second, to all accrued and unpaid interest, premium, if any, and fees owing to the Lender Group constituting Guarantied Obligations; and third, to the balance of the Guarantied Obligations. 12. Attorneys Fees and Costs. Each Guarantor agrees to pay, on demand, all reasonable attorneys fees and all other reasonable costs and expenses that may be incurred by the Lender Group in the enforcement of this Guaranty or in any way arising out of, or consequential to, the protection, assertion, or enforcement of the Guarantied Obligations (or any security therefor), irrespective of whether suit is brought. 13. Notices. All notices and other communications hereunder to Agent shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement. All -7- notices and other communications hereunder to a Guarantor shall be in writing and shall be mailed, sent or delivered in care of Borrower in accordance with the Loan Agreement. 14. Cumulative Remedies. No remedy under this Guaranty, under the Loan Agreement, or any other Loan Document is intended to be exclusive of any other remedy, but each and every remedy shall be cumulative and in addition to any and every other remedy given under this Guaranty, under the Loan Agreement, or any other Loan Document, and those provided by law. No delay or omission by the Lender Group or Agent on behalf thereof to exercise any right under this Guaranty shall impair any such right nor be construed to be a waiver thereof. No failure on the part of the Lender Group or Agent on behalf thereof to exercise, and no delay in exercising, any right under this Guaranty shall operate as a waiver thereof; nor shall any single or partial exercise of any right under this Guaranty preclude any other or further exercise thereof or the exercise of any other right. 15. Severability of Provisions. Any provision of this Guaranty that is prohibited or unenforceable under applicable law shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. 16. Entire Agreement; Amendments. This Guaranty constitutes the entire agreement between each Guarantor and the Lender Group, or Agent on behalf thereof pertaining to the subject matter contained herein. This Guaranty may not be altered, amended, or modified, nor may any provision hereof be waived or noncompliance therewith consented to, except by means of a writing executed by each Guarantor and Agent on behalf of the Lender Group. Any such alteration, amendment, modification, waiver, or consent shall be effective only to the extent specified therein and for the specific purpose for which given. No course of dealing and no delay or waiver of any right or default under this Guaranty shall be deemed a waiver of any other, similar or dissimilar, right or default or otherwise prejudice the rights and remedies hereunder. 17. Successors and Assigns. This Guaranty shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of the successors and assigns of each member of the Lender Group; provided, however, no Guarantor shall assign this Guaranty or delegate any of its duties hereunder without Agent's prior written consent and any assignment by a Guarantor without Agent's consent shall be absolutely void. In the event of any assignment or other transfer of rights by any member of the Lender Group the rights and benefits herein conferred upon each member of the Lender Group shall automatically extend to and be vested in such assignee or other transferee. 18. No Third Party Beneficiary. This Guaranty is solely for the benefit of each member of the Lender Group and each of their successors and assigns and may not be relied on by any other Person. 19. Counterparts;Telefacsimile Execution. This Guaranty may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Guaranty. Delivery of an executed counterpart of this Guaranty by telefacsimile shall be equally as effective as delivery of an original executed -8- counterpart of this Guaranty. Any party delivering an executed counterpart of this Guaranty by telefacsimile also shall deliver an original executed counterpart of this Guaranty but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Guaranty. 20. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER THE VALIDITY OF THIS GUARANTY, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS GUARANTY AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE COURTS AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. EACH GUARANTOR AND THE LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT SUCH PARTY MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 20. EACH GUARANTOR AND AGENT ON BEHALF OF THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS GUARANTY OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH GUARANTOR AND AGENT ON BEHALF OF THE LENDER GROUP REPRESENT THAT EACH such party HAS REVIEWED THIS WAIVER AND EACH such party KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS GUARANTY MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 21. Agreement to be Bound. (a) Each Guarantor hereby makes to the Lender Group each of the representations and warranties set forth in the Loan Agreement applicable to such Guarantor fully as though such Guarantor were a party thereto, and such representations and warranties are incorporated herein by this reference, mutatis mutandis; and (b) each Guarantor that is a Subsidiary of Borrower agrees and covenants for the benefit of the Lender Group (i) to -9- do each of the things set forth in the Loan Agreement that Borrower agrees and covenants to cause its Subsidiaries to do, and (ii) to not do each of the things set forth in the Loan Agreement that Borrower agrees and covenants to cause its Subsidiaries not to do, in each case, fully as though such Guarantor was a party thereto, and such agreements and covenants are incorporated herein by this reference, mutatis mutandis. 22. Termination. Upon the indefeasible final payment in full of the Guarantied Obligations, including the cash collateralization, expiration, or cancellation of all Guarantied Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, this Guaranty shall terminate, and Agent shall execute and deliver such documents and instruments and take such further action reasonably requested by Guarantors, at Guarantors' expense, as shall be necessary to evidence the termination hereof. [Signature page follows] -10- IN WITNESS WHEREOF, each of the undersigned has executed and delivered this Guaranty as of the date first written above. RIVER HOLDING CORP., a Delaware corporation By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- IH HOLDINGS LLC, a Delaware limited liability company By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- MW POST ADVISORY GROUP, LLC, a Delaware limited liability company, as Agent By: ------------------------------------- Name: Lawrence Post Title: Chief Executive Officer Signature Page General Continuing Guaranty EX-10.36 21 dex1036.txt INTERCOMPANY SUBORDINATION AGREEMENT (MW POST AS AGENT) Exhibit 10.36 INTERCOMPANY SUBORDINATION AGREEMENT THIS INTERCOMPANY SUBORDINATION AGREEMENT (this "Agreement"), dated as of October 7, 2003, is made among MW POST ADVISORY GROUP, LLC, a Delaware limited liability company ("Agent"), and the Debtors (as defined below), with reference to the following: WHEREAS, Hudson Respiratory Care Inc., a California corporation (the "Borrower"), the lenders signatory thereto from time to time (individually and collectively, being referred to as "Lenders"; together with Agent, individually and collectively, the "Lender Group"), and Agent have entered into that certain Loan and Security Agreement, dated as of even date herewith (as amended, restated, modified, supplemented, refinanced, renewed, or extended from time to time, the "Loan Agreement"), pursuant to which the Lender Group has agreed to make certain financial accommodations to Borrower; WHEREAS, each Debtor has made or may make certain loans or advances from time to time to one or more other Debtors; and WHEREAS, in order to induce the Lender Group to enter into the Loan Agreement, each Debtor has agreed to the subordination of such indebtedness of each other Debtor to such Debtor, upon the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises, covenants, conditions, representations, and warranties set forth herein and for other good and valuable consideration, the parties hereto agree as follows: SECTION 1 Definitions; Interpretation. (a) Terms Defined in Loan Agreement. All capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to them in the Loan Agreement. (b) Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Agreement" has the meaning set forth in the preamble to this Agreement. "Borrower" has the meaning set forth in the recitals to this Agreement. "Debtors" means, collectively, Borrower, River Holding Corp., a Delaware corporation, IH Holding LLC, a Delaware limited liability company, Industrias Hudson S.A. de C.V., a company organized under the laws of Mexico, Hudson Respiratory Care Tecate, S. de R.L. de C.V., a company organized under the laws of Mexico, and HRC Holding Inc., a Delaware corporation. "Insolvency Event" has the meaning set forth in Section 3. "Intercreditor Agreement" has the meaning set forth in the Loan Agreement. -1- "Lender Group" has the meaning set forth in the recitals to this Agreement. "Lenders" has the meaning set forth in the recitals to this Agreement. "Loan Agreement" has the meaning set forth in the recitals to this Agreement. "Senior Debt" means the Obligations and other indebtedness and liabilities of the Debtors to Agent and the Lender Group under or in connection with the Loan Agreement and the other Loan Documents, including all unpaid principal of the Advances, all interest accrued thereon, all fees due under the Loan Agreement and the other Loan Documents, and all other amounts payable by the Debtors to Agent and the Lender Group thereunder or in connection therewith, whether now existing or hereafter arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and including without limitation interest, fees, and other such amounts, which would accrue and become due but for the commencement of one or more of the Insolvency Events, whether or not such interest, fees, and other amounts are allowed or allowable in whole or in part in any of such Insolvency Events. "Subordinated Debt" means, with respect to each Debtor, all indebtedness, liabilities, and other monetary obligations of any other Debtor owing to such Debtor in respect of any and all loans or advances made by such Debtor to such other Debtor whether now existing or hereafter arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined, including all fees and all other amounts payable by any other Debtor to such Debtor under or in connection with any documents or instruments related thereto. "Subordinated Debt Payment" means any payment or distribution by or on behalf of the Debtors, directly or indirectly, of assets of the Debtors of any kind or character, whether in cash, property, or securities, including on account of the purchase, redemption, or other acquisition of Subordinated Debt, as a result of any collection, sale, or other disposition of collateral, or by setoff, exchange, or in any other manner, for or on account of the Subordinated Debt. (c) Interpretation. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" is not exclusive. The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Section, subsection, clause, schedule, and exhibit references are to this Agreement unless otherwise specified. References to agreements and other contractual instruments shall be deemed to include all subsequent amendments, restatements and other modifications thereto. References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending, or replacing the statute or regulation referred to. The captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. SECTION 2 Subordination To Payment Of Senior Debt. As to each Debtor, all payments on account of the Subordinated Debt shall be subject, subordinate, and junior, in right -2- of payment and exercise of remedies, to the extent and in the manner set forth herein, to the prior payment, in full, in cash or cash equivalents of the Senior Debt. SECTION 3 Subordination Upon Any Distribution Of Assets Of The Debtors. As to each Debtor, in the event of any payment or distribution of assets of any other Debtor of any kind or character, whether in cash, property, or securities, upon the dissolution, winding up, or total or partial liquidation or reorganization, readjustment, arrangement, or similar proceeding relating to such other Debtor or its property, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership, arrangement, or similar proceedings or upon an assignment for the benefit of creditors, or upon any other marshaling or composition of the assets and liabilities of such other Debtor, or otherwise, (such events, collectively, the "Insolvency Events"): (i) all amounts owing on account of the Senior Debt shall first be paid, in full, in cash, or payment provided for in cash or in cash equivalents, before any Subordinated Debt Payment is made; and (ii) to the extent permitted by applicable law, any Subordinated Debt Payment to which such Debtor would be entitled except for the provisions hereof, shall be paid or delivered by the trustee in bankruptcy, receiver, assignee for the benefit of creditors, or other liquidating lender making such payment or distribution directly to Agent for application to the payment of the Senior Debt in accordance with clause (i), after giving effect to any concurrent payment or distribution or provision therefor to Agent in respect of such Senior Debt. SECTION 4 Payments On Subordinated Debt. (a) Permitted Payments. So long as no Event of Default has occurred and is continuing, each Debtor may make, and each other Debtor shall be entitled to accept and receive, (i) payments on account of the Subordinated Debt in the ordinary course of business and (ii) payments allowed, if any, under the Loan Agreement. (b) No Payment Upon Senior Debt Defaults. Upon the occurrence of any Event of Default, and until such Event of Default is cured or waived, no Debtor shall make, and no other Debtor shall accept or receive, any Subordinated Debt Payment. SECTION 5 Subordination Of Remedies. As long as any Senior Debt shall remain outstanding and unpaid, following the occurrence of any Event of Default and until such Event of Default is cured or waived, no Debtor shall, without the prior written consent of Agent: (a) accelerate, make demand, or otherwise make due and payable prior to the original due date thereof any Subordinated Debt or bring suit or institute any other actions or proceedings to enforce its rights or interests in respect of the obligations of any other Debtor owing to such Debtor; (b) exercise any rights under or with respect to guaranties of the Subordinated Debt, if any; (c) exercise any rights to set-offs and counterclaims in respect of any indebtedness, liabilities, or obligations of such Debtor to any other Debtor against any of the Subordinated Debt; or -3- (d) commence, or cause to be commenced, or join with any creditor other than Agent or any Lender in commencing, any bankruptcy, insolvency, or receivership proceeding against the other Debtor. SECTION 6 Payment Over To Agent. In the event that, notwithstanding the provisions of Sections 3, 4, and 5, any Subordinated Debt Payments shall be received in contravention of such Sections 3, 4, or 5 by any Debtor before all Senior Debt is paid, in full, in cash or cash equivalents, such Subordinated Debt Payments, subject to the terms of the Intercreditor Agreement, shall be held in trust for the benefit of the Lender Group and shall be paid over or delivered to Agent for application to the payment, in full, in cash or cash equivalents of all Senior Debt remaining unpaid to the extent necessary to give effect to such Sections 3, 4, and 5, after giving effect to any concurrent payments or distributions to Agent in respect of the Senior Debt. SECTION 7 Authorization To Agent. If, while any Subordinated Debt is outstanding, any Insolvency Event shall occur and be continuing with respect to any Debtor or its property: (i) Agent hereby is irrevocably authorized and empowered (in the name of each other Debtor or otherwise), but shall have no obligation, to demand, sue for, collect, and receive every payment or distribution in respect of the Subordinated Debt and give acquittance therefor and to file claims and proofs of claim and take such other action (including voting the Subordinated Debt) as it may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of Agent; and (ii) each other Debtor shall promptly take such action as Agent reasonably may request (a) to collect the Subordinated Debt, to the extent permitted by law, for the account of the Lender Group and to file appropriate claims or proofs of claim in respect of the Subordinated Debt, (b) to execute and deliver to Agent such powers of attorney, assignments, and other instruments as it may request to enable it to enforce any and all claims with respect to the Subordinated Debt, and (c) to collect and receive any and all Subordinated Debt Payments, to the extent permitted by law. The Agent acknowledges that the exercise of the rights provided in this Section may at some times be subject to the provisions of the Intercreditor Agreement. SECTION 8 Certain Agreements Of Each Debtor. (a) No Benefits. Each Debtor understands that there may be various agreements among Agent, the Lenders, and any other Debtor evidencing and governing the Senior Debt, and each Debtor acknowledges and agrees that such agreements are not intended to confer any benefits on such Debtor unless such Debtor is also a party thereto and that Agent and the Lenders shall have no obligation to such Debtor or any other Person to exercise any rights, enforce any remedies, or take any actions which may be available to them under such agreements unless such Debtor is also a party thereto. (b) No Interference. Each Debtor acknowledges that certain other Debtors have granted to Agent for the benefit of the Lender Group security interests in all of such other Debtor's assets, and agrees not to interfere with or in any manner oppose a disposition of any Collateral by Agent in accordance with applicable law. (c) Reliance by Agent and Lenders. Each Debtor acknowledges and the Loan that Agent and the Lenders will have relied upon and will continue to rely upon the -4- subordination provisions provided for herein and the other provisions hereof in entering into the Loan Documents and making or issuing the Advances or other financial accommodations thereunder. (d) Waivers. Except as provided under the Loan Agreement, each Debtor hereby waives any and all notice of the incurrence of the Senior Debt or any part thereof and any right to require marshaling of assets. (e) Obligations of Each Debtor Not Affected. Each Debtor hereby agrees that at any time and from time to time, without notice to or the consent of such Debtor, without incurring responsibility to such Debtor, and without impairing or releasing the subordination provided for herein or otherwise impairing the rights of Agent hereunder: (i) the time for any other Debtor's performance of or compliance with any of its agreements contained in the Loan Documents may be extended or such performance or compliance may be waived by Agent or the Lenders; (ii) the agreements of any other Debtor with respect to the Loan Documents may from time to time be modified by such other Debtor, Agent, and the Lenders for the purpose of adding any requirements thereto or changing in any manner the rights and obligations of such other Debtor, Agent, or the Lenders thereunder; (iii) the manner, place, or terms for payment by any other Debtor of Senior Debt or any portion thereof may be altered or the terms for payment extended, or the Senior Debt of any other Debtor may be renewed in whole or in part; (iv) the maturity of the Senior Debt of any other Debtor may be accelerated in accordance with the terms of any present or future agreement by any other Debtor, Agent, and the Lenders; (v) any Collateral may be sold, exchanged, released, or substituted and any Lien in favor of Agent may be terminated, subordinated, or fail to be perfected or become unperfected; (vi) any Person liable in any manner for Senior Debt may be discharged, released, or substituted; and (vii) all other rights against the other Debtors, any other Person, or with respect to any Collateral may be exercised (or Agent may waive or refrain from exercising such rights). (f) Rights of Agent Not to Be Impaired. No right of Agent or the Lenders to enforce the subordination provided for herein or to exercise its other rights hereunder shall at any time in any way be prejudiced or impaired by any act or failure to act by any Debtor, Agent, or the Lenders hereunder or under or in connection with the other Loan Documents or by any noncompliance by the other Debtors with the terms and provisions and covenants herein or in any other Loan Document, regardless of any knowledge thereof Agent or the Lenders may have or otherwise be charged with. (g) Financial Condition of the Debtors. Except as provided under the Loan Agreement or by applicable law, no Debtor shall have any right to require Agent to obtain or disclose any information with respect to: (i) the financial condition or character of any other Debtor or the ability of any other Debtor to pay and perform Senior Debt; (ii) the Senior Debt; (iii) the Collateral or other security for any or all of the Senior Debt; (iv) the existence or nonexistence of any guarantees of, or any other subordination agreements with respect to, all or any part of the Senior Debt; (v) any action or inaction on the part of Agent or any other Person; or (vi) any other matter, fact, or occurrence whatsoever. -5- (h) Acquisition of Liens or Guaranties. No Debtor shall, without the prior consent of Agent, acquire any right or interest in or to any Collateral not owned by such Debtor or accept any guaranties for the Subordinated Debt. SECTION 9 Subrogation. (a) Subrogation. Until the payment and performance in full of all Senior Debt, each Debtor agrees to postpone, and shall not directly or indirectly exercise, any rights that it may acquire by way of subrogation under this Agreement, by any payment or distribution to Agent hereunder or otherwise. Upon the payment and performance in full of all Senior Debt, each Debtor shall be subrogated to the rights of Agent and Lenders to receive payments or distributions applicable to the Senior Debt until the Subordinated Debt shall be paid in full. For the purposes of the foregoing subrogation, no payments or distributions to Agent of any cash, property, or securities to which any Debtor would be entitled except for the provisions of Section 3, 4, or 5 shall, as among such Debtor, its creditors (other than Agent and the Lenders), and the other Debtors, be deemed to be a payment by the other Debtors to or on account of the Senior Debt. (b) Payments Over to the Debtors. If any payment or distribution to which any Debtor would otherwise have been entitled but for the provisions of Section 3, 4, or 5 shall have been applied pursuant to the provisions of Section 3, 4, or 5 to the payment of all amounts payable under the Senior Debt, such Debtor shall be entitled to receive from Agent or the Lenders any payments or distributions received by Agent or the Lenders in excess of the amount sufficient to pay in full in cash all amounts payable under or in respect of the Senior Debt. If any such excess payment is made to Agent or the Lenders, Agent or the Lenders shall promptly remit such excess to such Debtor and until so remitted shall hold such excess payment for the benefit of such Debtor. SECTION 10 Continuing Agreement; Reinstatement. (a) Continuing Agreement. This Agreement is a continuing agreement of subordination and shall continue in effect and be binding upon each Debtor until payment and performance in full in cash of the Senior Debt. The subordinations, agreements, and priorities set forth herein shall remain in full force and effect regardless of whether any party hereto in the future seeks to rescind, amend, terminate, or reform, by litigation or otherwise, its respective agreements with the other Debtor. (b) Reinstatement. This Agreement shall continue to be effective or shall be reinstated, as the case may be, if, for any reason, any payment of the Senior Debt by or on behalf of any other Debtor shall be rescinded or must otherwise be restored by Agent or the Lenders, whether as a result of an Insolvency Event or otherwise. SECTION 11 Transfer Of Subordinated Debt. No Debtor may assign or transfer its rights and obligations in respect of the Subordinated Debt without the prior written consent of Agent, and any such transferee or assignee, as a condition to acquiring an interest in the Subordinated Debt shall agree to be bound hereby, in form satisfactory to Agent. -6- SECTION 12 Obligations Of The Debtors Not Affected. The provisions of this Agreement are intended solely for the purpose of defining the relative rights of each Debtor against the other Debtors, on the one hand, and of Agent and the Lenders against the Debtors, on the other hand. Nothing contained in this Agreement shall (i) impair, as between each Debtor and the other Debtors, the obligation of the other Debtors to pay their respective obligations with respect to the Subordinated Debt as and when the same shall become due and payable, or (ii) otherwise affect the relative rights of each Debtor against the other Debtors, on the one hand, and of the creditors (other than Agent or the Lenders) of the other Debtors against the other Debtors, on the other hand. SECTION 13 Endorsement Of Debtor Documents; Further Assurances And Additional Acts. (a) Endorsement of Debtor Documents. At the request of Agent, all documents and instruments evidencing any of the Subordinated Debt, if any, shall be endorsed with a legend noting that such documents and instruments are subject to this Agreement, and each Debtor shall promptly deliver to Agent evidence of the same. (b) Further Assurances and Additional Acts. Each Debtor shall execute, acknowledge, deliver, file, notarize, and register at its own expense all such further agreements, instruments, certificates, financing statements, documents, and assurances, and perform such acts as Agent reasonably shall deem necessary or appropriate to effectuate the purposes of this Agreement, and promptly provide Agent with evidence of the foregoing reasonably satisfactory in form and substance to Agent. SECTION 14 Notices. All notices and other communications hereunder to Agent shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement and all notices and other communications hereunder to a Debtor shall be in writing and shall be mailed, sent or delivered in care of Borrower in accordance with the Loan Agreement. SECTION 15 No Waiver; Cumulative Remedies. No failure on the part of Agent or the Lenders to exercise, and no delay in exercising, any right, remedy, power, or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power, or privilege preclude any other or further exercise thereof or the exercise of any other right, remedy, power, or privilege. The rights and remedies under this Agreement are cumulative and not exclusive of any rights, remedies, powers, and privileges that may otherwise be available to Agent and the Lenders. SECTION 16 Costs And Expenses. Each of the Debtors, jointly and severally, agrees to pay to Agent on demand the (a) reasonable out-of-pocket costs and expenses of Agent, and the reasonable fees and disbursements of counsel to Agent, in connection with the negotiation, preparation, execution, delivery, and administration of this Agreement, and any amendments, modifications, or waivers of the terms thereof; and (b) all reasonable out-of-pocket costs and expenses of Agent, and the reasonable fees and disbursements of counsel, in connection with the enforcement or attempted enforcement of, and preservation of rights or interests under, this Agreement, including any losses, reasonable out-of-pocket costs and -7- expenses sustained by Agent as a result of any failure by any Debtor to perform or observe its obligations contained in this Agreement. SECTION 17 Survival. All covenants, agreements, representations and warranties made in this Agreement shall, except to the extent otherwise provided herein, survive the execution and delivery of this Agreement, and shall continue in full force and effect so long as any Senior Debt remains unpaid. Without limiting the generality of the foregoing, the obligations of each Debtor under Section 16 shall survive the satisfaction of the Senior Debt. SECTION 18 Benefits Of Agreement. This Agreement is entered into for the sole protection and benefit of the parties hereto and their successors and assigns, and no other person shall be a direct or indirect beneficiary of, or shall have any direct or indirect cause of action or claim in connection with, this Agreement. SECTION 19 Binding Effect. This Agreement shall be binding upon, inure to the benefit of and be enforceable by each Debtor, Agent, and the Lenders and their respective successors and permitted assigns. SECTION 20 Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the law of the State of California. SECTION 21 Submission To Jurisdiction. Each Debtor hereby (i) submits to the exclusive jurisdiction of the courts of the County of Los Angeles, State of California and the federal courts of the United States sitting in the County of Los Angeles, State of California, for the purpose of any action or proceeding arising out of or relating to this Agreement, (ii) agrees that all claims in respect of any such action or proceeding may be heard and determined in such courts, or at the sole option of Agent, in any other court which has subject matter jurisdiction over the matter in controversy, (iii) irrevocably waives (to the extent permitted by applicable law) any objection which it now or hereafter may have to the laying of venue of any such action or proceeding brought in any of the foregoing courts, and any objection on the ground that any such action or proceeding in any such court has been brought in an inconvenient forum, (iv) agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner permitted by law, and (v) EACH DEBTOR HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH DEBTOR REPRESENTS THAT EACH SUCH PARTY HAS REVIEWED THIS WAIVER AND EACH SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. SECTION 22 Entire Agreement; Amendments And Waivers. -8- (a) Entire Agreement. This Agreement constitutes the entire agreement of each of the Debtors and Agent with respect to the matters set forth herein and supersedes any prior agreements, commitments, drafts, communications, discussions, and understandings, oral or written, with respect thereto. None of the terms or conditions of this Agreement imposes on the Debtors any obligation or liability under any Loan Document (other than this Agreement). The foregoing notwithstanding, the terms and conditions of this Agreement shall not in any way limit or affect the obligations or liabilities of any Debtor under the Loan Documents to which such Debtor is a party. (b) Amendments and Waivers. No amendment to any provision of this Agreement shall in any event be effective unless the same shall be in writing and signed by each of the Debtors and Agent; and no waiver of any provision of this Agreement, or consent to any departure by any Debtor therefrom, shall in any event be effective unless the same shall be in writing and signed by Agent. Any such amendment, waiver, or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 23 Conflicts. In case of any conflict or inconsistency between any terms of this Agreement, on the one hand, and any documents or instruments in respect of the Subordinated Debt, on the other hand, then the terms of this Agreement shall control. SECTION 24 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under all applicable laws and regulations. If, however, any provision of this Agreement shall be prohibited by or invalid under any such law or regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such law or regulation, or, if for any reason it is not deemed so modified, it shall be ineffective and invalid only to the extent of such prohibition or invalidity without affecting the remaining provisions of this Agreement or the validity or effectiveness of such provision in any other jurisdiction. SECTION 25 Interpretation. This Agreement is the result of negotiations between, and has been reviewed by the respective counsel to, the Debtors and Agent and is the product of all parties hereto. Accordingly, this Agreement shall not be construed against Agent merely because of Agent's involvement in the preparation hereof. SECTION 26 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. SECTION 27 Termination Of Agreement. Upon indefeasible payment and performance in full of the Senior Debt, this Agreement shall terminate and Agent shall promptly execute and deliver to each Debtor such documents and instruments as shall be reasonably -9- necessary to evidence such termination; provided, however, that the obligations of each Debtor under Section 16 shall survive such termination. [Signature page follows.] -10- IN WITNESS WHEREOF, the undersigned has executed and delivered this Agreement as of the date first written above. RIVER HOLDING CORP., a Delaware corporation By: --------------------------------- Title: HUDSON RESPIRATORY CARE INC., a California corporation By: --------------------------------- Title: IH HOLDING LLC, a Delaware limited liability company By: --------------------------------- Title: HUDSON RESPIRATORY CARE TECATE, S. DE R.L. DE C.V., a company organized under the laws of Mexico By: --------------------------------- Title: INDUSTRIAS HUDSON S.A. DE C.V., a company organized under the laws of Mexico By: --------------------------------- Title: HRC HOLDING INC., a Delaware corporation By: --------------------------------- Title: Signature Page Intercompany Subordination Agreement MW POST ADVISORY GROUP, LLC, a Delaware limited liability company, as Agent By: --------------------------------- Title: Lawrence Post, Chief Executive Officer Signature Page Intercompany Subordination Agreement EX-10.37 22 dex1037.txt SUBORDINATION AGREEMENT (MW POST AS AGENT) Exhibit 10.37 SUBORDINATION AGREEMENT ----------------------- This SUBORDINATION AGREEMENT, dated as of October 7, 2003 (the "Agreement"), is made by and among Hudson Respiratory Care Inc. (the "Borrower"), FS Equity Partners IV, L.P., a Delaware limited partnership, and the additional parties signatory hereto (collectively, the "Subordinated Creditors"), and MW Post Advisory Group, LLC, as the administrative agent (in such capacity, the "Agent") for the lenders (collectively, the "Lenders") from time to time party to the Loan Agreement (as defined below). RECITALS A. The Borrower has entered into that certain Loan and Security Agreement (as amended, restated, supplemented, or modified from time to time, the "Loan Agreement") dated as of October 7, 2003, among the Borrower, the Lenders and the Agent, whereby the Lenders agreed to extend credit to the Borrower upon the terms and conditions contained in the Loan Agreement. B. The Borrower has borrowed an aggregate of $14,951,520 from the Subordinated Creditors pursuant to several Senior Subordinated Convertible Promissory Notes dated as of April 23, 2001 or August 15, 2001 made by the Borrower in favor of the Subordinated Creditors (collectively, and together with any accrued interest thereon, the "Subordinated Debt"). C. The Subordinated Creditors and the Borrower have agreed that the Subordinated Debt will be subordinated to the Senior Debt (as defined in Section D. The Subordinated Creditors desire to subordinate their right to payment of the Subordinated Debt at any time owed to the Subordinated Creditors to the Senior Debt in accordance with the provisions of this Agreement. NOW, THEREFORE, in consideration of the foregoing premises, the Subordinated Creditors, the Borrower and the Agent hereby agree as follows: AGREEMENT 1. Agreement to Subordinate. The Subordinated Creditors and the Borrower agree that the Subordinated Debt is and shall be subordinate, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full in cash of the Senior Debt. "Senior Debt" of the Borrower means all obligations consisting of the principal, accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Borrower to the extent post-filing interest is allowed in such proceeding) and fees and other amounts payable by the -1- Borrower to the Agent or the Lenders from time to time under the Loan Documents (as defined in the Loan Agreement) in respect of indebtedness of the Borrower under the Loan Documents. 2. No Payment on the Subordinated Debt. Unless and until the Senior Debt is paid in full in cash, the Subordinated Creditors hereby agree not to accept, ask, demand, sue for, take, create or receive from the Borrower, directly or indirectly, in cash or other property or by set-off or in any other manner (including without limitation from or by way of collateral), payment of all or any of the Subordinated Debt. The parties hereto acknowledge that at the option of the Borrower, interest on the Subordinated Debt may (a) be paid semi-annually on each April 15 and October 15, beginning on October 15, 2003 (each such semi-annual date that an interest payment is due, an "Interest Payment Date") but only through the issuance on any Interest Payment Date of an additional promissory note of equal ranking to the Subordinated Debt and on the same terms and conditions provided for therein, such additional promissory note to be issued in a principal amount that corresponds with the amount of the interest payment that would otherwise be due on such Interest Payment Date or (b) accrue, such accruing amount to be compounded semi-annually. 3. In Furtherance of Subordination. The Subordinated Creditors hereby agree as follows: a. Upon any distribution of all or any of the assets of the Borrower to creditors of the Borrower, in connection with any bankruptcy, reorganization, insolvency or other similar proceeding (a "Proceeding"), any payment or distribution of any kind (whether in cash, property or securities) which otherwise would be payable or deliverable upon or with respect to the Subordinated Debt shall be paid or delivered directly to the Agent in such capacity. b. If any Proceeding is commenced by or against the Borrower: i. The Agent is hereby irrevocably authorized and empowered, but shall have no obligation, to demand, sue for, collect and receive every payment or distribution referred to in subsection 3.a. above and give acquittance therefor and to file claims and proofs of claim and take such other actions (including, without limitation, voting the Subordinated Debt) as it may deem necessary or advisable for the exercise or enforcement of any of its rights or interests hereunder; and ii. The Subordinated Creditors shall duly and promptly take such action as the Agent may request (A) to collect the Subordinated Debt for account of the Agent and to file appropriate claims or proofs of claim in respect of the Subordinated Debt, (B) to execute and deliver to the Agent on behalf of the Lenders such powers of attorney, assignment, or other instruments as it may request in order to enable it to enforce any and all claims with respect to the Subordinated Debt, and (C) to collect -2- and receive any and all payments or distributions which may be payable or deliverable upon or with respect to the Subordinated Debt. c. All payments or distributions upon or with respect to the Subordinated Debt which are received by any Subordinated Creditor contrary to the provisions of this Agreement shall be received in trust for the benefit of the Agent, on behalf of the Lenders, shall be segregated from other funds and property held by such Subordinated Creditor and shall be forthwith paid over to the Agent in the same form as so received (with any necessary indorsement) to be applied (in the case of cash) to or held as collateral (in the case of non-cash property or securities) for the payment or prepayment of Senior Debt in accordance with its terms. d. The Agent is hereby authorized to demand specific performance of this Agreement, whether or not the Borrower shall have complied with any of the provisions hereof applicable to it, at any time when any Subordinated Creditor shall have failed to comply with any of the provisions of this Agreement applicable to it. The Subordinated Creditors hereby irrevocably waive any defense based on the adequacy of a remedy at law, which might be asserted as a bar to such remedy of specific performance. e. The Agent acknowledges that the exercise of the rights provided in this Section may at some times be subject to the provisions of the Intercreditor Agreement (as such term is defined in the Loan Agreement). 4. No Commencement of Any Proceeding. Each Subordinated Creditor agrees that, so long as any of the obligations under the Senior Debt shall remain unpaid, such Subordinated Creditor will not commence, or join with any creditor other than the Agent in commencing, any Proceeding. 5. Rights of Subrogation. The Subordinated Creditors agree that no payment or distribution to the Agent pursuant to the provisions of this Agreement shall entitle any Subordinated Creditor to exercise any rights of subrogation in respect thereof until the Senior Debt has been paid in full in cash. 6. Further Assurances. The Subordinated Creditors and the Borrower will further mark their respective books of account in such a manner as shall be effective to give proper notice of the effect of this Agreement and will, in the case of any Subordinated Debt which is not evidenced by any instrument, upon the Agent's written request, cause such Subordinated Debt to be evidenced by an appropriate instrument or instruments. The Subordinated Creditors will upon the Agent's request deliver to the Agent true and correct copies of all instruments, if any, evidencing Subordinated Debt. The Subordinated Creditors and the Borrower will, at their expense and at any time and from time to time, promptly execute and deliver all further instruments and documents, and take all further action, that, may be necessary or desirable, or that the Agent may reasonably request, in order to protect any right or interest granted or purported to be -3- granted hereby or to enable the Agent to exercise and enforce its rights and remedies hereunder. 7. No Change in or Disposition of Subordinated Debt. The Subordinated Creditors will not, without the consent of the Agent: a. Cancel or otherwise discharge any of the Subordinated Debt (except upon (a) payment of the Senior Debt in full in cash to the Agent and the Lenders or (b) conversion of the Subordinated Debt into common stock of the Borrower in accordance with the terms of the Subordinated Debt) or subordinate any of the Subordinated Debt to any indebtedness of the Borrower other than the Senior Debt and the debt of the Borrower under the WFF Loan Agreement; b. Sell, assign, pledge, encumber or otherwise dispose of any of the Subordinated Debt; or c. Permit the terms of any of the Subordinated Debt to be changed in any manner other than changes that only extend the maturity of or lower the interest rate on the Subordinated Debt. 8. Agreements by the Borrower. The Borrower agrees that it will not make any payment of any of the Subordinated Debt, or take any other action, in contravention of the provisions of this Agreement. 9. Obligations Hereunder Not Affected. All rights and interests of the Agent hereunder, and all agreements and obligations of the Subordinated Creditors and the Borrower under this Agreement, shall remain in full force and effect irrespective of: i. any lack of validity or enforceability of the Senior Debt or any agreement or instrument relating thereto; ii. any change in the time, manner of place of payment of, or in any other term of the Senior Debt, or any other amendment or waiver of or any consent to departure from the Senior Debt; iii. any taking and holding of any collateral or security or additional guarantees for all or any of the Senior Debt; or any amendment, alteration, exchange, substitution, transfer, enforcement, waiver, subordination, termination or release of any collateral or such guarantees, or any non-perfection of any collateral, or any consent to departure from any such guaranty; iv. any manner of application of collateral or proceeds thereof, to all or any of the Senior Debt, or the manner of sale of any collateral or other security; -4- v. any consent by the Agent to the change, restructure or termination of the corporate structure or existence of the Borrower and any corresponding restructure of the Senior Debt, or any other restructure or refinancing of the Senior Debt or any portion thereof; vi. any modification, compounding, compromise, settlement, release by the Agent, collection or other liquidation of the Senior Debt or of any collateral or security in whole or in part, and any refusal of payment to the Agent in whole or in part, from any obligor or guarantor in connection with any of the Senior Debt, whether or not with notice to, or further assent by, or any reservation of rights against, the Subordinated Creditors; or vii. any other circumstance (including, but not limited to, any statute of limitations) which might otherwise constitute a defense available to, or a discharge of the Borrower or the Subordinated Creditors. Without limiting the generality of the foregoing, the Subordinated Creditors hereby consent to, and hereby agree, that the rights of the Agent hereunder, and the enforceability hereof, shall not be affected by any and all releases of any collateral or security from the liens and security interests created by any security agreement, pledge agreement or other agreement whether for purposes of sales or other dispositions of assets or for any other purpose. This Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Senior Debt is rescinded or must otherwise be returned by the Agent upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, all as though such payment had not been made. 10. Waiver. a. The Subordinated Creditors and the Borrower hereby waive promptness, diligence, notice of acceptance and any other notice with respect to any of the Senior Debt and this Agreement and any requirement that the Agent protect, secure, perfect or insure any security interest or lien or any property subject thereto or exhaust any right or take any action against the Borrower or any collateral or security. b. The Subordinated Creditors and the Borrower hereby waive any right to require the Agent to proceed against any party hereto or any other Person, or proceed against or exhaust any collateral or security, or pursue any other remedy in the power of the Agent or any other Person. c. The Subordinated Creditors and the Borrower agree that the Agent, in its sole discretion, without notice or demand and without affecting the enforceability of this Agreement, may foreclose on any deed of trust or mortgage securing all or a portion of the Senior Debt and the interests in real property secured thereby by nonjudicial sale; and the Subordinated Creditors and the Borrower hereby waive any defense to the enforceability hereof by the Agent against the Subordinated -5- Creditors or the Borrower after a nonjudicial sale even though the Subordinated Creditors' right of subrogation may be altered, impaired or extinguished thereby. 11. Representations and Warranties. Each of the Subordinated Creditors and the Borrower hereby represents and warrants as follows: a. The Subordinated Debt (i) has been duly authorized by the Borrower as applicable, (ii) has not been, and will not be, amended or otherwise modified and (iii) constitutes the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. b. The Subordinated Creditors own the Subordinated Debt free and clear of any lien, security interest, charge or encumbrance or any rights of others. c. There exists no default in respect of the Subordinated Debt. 12. Amendments, Etc. No amendment or waiver of any provision of this Agreement nor consent to any departure by the Subordinated Creditors or the Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by all the Lenders or the Required Lenders (as defined in the Loan Agreement) in accordance with the Loan Agreement and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 13. Expenses. The Subordinated Creditors and the Borrower jointly and severally agree to pay, upon demand, to the Agent the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel, which the Agent may incur in connection with the exercise or enforcement of any of its rights or interests hereunder. 14. Addresses for Notices. All notices, requests, demands and other communications provided for or permitted hereunder shall, unless otherwise stated herein, be in writing (including telex, or telecopied communications) and shall be sent by mail (by registered or certified mail, return receipt requested), telex, telecopier or hand delivery: a. If to any Subordinated Creditor or the Borrower, to it at its address set forth on the signature pages hereof or at such other address as shall be designated by it in a written notice to the Agent complying as to delivery with the terms of this Section; or b. If to the Agent, addressed to it at the address for notices to the Agent provided in the Loan Agreement. All such notices, requests, demands and other communications shall be effective (a) when mailed, on the earlier of receipt or the third Business Day after being deposited in the -6- mails with postage prepaid, (b) when sent by telex, upon confirmation by telex answerback, (c) when sent by telecopy, upon receipt thereof, and (d) upon personal delivery thereof. 15. References to the Agent. Any reference herein to the "Agent" shall be a reference herein to the Agent or any successor Agent appointed pursuant to the terms of the Loan Agreement. It is understood and agreed that the Agent is not required to act or to refrain from acting without the consent of the Lenders to the extent such consent is required by the Loan Agreement. 16. No Waiver; Remedies. No failure on the part of the Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 17. Continuing Agreement. This Agreement is a continuing agreement and shall (i) remain in full force and effect until the Senior Debt shall have been paid in full in cash, (ii) be binding upon the Subordinated Creditors and the Borrower and their respective successors and assigns, and (iii) inure to the benefit of, and shall be enforceable by the Agent and its respective successors, transferees and assigns. 18. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective as to each party hereto after a counterpart hereof shall have been signed by such party, and such effectiveness shall not be diminished if one or more of the intended signatories (as reflected on the signature pages hereof) fails to sign this Agreement. 19. Waiver of Jury Trial. The parties hereto hereby irrevocably waive all right to trial by jury in any action, proceeding or counterclaim arising out of or relating to this Agreement. 20. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. -7- WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first above written. BORROWER: HUDSON RESPIRATORY CARE INC. By: ------------------------------------- Title: ---------------------------------- Address: 27711 Diaz Road Temecula, California 92589 Attention: Patrick Yount AGENT: MW POST ADVISORY GROUP, LLC, as Agent under the Loan Agreement By: ------------------------------------- Title: Lawrence Post, Chief Executive Officer Address: MW Post Advisory Group, LLC 11766 Wilshire Blvd., Suite 1660 Los Angeles, California 90025 Attn: Allan Schweitzer, CFA SUBORDINATED FS EQUITY PARTNERS IV, L.P. CREDITORS: By: FS CAPITAL PARTNERS, LLC, General Partner By: ----------------------------------- By: -------------------------------- Title: ----------------------------- Address: c/o Freeman Spogli & Co. Incorporated 11100 Santa Monica Boulevard, Suite1900 Los Angeles, California 90025 Attention: Mr. Jon D. Ralph Signature Page Subordination Agreement ADDITIONAL ---------- SUBORDINATED CREDITORS ---------------------- Address: THE HELEN HUDSON LOVAAS - ----------------------------------- SEPARATE PROPERTY TRUST - ----------------------------------- U/D/T/ DATED JULY 17, 1997 - ----------------------------------- By: ------------------------------------- Helen Hudson Lovaas, Trustee Address: - ----------------------------------- ---------------------------------------- - ----------------------------------- Richard W. Johansen - ----------------------------------- Address: - ----------------------------------- ---------------------------------------- - ----------------------------------- Jay R. Ogram - ----------------------------------- Address: - ----------------------------------- ---------------------------------------- - ----------------------------------- Lougene Williams - ----------------------------------- Address: - ----------------------------------- ---------------------------------------- - ----------------------------------- Jeffrey D. Brown - ----------------------------------- Address: - ----------------------------------- ---------------------------------------- - ----------------------------------- Brian W. Morgan - ----------------------------------- Signature Page Subordination Agreement ADDITIONAL ---------- SUBORDINATED CREDITORS ---------------------- Address: - ----------------------------------- ---------------------------------------- - ----------------------------------- Ola Magnusson - ----------------------------------- Address: - ----------------------------------- ---------------------------------------- - ----------------------------------- Patrick Yount - ----------------------------------- Address: - ----------------------------------- ---------------------------------------- - ----------------------------------- Jeri E. Eiserman - ----------------------------------- Address: - ----------------------------------- ---------------------------------------- - ----------------------------------- Douglas Y. Handa - ----------------------------------- Signature Page Subordination Agreement EX-10.38 23 dex1038.txt DEED OF TRUST AND OTHER- BENEFIT OF MW POST Exihibit 10.38 PREPARED BY, RECORDING REQUESTED BY, AND WHEN RECORDED MAIL TO: Sheppard, Mullin, Richter & Hampton LLP 333 South Hope Street, 48/th/ Floor Los Angeles, California 90071 Attention: William M. Scott IV, Esq. DEED OF TRUST, FINANCING STATEMENT, FIXTURE FILING, ASSIGNMENT OF RENTS AND LEASES AND SECURITY AGREEMENT by and from HUDSON RESPIRATORY CARE INC., "Grantor" to CHICAGO TITLE COMPANY, "Trustee" for the benefit of MW POST ADVISORY GROUP, LLC, "Beneficiary" Dated as of October 7, 2003 Municipality: Temecula County: Riverside State: California -1- DEED OF TRUST, FINANCING STATEMENT, FIXTURE FILING, ASSIGNMENT OF RENTS AND LEASES AND SECURITY AGREEMENT This DEED OF TRUST, FINANCING STATEMENT, FIXTURE FILING, ASSIGNMENT OF RENTS AND LEASES AND SECURITY AGREEMENT (as amended, supplemented or otherwise modified from time to time, this "Deed of Trust") is made as of the 7th day of October, 2003 by and from Hudson Respiratory Care Inc. ("Grantor"), with a taxpayer identification number of 95-1867330 and having an office at 27711 Diaz Road, Temecula, California 92589, to Chicago Title Company ("Trustee"), having an office at 560 E. Hospitality Lane, San Bernardino, California, for the benefit of MW Post Advisory Group, LLC, a Delaware limited liability company, having an office at 11766 Wilshire Blvd., Suite 1660, Los Angeles, California 90025 ("Beneficiary"). Terms appearing in this Deed of Trust with an initial capital letter that are not otherwise defined herein, shall have the same respective meanings as such terms have in that certain Loan and Security Agreement by and among Grantor, as Borrower, the lenders that are signatories thereto, as Lenders, and Beneficiary, as Administrative Agent, dated as of October 7, 2003 (as such may be amended, restated, supplemented or otherwise modified from time to time after the date hereof, the "Loan and Security Agreement"). Beneficiary and the Trustee are sometimes referred to herein collectively as the "Secured Parties." RECITALS -------- WHEREAS, Grantor is the owner of a fee simple estate in the Land (as defined below); WHEREAS, pursuant to the Loan and Security Agreement, the Lenders have agreed to make loan and credit Advances to Borrower in a principal amount not to exceed $30,000,000.00; WHEREAS, pursuant to the Loan and Security Agreement the Maturity Date of the loans and credit Advances made by Lenders to Borrower is October 1, 2007; WHEREAS, Grantor is receiving a good and valuable benefit, the sufficiency and receipt of which is hereby acknowledged, as a result of Beneficiary and Grantor entering into the Loan and Security Agreement; and WHEREAS, as a condition precedent to the lending of funds under the Loan and Security Agreement, the Lenders have required that Grantor grant this Deed of Trust and grant to Beneficiary, for the benefit of the Secured Parties, the liens and security interests referred to herein to secure (i) prompt and complete payment and performance of all of Grantor's obligations now or hereafter existing under the Loan and Security Agreement and other Loan Documents to which the Grantor is or may become a party, whether principal, interest, costs, fees, expenses or otherwise (including without limitation the "Obligations," as defined in the Loan and Security Agreement); and (ii) all other payment and performance obligations provided by this Deed of Trust in connection with the property mortgaged hereby, whenever incurred (all of the aforesaid obligations of Grantor to any of the Secured Parties, together with the other -1- payment and performance obligations and liabilities described herein, being hereinafter referred to collectively as the "Obligations Secured"). GRANTING CLAUSE --------------- NOW, THEREFORE, in consideration of the foregoing recitals and to secure payment of the Obligations Secured and in consideration of Ten Dollars ($10.00) in hand paid, the receipt and sufficiency whereof are hereby acknowledged, GRANTOR DOES HEREBY IRREVOCABLY GRANT, ASSIGN, BARGAIN, SELL, TRANSFER, REMISE, RELEASE, ALIENATE, CONVEY, MORTGAGE, PLEDGE AND WARRANT TO TRUSTEE AND ITS SUCCESSORS AND ASSIGNS IN TRUST, WITH RIGHT OF ENTRY AND POWER OF SALE FOR THE BENEFIT OF BENEFICIARY AND ITS SUCCESSORS AND ASSIGNS, FOR THE PURPOSES SET FORTH IN THIS DEED OF TRUST, all right, title and interest of Grantor in and to that certain real property legally described in Exhibit A attached hereto (the "Land") located in the County of Riverside and the State of California (the "State"); together with all right, title and interest, if any, which Grantor may now have or hereafter acquire in and to all improvements, buildings and structures now or hereafter located thereon of every nature whatsoever (which, together with the Land, is herein called the "Premises"); TOGETHER WITH all right, title and interest, if any, including any after-acquired right, title and interest, and including any right of use or occupancy, which Grantor may now have or hereafter acquire in and to (a) all easements, rights of way, gores of land or any lands occupied by streets, ways, alleys, passages, sewer rights, air rights, water courses, water rights and powers, and public places adjoining said Land, and any other interests in property constituting appurtenances to the Premises, or which hereafter shall in any way belong, relate or be appurtenant thereto, and (b) all hereditaments, gas, oil, minerals (with the right to extract, sever and remove such gas, oil and minerals), and easements, of every nature whatsoever, located in or on the Land and all other rights and privileges thereunto belonging or appertaining and all extensions, additions, improvements, betterments, renewals, substitutions and replacements to or of any of the rights and interests described in subparagraphs (a) and (b) above (hereinafter the "Property Rights"); TOGETHER WITH all right, title and interest, if any, including any after-acquired right, title and interest, and including any right of use or occupancy, which Grantor may now or hereafter acquire in and to all fixtures and appurtenances of every nature whatsoever now or hereafter located in, on or attached to, or used or intended to be used in connection with, or with the operation of, the Premises, including, but not limited to (a) all apparatus, inventory, machinery and equipment of Grantor (the "Equipment"); and (b) all extensions, additions, improvements, betterments, renewals, substitutions and replacements to or of any of the foregoing (the "Fixtures"). It is mutually agreed, intended and declared that the Premises and all of the Property Rights, Equipment and Fixtures owned by Grantor (referred to collectively herein as the "Real Property") shall, so far as permitted by law, be deemed to form a part and parcel of the Land and for the purpose of this Deed of Trust to be real estate and covered by this Deed of Trust; TOGETHER WITH all the estate, right, title and interest of the Grantor in and to (i) all judgments, insurance proceeds, awards of damages and settlements resulting from 2 condemnation proceedings or the taking of the Real Property, or any part thereof, under the power of eminent domain or for any damage (whether caused by such taking or otherwise) to the Real Property, or any part thereof, or to any rights appurtenant thereto, and all proceeds of any sales or other dispositions of the Real Property or any part thereof; and (subject to the terms of the Loan and Security Agreement) Beneficiary is hereby authorized to collect and receive said awards and proceeds and to give proper receipts and acquittance therefor, and to apply the same unless otherwise provided in the Loan and Security Agreement, in any order determined by Beneficiary in its sole and absolute discretion, notwithstanding any instructions, directions or requests from Grantor; and (ii) all contract rights, general intangibles, actions and rights in action relating to the Real Property including, without limitation, all rights to insurance proceeds and unearned premiums arising from or relating to damage to the Real Property; and (iii) all proceeds, products, replacements, additions, substitutions, renewals and accessions of and to the Real Property. (The rights and interests described in this paragraph shall hereinafter be called the "Intangibles.") Grantor (i) does hereby pledge and assign to Trustee for the benefit of Beneficiary from and after the date hereof (including any period of redemption), primarily and on a parity with the Real Property, and not secondarily, all the rents, issues and profits of the Real Property and all rents, issues, profits, revenues, royalties, bonuses, rights and benefits due, payable or accruing (including all deposits of money as advance rent, for security or as earnest money or as down payment for the purchase of all or any part of the Real Property) (the "Rents") under any and all present and future leases, contracts or other agreements relative to the ownership or occupancy of all or any portion of the Real Property; provided, however, that subject to the terms of the Loan and Security Agreement, until such time as an Event of Default has occurred and is continuing, Grantor shall have a license to collect such rents, and (ii) except to the extent such a transfer or assignment is prohibited by the terms thereof, does hereby transfer and assign to Trustee for the benefit of Beneficiary all such leases and agreements (including all Grantor's rights under any contracts for the sale of any portion of the Mortgaged Property (as defined below) and all Grantor's right, title and interest in and to all revenues and royalties under any oil, gas and mineral leases relating to the Real Property) (the "Leases"). All of the property described above, and each item of property therein described, not limited to but including the Land, the Premises, the Property Rights, the Equipment, the Fixtures, the Real Property, the Intangibles, the Rents and the Leases, is herein referred to as the "Mortgaged Property." Nothing herein contained shall be construed as constituting the Trustee or Beneficiary a mortgagee-in-possession in the absence of the taking of actual possession of the Mortgaged Property by Beneficiary. Nothing contained in this Deed of Trust shall be construed as imposing on Beneficiary any of the obligations of the lessor under any Lease of the Mortgaged Property in the absence of an explicit assumption thereof by Beneficiary. In the exercise of the powers herein granted Beneficiary, except as provided in the Loan and Security Agreement, no liability shall be asserted or enforced against Beneficiary, all such liability being expressly waived and released by Grantor. TO HAVE AND TO HOLD the Mortgaged Property, properties, rights and privileges hereby conveyed or assigned, or intended so to be, unto Trustee, its beneficiaries, 3 successors and assigns, for the benefit of Beneficiary, its successors and assigns, forever upon the trusts, terms and conditions and for the uses and purposes herein set forth. Grantor hereby releases and waives all rights of redemption under and by virtue of any of the laws, if any, of the State, and Grantor hereby covenants, represents and warrants that, at the time of the execution and delivery of this Deed of Trust, Grantor owns the Premises in fee simple, has the authority to sell, assign, convey and mortgage the Mortgaged Property, that Grantor's title to the Mortgaged Property is free and clear of all encumbrances, except for Permitted Liens, and that, except for the Permitted Liens, Grantor will forever defend the same against all claims in derogation of the foregoing. Grantor also acknowledges, represents and warrants that the execution, delivery and performance of this Deed of Trust have been duly authorized by all necessary action of Grantor, that when executed and delivered by the undersigned person on behalf of Grantor, this Deed of Trust will be a valid and binding obligation of Grantor, legally enforceable in accordance with its terms and that Grantor's execution of and performance under this Deed of Trust does not conflict with any other contract, agreement to which Grantor is a party or violate any other obligation of Grantor or any of its affiliates. It is also agreed that if any of the property herein mortgaged is of a nature so that a security interest therein can be perfected under the Uniform Commercial Code in effect in the State (the "Code"), this instrument shall constitute a security agreement, fixture filing and financing statement, and for that purpose, the following information is set forth: (a) In addition to the foregoing grant of mortgage, Grantor hereby grants a continuing security interest to the Trustee for the benefit of Beneficiary in all Fixtures and that portion of the Mortgaged Property with respect to which the creation and perfection of a lien is governed by the Code. (b) The "Debtor" is the Grantor and "Secured Party" is Beneficiary for the benefit of the Secured Parties. (c) The name and address of Debtor are the same as set forth for Grantor in the Preamble to this document. (d) The name and address of Secured Party are as set forth for Beneficiary in the Preamble to this document. (e) The description of the types or items of property covered by this financing statement and fixture filing is all of the Equipment, Fixtures and other property described or referred to in this Deed of Trust with respect to which Grantor has granted a security interest to Beneficiary pursuant to this Deed of Trust and for which a security interest may be perfected pursuant to the Code and laws of the State. (f) The description of real estate to which collateral is attached or upon which it is located is as set forth in Exhibit A. (g) The taxpayer identification number of the Debtor is as set forth in the Preamble to this document. 4 (h) Beneficiary is to file this Deed of Trust or a reproduction thereof, in the real estate records or other appropriate index, as a financing statement and/or fixture filing for any of the items specified herein as part of the Mortgaged Property. Any reproduction of this Deed of Trust or of any other security agreement or financing statement is sufficient as a financing statement and fixture filing. (i) Grantor agrees to execute, deliver, record, file and/or refile (and Grantor grants to Beneficiary the authority to do the same on Grantor's behalf) any financing statement, continuation statement, or other instruments Beneficiary may reasonably require from time to time to perfect or renew such security interest under the Code. To the extent permitted by law, (i) all of the Fixtures are or are to become fixtures on the Land and (ii) this instrument, upon recording or registration in the real estate records of the proper office, shall constitute a financing statement and "fixture-filing" within the meaning of Sections 9102 and 9502 of the Code. Subject to the terms and conditions of the Loan and Security Agreement, the remedies for any violation of the covenants, terms and conditions of the agreements herein contained shall be as prescribed herein or by general law, or, as to that part of the security in which a security interest may be perfected under the Code, by the specific statutory consequences now or hereafter enacted and specified in the Code, all at Beneficiary's sole election. THE FOLLOWING PROVISIONS SHALL ALSO CONSTITUTE AN INTEGRAL PART OF THIS DEED OF TRUST: Section 1. Payment of Taxes on the Deed of Trust. Without limiting any of the provisions of the Loan and Security Agreement, Grantor agrees that, if the government of the United States or any department, agency or bureau thereof or if the State or any of its subdivisions having jurisdiction shall at any time require documentary stamps to be affixed to this Deed of Trust or shall levy, assess, or charge any tax, assessment or imposition upon this Deed of Trust or the credit or indebtedness secured hereby or the interest of any Secured Party in the Premises or upon any Secured Party by reason of or as holder of any of the foregoing then, Grantor shall pay for such documentary stamps in the required amount and deliver them to Beneficiary or pay (or reimburse Beneficiary for) such taxes, assessments or impositions. Grantor agrees to exhibit to Beneficiary, at any time upon request, official receipts showing payment of all taxes, assessments and charges that Grantor is required or elects to pay under this paragraph. Grantor agrees to indemnify each Secured Party against liability on account of such documentary stamps, taxes, assessments or impositions. Section 2. Leases Affecting the Real Property. All future lessees under any Lease made after the date of recording of this Deed of Trust shall, at Beneficiary's option and without any further documentation, attorn to Beneficiary as lessor if for any reason Beneficiary becomes lessor thereunder, and, upon demand after an Event of Default, pay rent to Beneficiary, and Beneficiary shall not be responsible under such Lease for matters arising prior to Beneficiary becoming lessor thereunder; provided, however, Beneficiary shall not become lessor or obligated as lessor under any such Leases unless or until it shall elect in writing to do so. Section 3. Use of the Real Property. Grantor further covenants that (except as otherwise provided in the Loan Documents) it shall not institute or acquiesce in any proceeding to change the zoning classification of the Real Property, nor shall Grantor change the use of the 5 Mortgaged Property without the prior written consent of Beneficiary, which shall not be unreasonably withheld. Section 4. Indemnity. Grantor hereby agrees to indemnify and hold harmless the Secured Parties against (i) any and all transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of this Deed of Trust and the other Loan Documents, and (ii) any and all claims, actions, liabilities, costs and expenses of any kind or nature whatsoever (including reasonable fees and disbursements of counsel) that may be imposed on, incurred by, or asserted against any of them, in any way relating to or arising out of the Mortgaged Property, this Deed of Trust or any action taken or omitted by the Secured Parties hereunder, except to the extent that they resulted from the gross negligence or willful misconduct of any such Secured Party. Section 5. Insurance. Grantor shall, at its sole expense, obtain for, deliver to, assign and maintain for the benefit of Beneficiary, until the Obligations Secured are paid in full, insurance policies as specified in the Loan and Security Agreement. Each such policy shall name Beneficiary as loss payee under a standard mortgage endorsement. In the event of a casualty loss, the net insurance proceeds from such insurance policies shall be paid and applied in any order determined by Beneficiary in its reasonable discretion towards the Obligations Secured, unless otherwise provided in the Loan and Security Agreement. After an Event of Default (and subject to the terms of the Loan and Security Agreement), Beneficiary shall be entitled to adjust any casualty loss and Beneficiary shall be entitled to apply the proceeds thereof as provided in 0 of this Deed of Trust. Section 6. Real Property Taxes. Subject to good faith contest by the Grantor in accordance with the provisions of the Loan Documents, Grantor covenants and agrees to pay before due all real property taxes, assessments, ground rent, if any, water and sewer rents, fees and charges, levies, permit, inspection and license fees and other dues, charges or impositions, including all charges and license fees for the use of vaults, chutes and similar areas adjoining the Land, maintenance and similar charges and charges for utility services, in each instance whether now or in the future, directly or indirectly, levied, assessed or imposed on the Mortgaged Property or Grantor and whether levied, assessed or imposed as excise, privilege or property taxes ("Property Taxes"). Section 7. Condemnation Awards. Grantor hereby assigns to Beneficiary, as additional security, all awards of damage resulting from condemnation proceedings or the taking of or injury to the Real Property for public use, and Grantor agrees that the proceeds of all such awards shall be paid and applied in any order determined by Beneficiary in its reasonable discretion towards the Obligations Secured, unless otherwise provided in the Loan and Security Agreement. After an Event of Default (and subject to the terms of the Loan and Security Agreement), Beneficiary shall be entitled to direct any condemnation proceeding and Beneficiary shall be entitled to apply the proceeds thereof as provided in 0 of this Deed of Trust. Section 8. Event of Default. The following shall constitute an "Event of Default" under this Deed of Trust: 6 (a) The occurrence of an "Event of Default" as such term is defined in the Loan and Security Agreement; or (b) With respect to occurrences which do not constitute an Event of Default under the Loan and Security Agreement, any breach or default of the terms of this Deed or Trust by Grantor which is not cured within the following timeframes after receipt of written notice from Beneficiary: (i) ten (10) days for default or breach of any monetary obligation of Grantor set forth herein; or (ii) thirty (30) days for default or breach of any non-monetary obligation of Grantor set forth herein (or such longer period as may be reasonably required to cure; provided Grantor commences such cure within thirty (30) days and diligently prosecutes such cure to completion). Section 9. Remedies. Following an Event of Default, in addition to any rights and remedies provided for elsewhere in this Deed of Trust, the Loan and Security Agreement or in any other Loan Documents, and to the extent permitted by applicable law, subject to the terms of the Intercreditor Agreement, the following provisions shall apply: (a) Beneficiary's Power of Enforcement. Beneficiary may, at Beneficiary's sole discretion, (i) immediately cause the Trustee to sell the Mortgaged Property either in whole or in separate parcels, as prescribed by the laws of the State, under right of entry and power of sale, which power of sale (along with a right of entry) is hereby granted to Trustee to the full extent permitted by the law of the State, and thereupon, to make and execute to any purchasers thereof deeds of conveyance pursuant to applicable law; or (ii) immediately foreclose this Deed of Trust by judicial action pursuant to the law of the State. The court in which any proceeding is pending for the purpose of foreclosure of this Deed of Trust may, at once or at any time thereafter, either before or after sale, without notice and without requiring bond, and without regard to the solvency or insolvency of any person liable for payment of the Obligations Secured hereby, and without regard to the then value of the Mortgaged Property or the occupancy thereof as a homestead, appoint a receiver (the provisions for the appointment of a receiver and assignment of rents being an express condition upon which the obligations secured hereby are made) for the benefit of the Secured Parties, with power to collect the Rents, due and to become due, during such foreclosure suit and the full statutory period of redemption notwithstanding any redemption. The receiver, out of the Rents when collected, may pay costs incurred in the management and operation of the Real Property, prior and subordinate liens, if any, and taxes, assessments, water and other utilities and insurance, then due or thereafter accruing, and may make and pay for any necessary repairs to the Real Property, and may pay all or any part of the Obligations Secured or other sums secured hereby or any deficiency decree entered in such foreclosure proceedings. Upon or at any time after the filing of a suit to foreclose this Deed of Trust, the court in which such suit is filed shall have full power to enter an order placing Beneficiary in possession of the Real Property with the same power granted to a receiver pursuant to this subparagraph and with all other rights and privileges of a mortgagee-in possession under applicable law. (b) Beneficiary's Right to Enter and Take Possession, Operate and Apply Income. Beneficiary shall, at its option, have the right, acting through its agents or attorneys or a receiver, with process of law, to enter upon, take possession of, and, to the extent applicable, remove the Real Property and other Collateral located thereon, expel and remove any persons, goods, or chattels occupying or upon the same, to collect or receive all the Rents, and to manage and 7 control the same, and to lease the same or any part thereof, from time to time, and, after deducting all reasonable attorneys' fees and expenses, and all reasonable expenses incurred in the protection, care, maintenance, management and operation of the Real Property and other Collateral located thereon, distribute and apply the remaining net income in such order and to such of the Obligations Secured as Beneficiary may determine in its sole discretion (subject to the terms of the Loan and Security Agreement) or in accordance with any deficiency decree entered in any foreclosure proceedings. (c) Foreclosure by Power of Sale. Should Beneficiary elect to foreclose by exercise of the power of sale contained herein, Beneficiary will notify Trustee and will deposit with Trustee this Deed of Trust and evidence of the Obligations Secured and such receipts and evidence of expenditures made and secured hereby as Trustee may require. Trustee will exercise such power of sale in accordance with the following: (i) Upon receipt of such notice from Beneficiary, Trustee will cause to be recorded, mailed or delivered to Grantor such notice of default and election to sell as is then required by law and by this Deed of Trust. Trustee will, without demand on Grantor, after lapse of such time as may then be required by law and after recordation of such notice of default and after notice of sale has been given as required by law, sell the Mortgaged Property at the time and place of sale fixed by Trustee in said notice of sale, either as a whole, or in separate lots or parcels or items as Trustee deems expedient, and in such order as it may determine, at public auction, to the highest bidder for cash in lawful money of the United States payable at the time of sale. Trustee will deliver to such purchaser or purchasers thereof its good and sufficient deed or deeds conveying the property so sold, but without any covenant or warranty, express or implied. The recitals in such deed of any matters or facts will be conclusive proof of the truthfulness thereof. Any person, including without limitation Grantor, Trustee or Beneficiary, may purchase at such sale. Beneficiary, if it is the purchaser, may tender to Trustee evidence of the Obligations Secured at the amount owing thereon toward payment of the purchase price (or for endorsement of the purchase price as a payment on the Obligations Secured if the amount owing thereon exceeds the purchase price). Grantor expressly waives, to the extent waivable under law, any right of redemption after sale that Grantor may have at the time of sale or that may apply to the sale. (ii) After deducting all costs, fees and expenses of Trustee and of this Deed of Trust, including costs of evidence of title in connection with sale and reasonable Trustee's and attorneys' fees for conducting the sale, Trustee will apply the proceeds of sale to payment of all sums expended under the terms hereof and not then repaid (with accrued interest at the highest interest rate applicable to the Obligations Secured after an Event of Default), and to all other sums then secured hereby in such order as Beneficiary determines in its sole discretion (subject to the terms of the Loan and Security Agreement), and the remainder, if any, to the persons legally entitled thereto. (iii) At Beneficiary's direction, Trustee may postpone sale of all or any portion of the Mortgaged Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at the time fixed by the preceding postponement or by subsequently noticed sale, and 8 without further notice make such sale at the time fixed by the last postponement; or Trustee may, in its discretion, give a new notice of sale. Beneficiary may rescind any such notice of default at any time before Trustee's sale by executing a notice of rescission and recording the same. Section 10. Application of the Rents or Proceeds from Foreclosure or Sale. In any foreclosure of this Deed of Trust by judicial action, or any sale of the Mortgaged Property by advertisement, subject to the terms and provisions of the Loan and Security Agreement, there shall be allowed (and included in the decree for sale in the event of a foreclosure by judicial action) to be paid out of the Rents or the proceeds of such foreclosure proceeding and/or sale: (a) Obligations Secured. All of the Obligations Secured and other sums secured hereby which then remain unpaid; and (b) Other Advances. All other items advanced or paid by Beneficiary pursuant to this Deed of Trust; and (c) Costs, Fees and Other Expenses. All court costs, reasonable attorneys' and paralegals' fees and expenses, appraiser's fees, environmental audit, testing and survey fees, advertising costs, filing fees and transfer taxes, notice expenses, expenditures for documentary and expert evidence, stenographer's charges, publication costs, and costs (which may be estimated as to items to be expended after entry of the decree) of procuring all abstracts of title, title searches and examinations, title guarantees, title insurance policies, Torrens certificates and similar data with respect to title which Beneficiary in the reasonable exercise of its judgment may deem necessary. All such expenses shall become additional Obligations Secured hereby when paid or incurred by Beneficiary in connection with any proceedings, including but not limited to probate and bankruptcy proceedings, to which any Secured Party shall be a party, either as plaintiff, claimant or defendant, by reason of this Deed of Trust or any indebtedness hereby secured or in connection with the preparations for the commencement of any suit for the foreclosure, whether or not actually commenced, or sale by advertisement. The proceeds of any sale (whether through a foreclosure proceeding or Beneficiary's exercise of the power of sale) shall be distributed and applied in such order and to such of the Obligations Secured as Beneficiary may determine in its sole discretion, subject to the terms and provisions of the Loan and Security Agreement. Unless otherwise provided in the Loan and Security Agreement, Beneficiary shall apply the rents or proceeds received by such foreclosure proceeding and/or sale in any order determined by Beneficiary in its sole and absolute discretion. Section 11. Cumulative Remedies; Delay or Omission Not a Waiver. Each remedy or right of Beneficiary shall not be exclusive of but shall be in addition to every other remedy or right now or hereafter existing at law or in equity. No delay in the exercise or omission to exercise any remedy or right accruing on the occurrence or existence of any Event of Default shall impair any such remedy or right or be construed to be a waiver of any such Event of Default or acquiescence therein, nor shall it affect any subsequent Event of Default of the same or different nature. Every such remedy or right may be exercised concurrently or independently and when and as often as may be deemed expedient by Beneficiary. 9 Section 12. Beneficiary's Remedies against Multiple Parcels. If more than one property, lot or parcel is covered by this Deed of Trust, and if this Deed of Trust is foreclosed upon, or judgment is entered upon any Obligations Secured hereby, or if Beneficiary causes the Trustee to exercise its power of sale, execution may be made upon or Beneficiary may cause the Trustee to exercise its power of sale against any one or more of the properties, lots or parcels and not upon the others, or upon all of such properties or parcels, either together or separately, and at different times or at the same time, and execution sales or sales by advertisement may likewise be conducted separately or concurrently, in each case at Beneficiary's election. Section 13. No Merger. In the event of a foreclosure of this Deed of Trust or any other mortgage or trust deed securing the Obligations Secured, the Obligations Secured then due Beneficiary shall, at Beneficiary's option, not be merged into any decree of foreclosure entered by the court, and Beneficiary may concurrently or subsequently seek to foreclose one or more mortgages or deeds of trust which also secure said Obligations Secured. Section 14. Notices. All notices and other communications provided to any party hereto under this Deed of Trust shall be in writing and shall be given in the manner, within the time periods and to the addressees identified in the Loan and Security Agreement, provided that notices to the Trustee shall be addressed to Trustee at the address provided in the Preamble to this Deed of Trust. Section 15.Extension of Payments. Grantor agrees that, without affecting the liability of any person for payment of the Obligations Secured hereby or affecting the lien of this Deed of Trust upon the Mortgaged Property or any part thereof (other than persons or property explicitly released as a result of the exercise by Beneficiary of its rights and privileges hereunder), Beneficiary may at any time and from time to time, on request of the Grantor, without notice to any person liable for payment of any Obligations Secured, but otherwise subject to the provisions of the Loan and Security Agreement, extend the time, or agree to alter or amend the terms of payment of such Obligations Secured, provided, however, that such actions of Beneficiary are expressly limited by the terms and provisions of the Loan and Security Agreement. Grantor further agrees that any part of the security herein described may be released with or without consideration without affecting any other mortgage, deed of trust or other instrument now or hereafter given to secure the Obligations Secured or otherwise without affecting the remainder of the Obligations Secured or the remainder of the security. Section 16. Governing Law. The provisions of this Deed of Trust shall be governed by the laws of the State, without regard to conflicts of law principles. Section 17. Satisfaction of Deed of Trust. Upon full payment and performance of all the Obligations Secured, at the time and in the manner provided in the applicable Loan Document, or upon satisfaction of the conditions set forth in the Loan and Security Agreement for release of the Mortgaged Property from this Deed of Trust, then upon demand therefor following such payment or satisfaction of the conditions set forth in the Loan and Security Agreement for release of the Mortgaged Property, as the case may be, a satisfaction of mortgage or reconveyance of the Mortgaged Property shall promptly be provided by Beneficiary to Grantor. 10 Section 18. Successors and Assigns Included in Parties. This Deed of Trust shall be binding upon the Grantor and upon the successors, assigns and vendees of the Grantor and shall inure to the benefit of the Secured Parties' respective successors and assigns; all references herein to the Grantor and to Beneficiary shall be deemed to include their respective successors and assigns. Grantor's successors and assigns shall include, without limitation, a receiver, trustee or debtor in possession of or for the Grantor. Wherever used, the singular number shall include the plural, the plural shall include the singular, and the use of any gender shall be applicable to all genders. Notwithstanding anything to the contrary set forth herein, except as expressly permitted pursuant to the terms of the Loan and Security Agreement, Grantor shall not sell, transfer, pledge, encumber (except for Permitted Liens), create a security interest in, ground lease, or otherwise hypothecate (collectively "Transfer"), all or any portion of the Mortgaged Property without the prior written consent of Beneficiary. The consent by Beneficiary to any Transfer of any portion of the Mortgaged Property shall not be deemed to constitute a novation or a consent to any further Transfer or to waive the right of Beneficiary, at its option, to declare the indebtedness secured hereby immediately due and payable, without notice to Grantor or any other person or entity, upon any such attempted Transfer to which beneficiary shall not have consented. Section 19.Waiver of Appraisement, Valuation, Stay, Extension and Redemption Laws. Grantor agrees, to the full extent permitted by law, that at all times following an Event of Default, neither Grantor nor anyone claiming through or under it shall or will set up, claim or seek to take advantage of any appraisement, valuation, stay, homestead or extension laws now or hereafter in force, in order to prevent or hinder the enforcement or foreclosure of this Deed of Trust or the absolute sale of the Mortgaged Property or the final and absolute putting into possession thereof, immediately after such sale, of the purchaser thereat; and Grantor, for itself and all who may at any time claim through or under it, hereby waives, to the full extent that it may lawfully so do, the benefit of all such laws and any and all right to have the assets comprising the Mortgaged Property marshaled upon any foreclosure of the lien hereof and agrees that Trustee or any court having jurisdiction to foreclose such lien may sell the Mortgaged Property in part or as an entirety. To the full extent permitted by law, Grantor hereby irrevocably waives any and all statutory or other rights of redemption from sale under any order or decree of foreclosure of this Deed of Trust, on its own behalf and on behalf of each and every person acquiring any interest in or title to the Mortgaged Property subsequent to the date hereof. Grantor further waives, to the full extent it may lawfully do so, all statutory or other rights in its favor, limiting concurrent actions to foreclose this Deed of Trust and exercising other rights with respect to the Obligations Secured, including, without limitation, any right vested in Grantor or any affiliate to limit the right of Beneficiary to pursue or commence concurrent actions against Grantor or any such affiliate or any property owned by any one or more of them. Section 20.Interpretation with Other Documents. Notwithstanding anything in this Deed of Trust to the contrary: (a) in the event of a conflict or inconsistency between this Deed of Trust and the Loan and Security Agreement, the provisions of the Loan and Security Agreement shall govern; and (b) to the extent set forth in the Loan and Security Agreement, the exercise of any right or remedy by Beneficiary under this Deed of Trust shall be done in accordance with and is subject to the terms and provisions of the Loan and Security Agreement. 11 Section 21. Future Advances. This Deed of Trust is given in part for the purpose of securing loan advances which Beneficiary may make to or for the benefit of Grantor as Borrower pursuant and subject to the terms and provisions of the Loan and Security Agreement, which may include future advances under one or more revolving credit lines not to exceed a maximum aggregate principal amount at any one time outstanding of $30,000,000.00 (which limit shall not include the Secured Parties' costs, fees and expenses set forth in Section 10 of this Deed of Trust). The parties hereto intend that, in addition to any other debt or obligation secured hereby, this Deed of Trust shall secure unpaid balances of revolving credit loan advances made after this Deed of Trust is delivered to the offices in which mortgages are recorded in the applicable county of the State and in such event, such revolving credit future advances shall be secured to the same extent as if such advances were made on the date hereof, although there may be no credit or advance made at the time of execution hereof, although there may be no indebtedness outstanding at the time any advance is made and although such advance may from time to time be repaid to zero balance and thereafter re-advanced. Such loan advances may or may not be evidenced by guarantees or notes executed pursuant to the Loan and Security Agreement. Section 22.Invalid Provisions to Affect No Others. Wherever possible, each provision of this Deed of Trust shall be interpreted in such manner as to be effective and valid under applicable law, but in the event that any of the covenants, agreements, terms or provisions contained in this Deed of Trust shall be invalid, illegal or unenforceable in any respect, the validity of the remaining covenants, agreements, terms or provisions contained herein or in the Loan and Security Agreement shall not be in any way affected, prejudiced or disturbed thereby. In the event that the application of any of the covenants, agreements, terms or provisions of this Deed of Trust is held to be invalid, illegal or unenforceable, those covenants, agreements, terms and provisions shall not be in any way affected, prejudiced or disturbed when otherwise applied. Section 23. Changes. Neither this Deed of Trust nor any term hereof may be changed, waived, discharged or terminated orally, or by any action or inaction, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. To the extent permitted by law, any agreement hereafter made by Grantor and Beneficiary relating to this Deed of Trust shall be superior to the rights of the holder of any intervening lien or encumbrance. Section 24. Consent to Jurisdiction; Waiver of Immunities. The Grantor hereby acknowledges and agrees that: (a) With respect to the provisions of this Deed of Trust regarding the creation, perfection and enforcement of the liens and security interests herein granted, Grantor irrevocably submits to the jurisdiction of any state or federal court sitting in the State, in any action or proceeding arising out of or relating to this Deed of Trust, and the Grantor hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such State's state or federal court. The Grantor hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding. The Grantor hereby irrevocably consents to the service of any and all process in any such action or proceeding by the mailing of copies of such process to the Grantor at its address provided in the Preamble to this Deed of Trust along with a copy to the addressees provided in the Loan and Security Agreement. The Grantor agrees that a final judgment in any such action 12 or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (b) Nothing in this Section shall affect the right of Beneficiary to serve legal process in any other manner permitted by law or affect the right of Beneficiary to bring any action or proceeding against the Grantor or its property arising out of or relating to this Deed of Trust or any other of the Loan Documents in any court having jurisdiction under the provisions therein or under applicable law. (c) To the extent that the Grantor has or hereafter may acquire any immunity from the jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, the Grantor hereby irrevocably waives such immunity with respect to its obligations under this Deed of Trust. Section 25. Time of Essence. Time is of the essence with respect to the provisions of this Deed of Trust. Section 26. No Strict Construction. The parties hereto have participated jointly in the negotiation and drafting of this Deed of Trust. In the event an ambiguity or question of intent or interpretation arises, this Deed of Trust shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Deed of Trust. Section 27. Beneficiary's Right to Appear. Beneficiary shall have the right to appear in and defend any legal proceeding brought regarding the Mortgaged Property and to bring any legal proceeding, in the name and on behalf of Grantor or in Beneficiary's name, that Beneficiary, in its sole discretion, determines should be brought to protect Beneficiary's or the Secured Parties' interest in the Mortgaged Property. Section 28. Savings Clause. Any provision of this Deed of Trust that is prohibited or unenforceable in any jurisdiction, will, 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 will not invalidate or render unenforceable such provision in any other jurisdiction. Section 29. Trustee Provisions. (a) Trustee accepts this Deed of Trust and the Trust created hereby upon execution and delivery of this Deed of Trust. Except as provided by law, Trustee is not obligated to notify any party of a pending sale under this Deed of Trust or of a proceeding in which any Secured Party or Trustee is a party. (b) Trustee shall be under no duty to take any action hereunder except as expressly required herein or by law, or to perform any act which would involve Trustee in any expense or liability or to institute or defend any suit in respect hereof, unless properly indemnified to Trustee's reasonable satisfaction. Trustee, by acceptance of this Deed of Trust, covenants to perform and fulfill the trusts herein created, being liable, however, only for willful 13 negligence or misconduct, and hereby waives any statutory fee and agrees to accept reasonable compensation, in lieu thereof, for any services rendered by Trustee in accordance with the terms hereof. Trustee may resign at any time upon giving thirty (30) days' notice to Grantor and to Beneficiary. Beneficiary in its sole and absolute discretion and with or without cause may unilaterally remove Trustee at any time or from time to time and select a successor trustee. In the event of the death, removal, resignation, refusal to act, or inability to act of Trustee, or in its sole and absolute discretion for any reason whatsoever Beneficiary may, without notice and without specifying any reason therefor and without applying to any court, select and appoint a successor trustee, by an instrument recorded wherever this Deed of Trust is recorded and all powers rights, duties and authority of Trustee, as aforesaid, shall thereupon become vested in such successor and without conveyance of the Mortgaged Property, the successor trustee shall succeed to all the title, powers, and duties conferred upon Trustee herein and by applicable laws as if the successor had been named Trustee at the time this Deed of Trust was recorded. Such substitute trustee shall not be required to give bond for the faithful performance of the duties of Trustee hereunder unless required to do so by Beneficiary. Grantor shall pay all costs, fees and expenses incurred by Trustee and Trustee's agents and counsel in connection with the performance by Trustee of Trustee's duties hereunder and all such costs, fees and expenses shall be secured by this Deed of Trust. Section 30. Additional Provisions Pertaining to State Laws. (a) Proof of Default. In the event of a sale of the Mortgaged Property or any part thereof upon an Event of Default and in accordance with applicable law, and the execution of a deed therefor, such deed and the recitals therein (i) of default, (ii) of recording the notice of breach and election of sale, (iii) of the elapsing of the required time (if any) between the foregoing recording and the following notice, (iv) of the giving of notice of sale, and (v) of a demand by Beneficiary, or its successors or assigns, will be effective and conclusive against Grantor, its successors and assigns, and all other persons; and the receipt for the purchase money recited or contained in any deed executed to the purchaser as aforesaid will be sufficient to discharge such purchaser from any and all obligations to ensure the proper application of the purchase money. (b) Additional Security Agreement Provisions. Grantor shall (and Grantor upon the occurrence and during the continuation of an Event of Default hereunder irrevocably constitutes and appoints Beneficiary the attorney-in-fact of Grantor to) execute, deliver and, if appropriate, file with the appropriate filing officer or office such security agreements, financing statements, continuation statements or other instruments as Beneficiary may request or require in order to impose, perfect or continue the perfection of the security interests created hereby in those portions of the Mortgaged Property that are personal property subject to the Code (the "Personal Property Collateral"). Grantor will pay (or reimburse Beneficiary for) all costs of filing such statements and renewals and releases thereof and will pay all reasonable costs and expenses of any record searches for financing statements that Beneficiary may reasonably require. Upon the occurrence of any Event of Default hereunder, Beneficiary will have the right to access and remove any of the Personal Property Collateral and to cause the same to be sold at any one or more public or private sales as permitted by the Code or other applicable law, and Beneficiary will further have all other rights and remedies, whether at law, in equity or by statute, as are available to secured creditors under the Code or other applicable law. Any such 14 disposition may be conducted by an employee or agent of Beneficiary or Trustee. Any person, including both Grantor and Beneficiary, will be eligible to purchase any part or all of such Personal Property Collateral at any such disposition. Grantor, upon demand of Beneficiary, will assemble the Personal Property Collateral and make it available to Beneficiary at the Land, a place which is hereby deemed to be reasonably convenient to Beneficiary and Grantor. Beneficiary will give Grantor at least five (5) business days' prior written notice of the time and place of any public sale or other disposition of such Personal Property Collateral or of the time on or after which any private sale or any other intended disposition is to be made, and if such notice is sent to Grantor in the manner provided for the mailing of notices herein, Grantor acknowledges that such notice will be and is reasonable notice to Grantor. (c) Actions Affecting Personal Property Collateral. Grantor, at Grantor's sole cost and expense, will appear in, defend and contest any action or proceeding purporting to affect any of the Personal Property Collateral or the security interests therein created by this Deed of Trust or any of the other Loan Documents or the rights or powers of Trustee or Beneficiary hereunder or thereunder. Grantor will pay all reasonable costs and expenses incurred by Trustee or Beneficiary, including the cost of evidence of title and attorneys' fees and costs, in any such action or proceeding in which Trustee or Beneficiary may appear. (d) Request for Notices. Grantor requests that copies of any notice of default and any notice of sale hereunder be mailed to it at the address provided in the Preamble to this Deed of Trust. (e) Beneficiary Statements. For each statement of accounting as to the obligations secured hereby furnished at Grantor's request, Grantor shall pay Beneficiary the fee provided for pursuant to Section 2943(e)(6) of the California Civil Code, as amended from time to time. Grantor also will pay the charges of Beneficiary pursuant to Section 2941(e)(1) of the California Civil Code, as amended from time to time, for any other service rendered to Grantor, or on its behalf, in connection with this Deed of Trust or the obligations secured hereby, including, without limitation the delivery to an escrow holder of a request for full or partial reconveyance of this Deed of Trust or charges due to transferring or transmitting records pertaining to this Deed of Trust and the Obligations Secured to a new owner of the Mortgaged Property. (f) Code of Civil Procedure Section 736. Beneficiary will have all of the rights, privileges and remedies of a secured lender under Section 736 of the California Code of Civil Procedure, as amended from time to time. (g) Code of Civil Procedure Section 726.5. In accordance with California Code of Civil Procedure Section 726.5, Beneficiary may waive its lien against the Mortgaged Property or any portion thereof, to the extent such property is found to be environmentally impaired, and may exercise any and all rights and remedies of an unsecured creditor against Grantor and all of Grantor's assets and property for the recovery of any deficiency, including, without limitation, seeking an attachment order under California Code of Civil Procedure Section 483.010. No such waiver shall be final or binding on Beneficiary unless and until a final money judgment is obtained against Grantor. As between Beneficiary and Grantor, for purposes of California Code of Civil Procedure Section 726.5, Grantor shall have the burden of proving that the release or 15 threatened release was not knowingly or negligently caused or contributed to, or knowingly or willfully permitted or acquiesced to by Grantor or any related party (or any Subsidiary, affiliate or agent of Grantor or any related party) and that Grantor made written disclosure thereof to Beneficiary or that Beneficiary otherwise obtained actual knowledge thereof prior to the making of the Loan and Security Agreement. Notwithstanding anything to the contrary contained in this Deed of Trust or any of the Loan Documents, Grantor shall be fully and personally liable for all judgments and awards entered against Grantor pursuant to California Code of Civil Procedure 726.5 and such liability shall not be limited by the original principal amount of the obligations secured by this Deed of Trust. Grantor's obligations hereunder shall survive the foreclosure, deed in lieu of foreclosure, release, reconveyance or any other transfer of the Mortgaged Property or this Deed of Trust. For the purposes of any action brought under this Deed of Trust, Grantor hereby waives the defense of laches and any applicable statute of limitations. For purposes of California Code of Civil Procedure 726.5, the acts, knowledge and notice of each "726.5 Party" shall be attributed to and be deemed to have been performed by the party or parties then obligated on or liable for payment of the indebtedness. As used herein, "726.5 Party" shall mean Grantor, any partner thereof, any successor owner of Grantor of all or any portion of the Mortgaged Property, any Subsidiary or related party of Grantor or any such successor and any affiliate or agent of such party or any such related party. (h) Code of Civil Procedure Section 1265.225(a). Grantor hereby unconditionally and irrevocably waives all rights of a property owner under the provisions of California Code of Civil Procedure Section 1265.225(a), or any successor statute, providing for the allocation of condemnation proceeds between a property owner and a lienholder. (i) Obligations Remain. The provisions of this Deed of Trust shall remain in full force and effect notwithstanding (i) any partial release of Grantor from any liability with respect to the Obligations Secured; or (ii) any partial release or subordination of any real or personal property now or hereafter held by Beneficiary as security for the performance of the Obligations Secured. (j) Waiver. (i) Grantor expressly waives any and all benefits which might otherwise be available to Grantor under California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2849, 2850, 2899 and 3433. (ii) Grantor hereby waives any and all defenses, including but not limited to Grantor's defense of estoppel discussed in Union Bank vs. Gradsky (1968) 265 Cal.App.2d 40, based upon a foreclosure against all or any part of the real property security for the indebtedness evidenced by the Loan and Security Agreement and the Loan Documents pursuant to the power of sale contained in this Deed of Trust or any of the additional deeds of trust as opposed to proceeding by way of judicial foreclosure. Grantor waives all rights and defenses arising out of an election of remedies by Beneficiary, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed Grantor's rights of subrogation and reimbursement by the operation of Section 580d of the Code of Civil Procedure or otherwise. 16 (iii) Grantor hereby waives all rights and defenses that Grantor may have because any of Grantor's debt is secured by real property. This means, among other things: (i) Beneficiary may collect from Grantor without first foreclosing on any real or personal property collateral pledged by Grantor; and (ii) if Beneficiary forecloses on any real property collateral pledged by Grantor (A) the amount of debt may be reduced only by the price for which the collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price, and (B) Beneficiary may collect from Grantor even if Beneficiary, by foreclosing on the real property collateral, has destroyed any right Grantor may have to collect from any other party. This is an unconditional and irrevocable waiver of any rights and defenses Grantor may have because Grantor's debt is secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure. (iv) In the case of a power of sale foreclosure under this Deed of Trust or any other deed of trust entered into by the parties as security for the Obligations Secured, the fair market value of the real property collateral shall be conclusively deemed to be the amount of the successful bid at the foreclosure sale. Grantor waives any rights or benefits it may now or hereafter have to a fair value hearing under Section 580a of the California Code of Civil Procedure. Beneficiary shall have absolutely no obligation to make a bid at any foreclosure sale, but rather may make no bid or bid any amount which Beneficiary, in its sole discretion, deems appropriate. (v) Grantor hereby irrevocably authorizes Beneficiary, at Beneficiary's sole discretion, to apply any and all amounts received by Beneficiary in repayment of the Obligations Secured first to amounts which are guaranteed pursuant to the terms of the Deed of Trust and then to amounts which are not guaranteed pursuant to the terms of the Deed of Trust, if any. Grantor hereby waives any and all rights that it has or may hereafter have under Section 2822 of the California Civil Code which provides that if a guarantor is "liable upon only a portion of an obligation and the principal provides partial satisfaction of the obligation, the principal may designate the portion of the obligation that is to be satisfied." (vi) Beneficiary acknowledges that the provisions of this Section 30(j) are intended to constitute a waiver of any rights and defenses Grantor may now or hereafter have as a "guarantor" to the extent this Deed of Trust is construed to be in whole or in part a guaranty of any of its Subsidiaries' obligations under the Loan and Security Agreement or the Loan Documents. (k) Attorneys' Fees. Subject to the terms of the Loan and Security Agreement, if the Obligations Secured are not paid when due or if any other Event of Default occurs, Grantor shall pay all costs of enforcement and collection, including reasonable attorneys' fees, whether or not such enforcement and collection includes a legal proceeding. As used in this Deed of Trust, the term "attorneys' fees" or "attorneys' fees and costs" will mean the fees and expenses of counsel to the parties hereto, which may include printing, photostating, duplicating and other expenses, air freight charges, and fees billed for law clerks, paralegals, librarians and others not admitted to the bar but performing services under the supervision of an attorney. The terms "attorneys' fees" or "attorneys' fees and costs" will also include all such fees and expenses incurred with respect to appeals, arbitrations, bankruptcy proceedings and any post-judgment 17 proceedings to collect any judgment, and whether or not any legal proceeding is brought with respect to the matter for which said fees and expenses were incurred. (l) Controlling Provisions. In the event of any conflict between this 0 and any other provisions of this Deed of Trust (other than Section 20 which shall govern), the provisions of this 0 will control. (m) Additional Remedies. Without limiting any other provisions of this Deed of Trust but subject to the terms of the Loan and Security Agreement, Beneficiary shall have the following additional rights and remedies upon the occurrence of an Event of Default: (i) Beneficiary may deliver to Trustee a written declaration of default and demand for sale, and a written notice of default and election to cause Grantor's interest in the Mortgaged Property to be sold, which notice Trustee or Beneficiary shall cause to be duly filed for record in the Official Records of the county in which the Mortgaged Property is located. (ii) Beneficiary may exercise all other rights and remedies provided herein, in the Loan and Security Agreement or other document or agreement now or hereafter securing all or any portion of the obligations secured hereby, or by law. (iii) Should Beneficiary elect to foreclose by exercise of the power of sale herein contained, Beneficiary shall notify Trustee and shall deposit with Trustee this Deed of Trust and such receipts and evidence of expenditures made and secured hereby as Trustee may require. (1) Upon receipt of such notice from Beneficiary, Trustee shall cause to be recorded, published and delivered to Grantor such notice of default and election to sell ("Notice of Sale") as then required by applicable law of the State and by this Deed of Trust. Trustee shall, without demand on Grantor, after lapse of such time as may then be required by applicable law and after recordation of such Notice of Sale having been given as required by applicable laws, sell the Mortgaged Property at the time and place of sale fixed by it in said Notice of Sale, either as a whole, or in separate lots or parcels or items as Trustee shall deem expedient, and in such order as it may determine, at public auction to the highest bidder for cash in lawful money of the United States payable at the time of sale. Trustee shall deliver to such purchaser or purchasers thereof its good and sufficient deed or deeds conveying the property so sold, but without any covenant or warranty, express or implied. Provided, however, Grantor covenants to warrant and defend the title to the property so sold. The recitals in such deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including Grantor, Trustee or Beneficiary, may purchase at such sale. (2) Trustee shall apply the proceeds of sale as follows: FIRST, to the expenses of such sale and of all proceedings in connection therewith, including, without limitation, reasonable fees of the Beneficiary's attorney (and attorney fees and expenses shall become absolutely due and payable whenever foreclosure is commenced), court costs, advertising expenses, auctioneer's allowance, the expenses, if any, required to correct any irregularity in the title, premium for the Trustee's bond, auditors fee, and all other costs and expenses of entering 18 upon, taking possession of, operating or managing the Mortgaged Property reasonably incurred by the Beneficiary and the Trustee; then SECOND, to all expenses incurred in and about the protection of the Mortgaged Property and execution of this Deed of Trust and all insurance premiums, liens, assessments, taxes, and charges including utility charges advanced by the Beneficiary, and interest thereon from the date of advancement; then THIRD, in accordance with the terms of the Loan and Security Agreement, to payment of the Obligations Secured and accrued interest thereon; and FINALLY the remainder, if any, shall be paid to Grantor, or to the person or entity lawfully entitled thereto, upon the delivery and surrender to the purchaser of possession of the Mortgaged Property, less costs and expenses of obtaining possession. (iv) Subject to applicable law, Trustee may postpone sale of all or any portion of the Mortgaged Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement or subsequently noticed sale, and without further notice make such sale at the time fixed by the last postponement, or may, in its discretion, give a new notice of sale. (v) Upon the occurrence of an Event of Default, Beneficiary may proceed, in any sequence: (a) to exercise its rights hereunder with respect to all or any portion of the Mortgaged Property and all or any portion of the Personal Property; and (b) to exercise its rights under this Deed of Trust with respect to all or any portion of the Personal Property Collateral in accordance with the provisions of the Code and applicable law. (n) Accommodation Provisions. Grantor has executed and delivered this Deed of Trust as an accommodation instrument with the intent of subjecting its interests in the Mortgaged Property to the lien of this Deed of Trust as security for the Obligations Secured; accordingly Grantor hereby agrees, to the fullest extent permitted by law, not to assert or take advantage of: (i) Any right to require Beneficiary to proceed against Borrower or any guarantor under the Loan Documents, or any other person or to proceed against or exhaust any other security held by Beneficiary at any time or to pursue any other remedy in Beneficiary's power before exercising any right or remedy under this Deed of Trust. (ii) Any defense that may arise by reason of: (1) Beneficiary's failure to proceed against any of Borrower's property, or any other party against whom Beneficiary might assert a claim, before proceeding against Grantor under this Deed of Trust; or (2) The release, suspension, discharge or impairment of any of Beneficiary's rights against Borrower or any other party against whom Beneficiary might assert a claim, whether such release, suspension, discharge or impairment is explicit, tacit or inadvertent; or (3) Beneficiary's failure to pursue any other remedies available to Beneficiary that would reduce the burden of the indebtedness secured hereby on Grantor's interests in the Mortgaged Property; or 19 (4) Any extension of the time for the payment or performance of any of Borrower's obligations under the Loan and Security Agreement or any of the Loan Documents; or (5) The incapacity or lack of authority of Borrower or any person or persons; or (6) The failure of Beneficiary to file or enforce a claim against the estate (in either administration, bankruptcy or any other proceedings) of any owner or officer of any of Borrower or any other person or persons. (iii) Subject to the terms of the Loan and Security Agreement and this Deed of Trust, and except as required by law, the sufficiency of any demand, protest and/or notice of any kind, including, without limitation, the following notices: (1) Notice of the evidence, creation or incurring of any new or additional indebtedness or obligation by the Borrower (provided that such indebtedness or obligation is not secured by this Deed of Trust); or (2) Notice of any amendment of any of the Loan Documents; or (3) Notice of any action or non-action on the part of Borrower or Beneficiary in connection with any obligation or evidence of indebtedness held by Beneficiary as collateral pursuant to the Loan Documents; or (4) Notice of payment or non-payment by Borrower of the indebtedness secured by this Deed of Trust. (iv) Any right to assert against Beneficiary any defense arising by reason of any claim or defense based upon an election of remedies by Beneficiary to foreclose, either by judicial foreclosure or by exercise of the power of sale, this Deed of Trust, which in any manner impairs, reduces, releases, destroys or extinguishes Grantor's subrogation rights, rights to proceed against any Guarantor for reimbursement, or any other rights of Grantor to proceed against any other person or security. Grantor waives all rights and defenses to enforcement of all or any part of the indebtedness secured hereby which defenses are based on an election of remedies by Beneficiary, even though the election of remedies, such as nonjudicial foreclosure with respect to this Deed of Trust, may destroy Grantor's rights of subrogation and reimbursement against any Guarantor by operation of Section 580d of the California Code of Civil Procedure. (v) Any rights arising because of Grantor's payment or satisfaction of the indebtedness secured hereby against any guarantor or any other party obligated to pay any of the indebtedness secured hereby, by way of contribution or reimbursement or otherwise, but only until the indebtedness secured hereby is paid in full. (vi) Any duty on the part of Beneficiary to disclose to Grantor any default under the Loan and Security Agreement or any other Loan Document. 20 (vii) Any duty on the part of Beneficiary to disclose to Grantor any facts Beneficiary may now know or may hereafter know about Borrower or any successors in interest (if any) regardless of whether Beneficiary (i) has reason to believe that any such facts materially increase the risk beyond the risk which Grantor intends to assume by executing this Deed of Trust, (ii) has reason to believe that these facts are unknown to Grantor, or (iii) has a reasonable opportunity to communicate such facts to Grantor, it being understood and agreed that Grantor is fully responsible for being and keeping informed of the financial condition of Borrower or any successor in interest of Borrower and of all circumstances bearing on the risk of nonpayment of any indebtedness of Borrower to Beneficiary that is secured hereby. (viii) Any right to object to the release of any portions of the Mortgaged Property from the lien of this Deed of Trust notwithstanding the fact that such releases may be made without Beneficiary having received any or adequate consideration therefor. (o) Grantor further agrees that with respect to any obligation secured hereby Beneficiary may, in such manner and upon such terms and at such times as Beneficiary deems best and without demand or notice to or consent of Grantor (i) release any party now or hereafter liable for the performance of any such obligation, (ii) extend the time for the performance of any such obligation, (iii) accept additional security therefor, and (iv) alter, substitute or release any property securing such performance. (p) Before executing this Deed of Trust, Grantor has made such independent legal and factual inquiries and investigations as Grantor deemed necessary or desirable with respect to Grantor's and Guarantors' ability to honor all of Grantor's covenants and agreements with Beneficiary, and Grantor has relied solely on said independent inquiries and investigations preparatory to entering into this Deed of Trust. GRANTOR PLEASE NOTE: UPON THE OCCURRENCE OF AN EVENT OF DEFAULT, CALIFORNIA PROCEDURE PERMITS THE TRUSTEE TO SELL THE COLLATERAL AT A SALE HELD WITHOUT SUPERVISION BY ANY COURT AFTER EXPIRATION OF A PERIOD PRESCRIBED BY LAW. UNLESS YOU PROVIDE AN ADDRESS FOR THE GIVING OF NOTICE, YOU MAY NOT BE ENTITLED TO NOTICE OF THE COMMENCEMENT OF SALE PROCEEDINGS. BY EXECUTION OF THIS DEED OF TRUST, YOU CONSENT TO SUCH PROCEDURE. THE SECURED PARTIES URGE YOU TO GIVE PROMPT NOTICE OF ANY CHANGE IN YOUR ADDRESS SO THAT YOU MAY RECEIVE PROMPTLY ANY NOTICE GIVEN PURSUANT TO THIS DEED OF TRUST. THE GRANTOR HEREBY DECLARES AND ACKNOWLEDGES THAT THE GRANTOR HAS RECEIVED, WITHOUT CHARGE, A TRUE COPY OF THIS DEED OF TRUST. 21 IN WITNESS WHEREOF, this instrument is executed as of the day and year first above written by the person or persons identified below on behalf of Grantor (and said person or persons hereby represent that they possess full power and authority to execute this instrument). GRANTOR: HUDSON RESPIRATORY CARE INC., a California corporation By -------------------------------------- Name: ----------------------------------- Title: ---------------------------------- Signature Page Deed of Trust STATE OF CALIFORNIA ) ) ss COUNTY OF ) On ______________________, before me, ___________________________________, Notary Public, personally appeared ________________________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ---------------------------------------- [SEAL] Signature of Notary Public Acknowledgement Deed of Trust Exhibit A --------- Legal Description for 27711 Diaz Road, Temecula, California 92589 The land referred to in this Deed of Trust is situated in the State of California, County of RIVERSIDE and is described as follows: PARCEL 1: PARCEL 2 AS SHOWN ON PARCEL MAP IN THE CITY OF TEMECULA, IN THE COUNTY OF RIVERSIDE, STATE OF CALIFORNIA, RECORDED IN BOOK 1, PAGE 97 OF PARCEL MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF RIVERSIDE COUNTY, STATE OF CALIFORNIA. PARCEL 2: AN EASEMENT FOR ACCESS PURPOSES TO BE USED IN COMMON WITH OTHERS IN AND OVER A STRIP OF LAND OVER THAT PORTION OF THE RANCHO TEMECULA IN THE COUNTY OF RIVERSIDE, STATE OF CALIFORNIA, WHICH RANCHO WAS GRANTED BY THE GOVERNMENT OF THE UNITED STATES TO LUIS VIGNES BY PATENT DATED JANUARY 18, 1860, AND RECORDED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO, STATE OF CALIFORNIA, IN LIBRA 1, OF PATENTS, AT PAGE 37 THEREOF, BEING A STRIP OF LAND 50.00 FEET WIDE IN THE SOUTHERLY LINE OF WHICH IS DESCRIBED AS FOLLOWS: BEGINNING AT THE SOUTHWESTERLY TERMINUS OF THAT CERTAIN COURSE DESCRIBED AS NORTH 47DEG. 00' 00" EAST 920.58 FEET ALONG THE NORTHERLY BOUNDARY LINE OF PARCEL 1 OF SAID PARCEL MAP; THENCE SOUTH 47DEG. 00' 00" WEST 105.00 FEET. -1- EX-10.39 24 dex1039.txt FORM OF UNSECURED SENIOR PROMISSORY NOTE Exhibit 10.39 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS. $____________ Temecula,California ___________, 2003 UNSECURED SENIOR PROMISSORY NOTE DUE 2008 Hudson Respiratory Care Inc., a California corporation (the "Maker"), for value received, promises to pay to_________________________ (the "Holder") the principal sum of ______________________ ($__________) on March 31, 2008 (the "Maturity Date") as provided herein. The Maker also promises to pay interest from the date of this Note until payment in full on the unpaid principal balance as set forth in Section 1 below. 1. Interest. The interest rate payable hereunder shall be 12% per annum, computed on the basis of the actual number of days elapsed and a year of 365 days. All interest hereunder shall begin to accrue on May 14, 2002 and shall not be paid currently but shall accrue, such accruing amount to be compounded quarterly as of the end of each calendar quarter commencing December 31, 2002, and be payable in full on the Maturity Date in cash. 2. Prepayments. The principal balance of, and accrued interest on, this Note may be prepaid at any time, in whole or in part, without premium or penalty. Any such prepayment shall be first applied to the payment of any accrued interest and then to the unpaid balance of the principal amount. 3. Events of Default. If any of the following events (each, an "Event of Default") shall occur: (a) the Maker shall fail to make any payment hereunder when due and payable; or (b) the Maker shall fail to make any payment under any indebtedness of the Maker that is outstanding in an aggregate principal amount of at least $15,000,000 due and payable either (i) at the final stated maturity of such indebtedness or (ii) at any other time if, as a result of such nonpayment, the maturity of such indebtedness is accelerated; or (c) the Maker shall generally fail to pay, or admit in writing its inability to pay, its debts as they become due, or shall voluntarily commence any proceeding or file any petition under any bankruptcy, insolvency or similar federal, state or foreign law or seeking dissolution, liquidation or reorganization or the appointment of a receiver, trustee, custodian or liquidator for it or a substantial portion of its property, assets or business or to effect a plan or other arrangement with its creditors, or shall file any answer admitting the jurisdiction of the court and the material allegations of an involuntary petition filed against it in any bankruptcy, insolvency or similar proceeding, or shall be adjudicated bankrupt, or shall make a general assignment for the benefit of creditors, or shall consent to, or acquiesce in the appointment of, a receiver, trustee, custodian or liquidator for a substantial portion of its property, assets or business, or shall by any act or failure to act indicate its consent to or approval of any of the foregoing, or if any corporate action is taken by the Maker for the purpose of effecting any of the foregoing; or (d) involuntary proceedings or an involuntary petition shall be commenced or filed against the Maker under any bankruptcy, insolvency or similar federal, state or foreign law or seeking the dissolution, liquidation or reorganization of it or the appointment of a receiver, trustee, custodian or liquidator for it or of a substantial part of its property, assets or business, and such proceedings or petition shall not be dismissed within 60 days; or any writ, judgment, tax lien, warrant of attachment, execution or similar process shall be issued or levied against a substantial part of its property, assets or business, and such writ, judgment, lien, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded, within 60 days after commencement, filing or levy, as the case may be, or any order for relief shall be entered in any such proceeding; or any winding-up, dissolution, liquidation or reorganization of the Maker; then, and in every such event, and at any time thereafter during the continuance of such event, (i) in the case of an Event of Default under clauses (a) and (b), the Holders of a majority of the outstanding principal amount of all Notes may declare all principal and accrued interest and all other fees and other obligations of the Maker under the Notes to be due and payable, and (ii) in the case of an Event of Default under clauses (c) or (d), all principal and accrued interest on all outstanding Notes and all fees and other obligations of the Maker due under the Notes will be immediately due and payable without any further declaration or other act on the part of the Holders, in either case without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Maker. 4. Series of Notes; Actions by Majority. This Note is one of a series of Notes of like tenor issued in an original aggregate principal amount of up to $12,000,000. When actions are specified herein as happening upon the decision of holders of a majority in outstanding principal amount of the Notes, such action shall be evidenced by a writing executed by such Holders and delivered to all Holders of Notes and shall be the act of and binding on all Holders. 5. Costs and Expenses. The Maker promises to pay all costs and expenses, including reasonable attorneys' fees, incurred by the Holder in connection with the enforcement of, or collection of any amounts due under, this Note. 6. Successors and Assigns. This Note shall be binding upon, and shall inure to the benefit of, the Maker and the Holder and their respective successors and assigns; provided, however, that neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by the Maker without the prior written consent of the Holder except in connection with an assignment in whole to a successor Maker to the Maker in a merger of the Maker or a sale of all or substantially all of the Maker's property and assets and then only if the Holder's rights hereunder are not impaired. 2 7. Modifications and Amendments; Reissuance of Note. This Note may only be modified, amended, or terminated (other than by payment in full) by an agreement in writing signed by the Maker and the Holders of a majority in principal amount of all Notes. No waiver of any term, covenant or provision of this Note shall be effective unless given in writing by the Holders of a majority in principal amount of all Notes. Upon receipt of evidence reasonably satisfactory to the Maker of the loss, theft, destruction, or mutilation of this Note and of an agreement of indemnity reasonably satisfactory to the Maker, and upon surrender or cancellation of this Note, if mutilated, the Maker will make and deliver a new Note of like tenor in lieu of such lost, stolen, destroyed, or mutilated Note. 8. Remedies Cumulative. Each and every right, power and remedy herein given to the Holder, or otherwise existing, shall be cumulative and not exclusive and be in addition to all other rights, powers and remedies now or hereafter granted (including, without limitation, other rights of set-off under applicable law) or otherwise existing. Each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by the Holder. 9. Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by facsimile, hand or by messenger (which may be by overnight delivery service), addressed (a) if to the Maker, at the address and facsimile number set forth on the signature page to this Note or at such other address and facsimile number as the Maker shall have furnished to the Holder by first class mail, or (b) if to the Holder, at the address specified at the foot of this Note, or at such other address and facsimile number as the Holder shall have furnished to the Maker by first class mail. 10. Waiver. The Holder shall not by any act (except by a written instrument in accordance with the immediately preceding paragraph), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Holder, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Holder of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Holder would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 11. Governing Law. This Note shall be construed in accordance with the laws of the State of California, without regard to the conflicts of law provisions of the State of California or of any other state. 12. Jurisdiction. ALL LEGAL ACTIONS OR PROCEEDINGS BROUGHT AGAINST THE MAKER WITH RESPECT TO THIS NOTE MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS NOTE THE MAKER 3 ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, THE JURISDICTION OF THE AFORESAID COURTS. THE MAKER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES ANY CLAIM OR DEFENSE IN ANY SUCH ACTION OR PROCEEDING BASED ON ANY ALLEGED LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS OR ANY SIMILAR BASIS. THE MAKER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF ANY COMPLAINT, SUMMONS, NOTICE OR OTHER PROCESS RELATING TO ANY LEGAL ACTION OR PROCEEDING BY DELIVERY THEREOF TO IT BY HAND OR BY MAIL TO THE ADDRESS OF THE MAKER SET FORTH ABOVE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF A HOLDER TO BRING PROCEEDINGS AGAINST THE MAKER IN THE COURTS OF ANY OTHER JURISDICTION OR TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. 13. Interest. The rate of interest payable under this Note shall in no event exceed the maximum rate permissible under applicable law. If the rate of interest payable on this Note is ever reduced as a result of this paragraph and at any time thereafter the maximum rate permitted under applicable law exceeds the rate of interest provided for in this Note, then the rate provided for in this Note shall be increased to the maximum rate provided for under applicable law for such period as is required so that the total amount of interest received by the Holder is that which would have been received by the Holder but for the operation of the first sentence of this paragraph. 14. Designation of Senior Debt. The obligations contemplated by this Note (and the Notes in the aggregate) shall constitute "Designated Senior Debt" as defined in and for purposes of that certain Indenture dated as of April 7, 1998 among the Maker, River Holding Corp. and the Untied States Trust Company of New York, as Trustee, with respect to the 9 1/8% Senior Subordinated Notes due 2008. 15. Payments. All payments of principal and interest shall be made in legal tender of the United States of America and shall be made at such place as Holder shall have designated to Maker. 4 IN WITNESS WHEREOF, the Maker has caused this Note to be signed on the date first set forth above. MAKER: HUDSON RESPIRATORY CARE INC. By: ----------------------------------- Name: Patrick Yount Title: Chief Financial Officer Notice Address: 27111 Diaz Road P.O. Box 9020 Temecula, California 92589-9020 Facsimile: (909) 676-1578 NOTICE ADDRESS FOR HOLDER: - ----------------------- - ----------------------- - ----------------------- SIGNATURE PAGE TO UNSECURED SENIOR PROMISSORY NOTE DUE 2008 5 EX-10.40 25 dex1040.txt AGREEMENT TO AMEND NOTES- $12,000,000 Exhibit 10.40 AGREEMENT TO AMEND NOTES This Agreement to Amend Notes (the "Agreement") is entered into as of September __, 2003 by and among Hudson Respiratory Care Inc., a California corporation (the "Company"), and a majority of the holders of the outstanding principal amount of those certain Unsecured Senior Promissory Notes due 2004 that are signatories hereto (the "Holders"). All capitalized terms used in this Agreement not otherwise defined herein shall have the same meanings given to such terms in the Notes. R E C I T A L S - - - - - - - - WHEREAS, the Company has previously issued a series of Unsecured Senior Promissory Notes due 2004 in an aggregate principal amount of $12,000,000 to the holders set forth on Schedule A hereto (the "Notes"); WHEREAS, pursuant to Section 7 of the Notes, the Holders of a majority of the outstanding principal amount of the Notes may amend all of the outstanding Notes in the series by an agreement in writing with the Company; WHEREAS, the Company wishes to obtain credit facility subject to the terms and provisions of a Loan and Security Agreement by and among Parent, Wells Fargo Foothill, Inc., as the Arranger and Administrative Agent and the Lenders that are signatory thereto and a Loan and Security Agreement by and among Parent, MW Post Advisory Group, LLC, as the Administrative Agent and the Lenders that are signatory thereto (collectively, the "Loan and Security Agreements"); WHEREAS, it is a condition to the making of loans under the Loan and Security Agreements to Parent that the Company amend the Notes to extend the maturity date of the Notes to March 31, 2008; and WHEREAS, a majority of the Holders of the outstanding principal amount of the Notes have agreed to amend the Notes. A G R E E M E N T - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements of the parties contained herein, the parties hereby agree as follows: 1. Amendments to the Notes. The opening paragraph of the Notes is hereby amended to extend the Maturity Date of the Notes to March 31, 2008. 2. Scope. This Agreement shall have the effect of amending the Notes as appropriate to express the agreements contained herein. In all other respects, the Notes shall remain in full force and effect in accordance with their respective terms. 3. Governing Law. In all respects, including all matters of construction, validity and performance, this Agreement and the rights and obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the internal laws of the State of California applicable to contracts made and performed in such state (without regard to the choice of law or conflicts of law principles there). 4. Counterparts; Facsimile. This Agreement may be executed in any number of counterparts and by facsimile, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first written above. THE COMPANY: HUDSON RESPIRATORY CARE INC., a California corporation By: ------------------------------------- Name: Title: HOLDERS: FS EQUITY PARTNERS IV, L.P., a Delaware limited partnership $10,860,000 principal amount of the Notes By: FS Capital Partners LLC Its: General Partner By: -------------------------------- Name: Title: $1,086,000 principal THE HELEN LOVAAS SEPARATE amount of the Notes PROPERTY TRUST U/D/T DATED JULY 17, 1998 By: ------------------------------------- Helen Hudson Lovaas Trustee SCHEDULE A PRINCIPAL AMOUNT ---------------- HOLDER OF NOTE - ------ ---------------- FS Equity Partners IV, L.P. $ 10,860,000 The Helen Lovaas Separate Property Trust $ 1,086,000 U/D/T dated July 17, 1997 Sten Gibeck $ 54,000 ---------------- Aggregate Principal Amount: $ 12,000,000 EX-10.41 26 dex1041.txt AGREEMENT TO AMEND NOTES- $10,100,000 Exhibit 10.41 AGREEMENT TO AMEND NOTES This Agreement to Amend Notes (the "Agreement") is entered into as of September __, 2003 by and among HRC Holding Inc., a Delaware corporation (the "Company"), and a majority of the holders of the outstanding principal amount of those certain Unsecured Senior Promissory Notes due 2004 that are signatories hereto (the "Holders"). All capitalized terms used in this Agreement not otherwise defined herein shall have the same meanings given to such terms in the Notes. R E C I T A L S - - - - - - - - WHEREAS, the Company has previously issued a series of Unsecured Senior Promissory Notes due 2004 in an aggregate principal amount of $10,100,000 to the holders set forth on Schedule A hereto (the "Notes"); WHEREAS, pursuant to Section 7 of the Notes, the Holders of a majority of the outstanding principal amount of the Notes may amend all of the outstanding Notes in the series by an agreement in writing with the Company; WHEREAS, Hudson Respiratory Care Inc., the holder of all of the outstanding capital stock of the Company ("Parent"), wishes to obtain credit facility subject to the terms and provisions of a Loan and Security Agreement by and among Parent, Wells Fargo Foothill, Inc., as the Arranger and Administrative Agent and the Lenders that are signatory thereto and a Loan and Security Agreement by and among Parent, MW Post Advisory Group, LLC, as the Administrative Agent and the Lenders that are signatory thereto (collectively, the "Loan and Security Agreements"); WHEREAS, it is a condition to the making of loans under the Loan and Security Agreements to Parent that the Company amend the Notes to extend the maturity date of the Notes to March 31, 2008; and WHEREAS, a majority of the Holders of the outstanding principal amount of the Notes have agreed to amend the Notes. A G R E E M E N T - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements of the parties contained herein, the parties hereby agree as follows: 1. Amendments to the Notes. The opening paragraph of the Notes is hereby amended to extend the Maturity Date of the Notes to March 31, 2008. 2. Scope. This Agreement shall have the effect of amending the Notes as appropriate to express the agreements contained herein. In all other respects, the Notes shall remain in full force and effect in accordance with their respective terms. 3. Governing Law. In all respects, including all matters of construction, validity and performance, this Agreement and the rights and obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the internal laws of the State of California applicable to contracts made and performed in such state (without regard to the choice of law or conflicts of law principles there). 4. Counterparts; Facsimile. This Agreement may be executed in any number of counterparts and by facsimile, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first written above. THE COMPANY: HRC HOLDING INC., a Delaware corporation By: ------------------------------------- Name: Title: HOLDERS: FS EQUITY PARTNERS IV, L.P., a Delaware limited partnership $9,140,000 principal amount of the Notes By: FS Capital Partners LLC Its: General Partner By: -------------------------------- Name: Title: $914,000 principal THE HELEN LOVAAS SEPARATE amount of the Notes PROPERTY TRUST U/D/T DATED JULY 17, 1998 By: ------------------------------------- Helen Hudson Lovaas Trustee SCHEDULE A PRINCIPAL AMOUNT ---------------- HOLDER OF NOTE - ------ ---------------- FS Equity Partners IV, L.P. $ 1,140,000 FS Equity Partners IV, L.P. $ 8,000,000 The Helen Lovaas Separate Property Trust $ 914,000 U/D/T dated July 17, 1997 Sten Gibeck $ 46,000 ---------------- Aggregate Principal Amount: $ 10,100,000 EX-10.42 27 dex1042.txt AGREEMENT TO AMEND NOTES- $9,951,250 Exhibit 10.42 AGREEMENT TO AMEND NOTES This Agreement to Amend Notes (the "Agreement") is entered into as of September __, 2003 by and among Hudson Respiratory Care Inc., a California corporation (the "Company"), and a majority of the holders of the outstanding principal amount of those certain Senior Subordinated Convertible Promissory Notes due 2005 that are signatories hereto (the "Holders"). All capitalized terms used in this Agreement not otherwise defined herein shall have the same meanings given to such terms in the Notes. R E C I T A L S - - - - - - - - WHEREAS, the Company has previously issued a series of Senior Subordinated Convertible Promissory Notes due 2005 in an aggregate principal amount of $9,951,250 to the holders set forth on Schedule A hereto (the "Notes"); WHEREAS, pursuant to the terms of Section 9 of the Notes, the Holders of a majority of the outstanding principal amount of the Notes may amend all of the outstanding Notes in the series by an agreement in writing with the Company; WHEREAS, the Company wishes to obtain credit facility subject to the terms and provisions of a Loan and Security Agreement by and among the Company, Wells Fargo Foothill, Inc., as the Arranger and Administrative Agent and the Lenders that are signatory thereto and a Loan and Security Agreement by and among the Company, MW Post Advisory Group, LLC, as the Administrative Agent and the Lenders that are signatory thereto (collectively, the "Loan and Security Agreements"); WHEREAS, it is a condition to the making of loans under the Loan and Security Agreements to the Company that the Company amend the Notes to extend the maturity date of the Notes to March 31, 2008; and WHEREAS, a majority of the Holders of the outstanding principal amount of the Notes have agreed to amend the Notes. A G R E E M E N T - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements of the parties contained herein, the parties hereby agree as follows: 1. Amendments to the Notes. (a) The opening paragraph of the Notes is hereby amended to extend the Maturity Date of the Notes to March 31, 2008. (b) Section 2(a) of the Notes is hereby amended so that the reference in Section 2(a) to the "Subordination Agreement" shall mean (i) that certain Subordination Agreement, dated as of October 7, 2003, by and among the Company,and the FSEP IV, and the additional parties signatory thereto and Wells Fargo Foothill, Inc., as the arranger and administrative agent for the lenders from time to time party to the Loan Agreement (as defined therein) and (ii) that certain Subordination Agreement, dated as of October 7, 2003, by and among the Company, FSEP IV, and the additional parties signatory thereto and MW Post Advisory Group, LLC, as the administrative agent for the lenders from time to time party to the Loan Agreement (as defined therein). 2. Scope. This Agreement shall have the effect of amending the Notes as appropriate to express the agreements contained herein. In all other respects, the Notes shall remain in full force and effect in accordance with their respective terms. 3. Governing Law. In all respects, including all matters of construction, validity and performance, this Agreement and the rights and obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the internal laws of the State of California applicable to contracts made and performed in such state (without regard to the choice of law or conflicts of law principles there). 4. Counterparts; Facsimile. This Agreement may be executed in any number of counterparts and by facsimile, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first written above. THE COMPANY: HUDSON RESPIRATORY CARE INC., a California corporation By: ------------------------------------- Name: Title: HOLDERS: FS EQUITY PARTNERS IV, L.P., a Delaware limited partnership $8,192,000 principal amount of the Notes By: FS Capital Partners LLC Its: General Partner By: ----------------------------- Name: Title: $1,308,000 principal THE HELEN LOVAAS SEPARATE amount of the Notes PROPERTY TRUST U/D/T DATED JULY 17, 1998 By: ---------------------------------- Helen Hudson Lovaas Trustee SCHEDULE A PRINCIPAL AMOUNT ---------------- HOLDER OF NOTE - ------ ---------------- FS Equity Partners IV, L.P. $ 5,500,000 FS Equity Partners IV, L.P. $ 2,692,000 The Helen Lovaas Separate Property Trust $ 500,000 U/D/T dated July 17, 1997 The Helen Lovaas Separate Property Trust $ 808,000 U/D/T dated July 17, 1997 Ola Magnusson $ 131,250 Richard Johansen $ 100,000 Patrick Yount $ 50,000 Jay Ogram $ 50,000 Lougene Williams $ 35,000 Brian Morgan $ 30,000 Jeffrey Brown $ 25,000 Douglas Handa $ 15,000 Jeri Eiserman $ 15,000 ---------------- Aggregate Principal Amount: $ 9,951,250 EX-10.43 28 dex1043.txt AGREEMENT TO AMEND NOTES- HELD BY FSEP IV Exhibit 10.43 AGREEMENT TO AMEND NOTES This Agreement to Amend Notes (the "Agreement") is entered into as of September __, 2003 by and among Hudson Respiratory Care Inc., a California corporation (the "Company"), HRC Holding Inc., a Delaware corporation and wholly-owned subsidiary of the Company ("HRC") and FS Equity Partners IV, L.P., a Delaware limited partnership ("FSEP IV") to amend that certain Senior Subordinated Convertible Promissory Note set forth on Schedule A hereto made by the Company in favor of FSEP IV and those certain Promissory Notes set forth on Schedule A hereto made by HRC in favor of FSEP IV. R E C I T A L S - - - - - - - - WHEREAS, the Company has previously issued to FSEP IV a Senior Subordinated Convertible Promissory Note in a principal amount of $5,000,000 (the "Hudson Note") and HRC has previously issued to FSEP IV Promissory Notes in an aggregate principal amount of $2,264,241 (the "HRC Notes", and collectively with the Hudson Note, the "Notes"), all as set forth on Schedule A; WHEREAS, the Company wishes to obtain credit facility subject to the terms and provisions of a Loan and Security Agreement by and among the Company, Wells Fargo Foothill, Inc., as the Arranger and Administrative Agent and the Lenders that are signatory thereto and a Loan and Security Agreement by and among the Company, MW Post Advisory Group, LLC, as the Administrative Agent and the Lenders that are signatory thereto (collectively, the "Loan and Security Agreements"); WHEREAS, it is a condition to the making of loans under the Loan and Security Agreements to the Company that the Company and HRC amend the Notes to extend the maturity date of the Notes to March 31, 2008. A G R E E M E N T - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements of the parties contained herein, the parties hereby agree as follows: 1. Amendment to the HRC Notes. The opening paragraph of the HRC Notes is hereby amended to extend the Maturity Date of the HRC Notes to March 31, 2008. 2. Amendments to the Hudson Note. (a) The opening paragraph of the Hudson Note is hereby amended to extend the Maturity Date of the Hudson Note to March 31, 2008. (b) Section 2(a) of the Hudson Note is hereby amended so that the reference in Section 2(a) to the "Subordination Agreement" shall mean (i) that certain Subordination Agreement, dated as of October 7, 2003, by and among the Company, FSEP IV, and the additional parties signatory thereto and Wells Fargo Foothill, Inc., as the arranger and administrative agent for the lenders from time to time party to the Loan Agreement (as defined therein) and (ii) that certain Subordination Agreement, dated as of October 7, 2003, by and among the Company, FSEP IV, and the additional parties signatory thereto and MW Post Advisory Group, LLC, as the administrative agent for the lenders from time to time party to the Loan Agreement (as defined therein). 3. Scope. This Agreement shall have the effect of amending the Notes as appropriate to express the agreements contained herein. In all other respects, the Notes shall remain in full force and effect in accordance with their respective terms. 4. Governing Law. In all respects, including all matters of construction, validity and performance, this Agreement and the rights and obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the internal laws of the State of California applicable to contracts made and performed in such state (without regard to the choice of law or conflicts of law principles there). 5. Counterparts; Facsimile. This Agreement may be executed in any number of counterparts and by facsimile, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first written above. THE COMPANY: HUDSON RESPIRATORY CARE INC., a California corporation By: ------------------------------------- Name: Title: HRC: HRC HOLDING, INC., a Delaware corporation By: ------------------------------------- Name: Title: HOLDER: FS EQUITY PARTNERS IV, L.P., a Delaware limited partnership By: FS Capital Partners LLC Its: General Partner By: -------------------------------- Name: Title: SCHEDULE A PRINCIPAL AMOUNT ISSUER OF NOTE Hudson Respiratory Care Inc. $ 5,000,000 HRC Holding Inc. $ 759,128 HRC Holding Inc. $ 1,505,113 ---------------- Aggregate Principal Amount: $ 7,264,241 EX-31.1 29 dex311.txt CERTIFICATION OF CEO- SECTION 302 Exhibit 31.1 CERTIFICATIONS I, Charles French, certify that: 1. I have reviewed this quarterly report on Form 10-Q of River Holding Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control of over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to affect adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ Charles French -------------------------------------- Charles French Chief Executive Officer and President EX-31.2 30 dex312.txt CERTIFICATION OF CFO- SECTION 302 Exhibit 31.2 CERTIFICATIONS I, Patrick Yount, certify that: 1. I have reviewed this quarterly report on Form 10-Q of River Holding Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control of over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to affect adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ Patrick Yount --------------------------------------- Patrick Yount Chief Financial Officer and Secretary EX-32.1 31 dex321.txt CERTIFICATION OF CEO- SECTION 906 Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER In connection with the Quarterly Report of River Holding Corp. ("Holding") on Form 10-Q for the quarter ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Periodic Report"), I, Charles A. French, President and Chief Executive Officer of Holding, certify, to my knowledge, that: 1. The Periodic Report fully complies with the requirements of Section 13(a) of the Securities and Exchange Act of 1934; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Charles French --------------------------------------- Charles A. French Chief Executive Officer and President November 14, 2003 EX-32.2 32 dex322.txt CERTIFICATION OF CFO- SECTION 906 Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER In connection with the Quarterly Report of River Holding Corp. ("Holding") on Form 10-Q for the quarter ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Periodic Report"), I, Patrick G. Yount, Chief Financial Officer of Holding, certify, to my knowledge, that: 1. The Periodic Report fully complies with the requirements of Section 13(a) of the Securities and Exchange Act of 1934; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Patrick G. Yount --------------------------------------- Patrick G. Yount Chief Financial Officer and Secretary November 14, 2003
-----END PRIVACY-ENHANCED MESSAGE-----