-----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, U4ghS6ghJhb4iil8ykuWhRMm0ZjG/YodHZxkfHw+x+/VBG9iPbGI63DFsZFGiWod h6B1o3P6g8Vp1xd1SkXT9Q== 0000898430-02-002400.txt : 20020624 0000898430-02-002400.hdr.sgml : 20020624 20020624155812 ACCESSION NUMBER: 0000898430-02-002400 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020624 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUDSON RESPIRATORY CARE INC CENTRAL INDEX KEY: 0001061893 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 951867330 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-56097 FILM NUMBER: 02685453 BUSINESS ADDRESS: STREET 1: 27711 DIAZ RD STREET 2: P O BOX 9020 CITY: TEMECULA STATE: CA ZIP: 92589 BUSINESS PHONE: 9096765611 MAIL ADDRESS: STREET 1: 27711 DIAZ RD STREET 2: P O BOX 9020 CITY: TEMECULA STATE: CA ZIP: 92589 10-K 1 d10k.txt FORM 10-K ================================================================================ - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 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 333-56097 HUDSON RESPIRATORY CARE INC. (Exact name of registrant as specified in its charter) California 95-1867330 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 27711 Diaz Road, P.O. Box 9020 92589 Temecula, California (Zip Code) (Address of Principal Executive Offices) (909) 676-5611 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: None 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 [_] No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Not Applicable. As of May 31, 2002, the number of shares of Common Stock, $.01 par value, outstanding (the only class of common stock of the registrant outstanding) was 10,654,293. The registrant's Common Stock is not traded in a public market. Aggregate market value of the registrant's voting and nonvoting Common Stock: Not Applicable. Documents Incorporated by Reference: None ================================================================================ HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES Fiscal Year Ended December 31, 2001 TABLE OF CONTENTS
Page ---- PART I ........................................................................................................ 1 Item 1. Business ..................................................................................... 1 Item 2. Properties ................................................................................... 7 Item 3. Legal Proceedings ............................................................................ 8 Item 4. Submissions of Matters to a Vote of Security Holders ......................................... 8 PART II ....................................................................................................... 9 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ........................ 9 Item 6. Selected Financial Data ...................................................................... 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation ......... 11 Item 7A. Quantitative and Qualitative Disclosure About Market Risk .................................... 28 Item 8. Financial Statements ......................................................................... 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......... 29 PART III ...................................................................................................... 32 Item 10. Directors and Executive Officers of the Registrant ........................................... 32 Item 11. Executive Compensation ....................................................................... 34 Item 12. Security Ownership of Certain Beneficial Owners and Management ............................... 38 Item 13. Certain Relationships and Related Transactions ............................................... 39 PART IV ....................................................................................................... 41 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .............................. 41 SIGNATURES .................................................................................................... S-1
ii PART I Item 1. Business. This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include without limitation the words "believes," "anticipates," "estimates," "intends," "expects," and words of similar import. All statements other than statements of historical fact included under "Item 1. Business," "Item 2. Properties," "Item 3. Legal Proceedings" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" include forward-looking information and may reflect certain judgements by management. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Hudson Respiratory Care Inc. or the respiratory care and anesthesia products industries to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These potential risks, uncertainties and other factors include, but are not limited to, those identified in the "Risk Factors" section of this Form 10-K located at the end of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. General Hudson Respiratory Care Inc. ("Hudson RCI" or the "Company") is a leading manufacturer and marketer of disposable medical products utilized in the respiratory care and anesthesia segments of the domestic and international health care markets. The Company offers one of the broadest respiratory care and anesthesia product lines in the industry, including such products as oxygen masks, humidification systems, nebulizers, cannulae and tubing. In the United States, the Company markets its products to a variety of health care providers, including hospitals and alternate site service providers such as outpatient surgery centers, long-term care facilities, physician offices and home health care agencies. Internationally, the Company sells its products to distributors that market to hospitals and other health care providers. The Company's products are sold to over 7,000 distributors and alternate site service providers throughout the United States and in more than 90 countries worldwide. The Company has supplied the disposable respiratory care market for over 55 years and enjoys strong brand name recognition and leading market positions. The Company manufactures and markets approximately 2,000 respiratory care and anesthesia products. The Company believes that its broad product offering represents a competitive advantage over suppliers with more limited product offerings, as health care providers seek to reduce medical supply costs and concentrate purchases among fewer vendors. The Company also benefits competitively in the United States from its extensive relationships with leading group purchasing organizations ("GPOs"), as large purchasing organizations play an increasingly important role in hospitals' purchasing decisions. The Company maintains three manufacturing facilities and two distribution facilities in the United States, assembly operations in Mexico and Malaysia and sales and marketing offices in the United States, Sweden, the United Kingdom, France and Germany. Hudson Oxygen Therapy Sales Company ("Hudson Oxygen"), Hudson RCI's predecessor, was founded in 1945. In 1988, Hudson Oxygen formed Industrias Hudson, a subsidiary that oversees the Company's assembly operation in Mexico. In 1989, Hudson Oxygen merged with Respiratory Care Inc. to form Hudson RCI. In April 1998, the Company consummated a recapitalization, pursuant to which it became a majority-owned subsidiary of River Holding Corp. ("Holding"). In the past four years, the Company has completed a number of strategic acquisitions in order to expand its product line and geographic penetration, most significantly with the July 1999 acquisition of Hudson RCI AB (formerly Louis Gibeck AB), a Swedish company that manufactures and markets medical devices under the Gibeck brand. Hudson RCI's principal executive offices are located at 27711 Diaz Road, P.O. Box 9020, Temecula, California 92589, and its telephone number is (909) 676-5611. 1 Industry Overview The worldwide market for disposable respiratory care and anesthesia products consists of the domestic hospital market, the alternate site market and the international market. Respiratory care and anesthesia principally involve the delivery of oxygen or anesthesia from a gas source, such as a mechanical ventilator or respirator, to the patient's pulmonary system. The gas is typically delivered to the patient through specialized tubing connecting to a cannula, mask or endotracheal tube. In addition, it is often clinically desirable to humidify or medicate the gas prior to delivery to the patient. The market for respiratory care and anesthesia products, including disposable products, is expected to be positively impacted by demographic trends, both domestically and internationally. In the United States, changes in demographics, including an aging population, increased incidence and awareness of respiratory illnesses and heightened focus on cost-efficient treatment, have had a positive impact on the domestic respiratory care and anesthesia markets. There has been an increasing incidence of respiratory illnesses (such as asthma and emphysema), due in part to an increasingly susceptible aging population, environmental pollution, smoking-related illnesses and communicable diseases with significant respiratory impact, such as tuberculosis, HIV and influenza. The Company believes that the international respiratory care and anesthesia markets will experience many of the trends currently affecting domestic markets. In addition, many international markets have high incidences of communicable respiratory diseases and are becoming increasingly aware of the clinical and economic value of single-use, disposable products. The market for respiratory care and anesthesia products is also affected by trends involving the health care market generally. In particular, the overall trend towards cost containment and infection control has increased the desirability of disposable products relative to reusable products, and has influenced pricing, distribution channels, purchasing decisions and health care delivery methods. Efforts to contain rising health care costs have increased the preference for disposable medical products that improve the productivity of health care professionals and reduce overall provider costs. Health care organizations are evaluating modes of treatment that are less labor and/or technology intensive as a means of decreasing the cost of care, which can often result in increased disposable usage. In particular, increased utilization of disposable products can decrease labor and other costs associated with sterilizing reusable products. In addition, the risks of transmission of infectious diseases such as HIV, hepatitis and tuberculosis, and related concerns about the occupational safety of health care professionals, have also contributed to an increased preference for disposable single-use medical products. Cost containment has caused consolidation throughout the health care product supply channel, which has favored reliable manufacturers with large, high quality product offerings and competitive pricing. In an effort to contain costs, service providers have consolidated to form GPOs, which take advantage of group buying power to obtain lower supply prices. This, in turn, has led to consolidation among distributors, who seek to provide "one-stop shopping" for these large buying groups. Distributors have also sought to concentrate purchases among fewer vendors in an effort to reduce supply costs. Since selection as a contracted GPO provider and strong relationships with distributors are critical to many health care manufacturers, they have responded to these trends by providing a broad range of integrated products, combined with reliable delivery and strong after-sales support. Cost containment has also caused a migration of the decision making function with respect to supply acquisition from the clinician to the administrator. As clinicians lose influence and purchasing agents, materials managers and upper level management become more involved in the purchasing decision, a greater emphasis is placed on price relative to product features and clinical benefits. As a result of cost containment, health care is increasingly provided outside of traditional hospital settings through alternate health care sites, such as outpatient surgery centers, long-term care facilities, physician offices and patients' homes. Growth of the alternate site market is also attributable to advances in technology that have facilitated the delivery of care outside of the hospital, an increased number of illnesses and diseases considered to be treatable outside of the hospital and increased acceptance by the medical community of, and patient preference for, non-hospital treatment. 2 Products 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 filtration; and (iv) airway management. Although the Company's sales efforts differ depending on the clinical use of its products, management focuses on geographical segments for strategic decision making.
Category/Products Description - ---------------------------------------------------- ------------------------------------------------------- Oxygen Therapy: oxygen masks, cannulae, oxygen Used to transport, regulate, deliver and analyze catheters, oxygen tubing, prefilled and refillable therapeutic, supplemental oxygen to a patient. Cylinder humidifiers, oxygen regulators, cylinder carts and carts and bases are used to transport and stabilize bases, oxygen analyzers/monitors, oxygen sensors, oxygen cylinders. Regulators control the pressure and and adaptors and connectors. Sales for this flow of oxygen from the primary gas source to the category as a percentage of total Company sales were patient. Oxygen masks and nasal cannulae cover the nose 32.6%, 34.6% and 40.0% for fiscal years 2001, 2000 and mouth or fit inside the nostrils and are connected and 1999, respectively. to an oxygen source via small diameter tubing through which oxygen flows. Oxygen analyzers, monitors and sensors are utilized to measure and monitor the oxygen concentration being delivered to the patient. Adaptors and connectors are frequently used in respiratory care and anesthesia to add accessories, modify configurations, and/or customize other related products to meet specific needs. Aerosol Therapy: aerosol masks, prefilled and Used to create and deliver aerosolized particles of refillable large volume nebulizers, aerosol tubing, liquid water, sodium chloride or medication solutions unit dose solutions, small volume nebulizers, peak to the patient's airways to dilute and mobilize flow meters, spacers/changers. Sales for this secretions and/or dilate constricted breathing category as a percentage of total Company sales were passages. The peak flow meter is used to monitor the 16.5%, 17.2% and 21.0% for fiscal years 2001, 2000 patient's respiratory status before and after an and 1999, respectively. aerosolized medication treatment. Spacers/Chambers are used as an adjunct to metered dose inhaler therapy to facilitate optimal treatment effectiveness. Humidification and Filtration: ConchaTherm heated Heated humidification systems actively heat and humidifiers and accessories, Humid-Heat and humidify oxygen/air mixtures or anesthetic gases accessories, AquaTherm and ThermaGard nebulizer provided by a mechanical ventilator or anesthesia gas heaters; Concha water, Concha Pak, Aqua+ and machine or other gas source. Heat Moisture Exchangers Humid-Vent HME's, and filters for critical care, (HMEs) passively conserve the heat and humidity in the anesthesia and pulmonary function. Sales for this patient's exhaled breath for use during inspiration. category as a percentage of total Company sales were Breathing filters are used to protect patients, 21.6%, 27.3% and 21.5% for fiscal years 2001, 2000 caregivers and medical equipment from and 1999, respectively. cross-contamination with bacteria and viruses. Airway Management: oral airways, Sheridan(R) Used to secure and maintain an open airway and endotracheal tubes, incentive breathing exercisers unobstructed breathing passage; convey an oxygen/air (IBEs), disposable and re-useable resuscitation mixture and/or anesthetic gas from a mechanical bags, ventilator,
3
Category/Products Description - --------------------------------------------------- ------------------------------------------------------- hyperinflation bags, breathing bags, air cushion anesthesia gas machine to a patient; and artificially masks, anesthesia circuits, heated-wire and support ventilation during resuscitative efforts. The conventional ventilator circuits, gas sampling infant CPAP system provides non-invasive respiratory lines and filters, catheter mounts and infant CPAP. support to premature infants with under-developed, Sales for this category as a percentage of total immature lungs. Company sales were 29.2, 20.9% and 17.5% for fiscal years 2001, 2000 and 1999, respectively.
Sales, Marketing and Distribution The Company's main focus for operational management and strategic decisions is based on geographical segments. These are defined as the Domestic and European operations, each having their own, distinct management team. The Company has sales offices in Temecula, Sweden, Germany, France and the United Kingdom and two distribution facilities in the United States and one in Europe. The Company also employs sales representatives in Thailand, China and Australia. While a majority of the Company's domestic hospital sales are made to distributors, the Company's marketing efforts are focused on the health care service provider. In the alternate site market, the Company both sells and markets directly to the service provider. Internationally, the Company sells its products to distributors that market to hospitals and other health care providers. See Note 10 to "Item 8. Financial Statements" for information with respect to international sales. The Company's U.S. sales personnel currently call on approximately 5,900 hospitals and surgery centers, over 50 hospital distributors and over 3,000 alternate site customers. Due to consolidation and cost pressures among the Company's customer base, the Company's target call point at the health care provider has been moving away from the clinician to include a purchasing manager or corporate executive. In the current U.S. hospital market environment, GPO relationships are an essential part of access to the Company's target markets and the Company has entered into preferred supplier arrangements with 14 national GPOs. The Company is typically positioned as either a sole supplier of respiratory care disposables to the GPO, or as one of two suppliers. While these arrangements set forth pricing and terms for various levels of purchasing, they do not obligate either party to purchase or sell a specific amount of product. In addition, GPO affiliated hospitals often purchase products from other suppliers notwithstanding the existence of sole or dual source GPO arrangements. Further, these arrangements are terminable at any time, but in practice usually run for two to three years. The Company enjoys longer terms with three of its major GPOs, Novation LLC, Consorta and HealthTrust Corporation. The Company's most significant GPO relationships are with AmeriNet Inc., Broadlane, Consorta, Health Services Corporation of America, HealthTrust Corporation and Novation LLC. Health care providers have responded to pressures to reduce their costs by merging with other members of their industry. The acquisition of a customer of the Company often results in the renegotiation of contracts, the granting of price concessions or in the loss of the customer. Alternatively, to the extent a customer of the Company grows through acquisition activity, the Company may benefit from increased sales to the larger entity. The Company markets its products primarily through consultative dialogue with health care providers, targeted print and web site advertising, trade shows, selective promotional arrangements with distributors and the Company's heater lease program. To support sales of the entire line of humidification and ventilation products, the Company leases heaters to domestic customers without charge. The revenues from the sale of products used in connection with the operation of the heaters covers the amortization of the heater cost under the leases. The Company has heaters with a net book value of approximately $2.2 million as of December 31, 2001 placed at service provider locations under this program. 4 The Company utilizes a network of over 50 hospital distributors, as well as over 3,000 alternate site distributors and end-users, to reach its markets. A number of these distributors carry competing product lines, but many are moving to select single supply sources for particular product groups. The Company has been selected as the FOCUS preferred vendor of respiratory disposables for Owens & Minor Inc. Such status gives preference to the shipping of the Company's products versus competing product lines. Owens & Minor Inc. is the Company's largest distributor, accounting for approximately $30.4 million or approximately 19.4% of total fiscal 2001 net sales, $32.2 Million or 20.2% of total fiscal 2000 net sales and $24.5 million or 19.0% of total fiscal 1999 net sales. The Company provides a price list to its distributors which details base acquisition prices. Distributors receive orders from the service providers and charge the contract pricing (which is determined by their GPO affiliation or individual contract price) plus a service margin. As is customary within the industry, the Company rebates the difference between base acquisition price and the specific contract price to the distributor. The Company's international distributors outside of the European Union ("EU"), Middle East and Africa place their orders directly with dedicated international customer service representatives. Customer orders are shipped from one of three warehouse locations. Sales strategies and marketing plans are tailored to each clinical product group with involvement of the distributor. Region and territory sales managers are responsible for the launch of products into their regions, including related support and training. The Company utilizes a network of approximately 120 international distributors, typically on an exclusive basis within each market. Customers within Europe, the Middle East and Africa are serviced by the Company's Sweden office. Manufacturing and Assembly The Company operates three manufacturing facilities in the United States and assembly facilities in Ensenada, Mexico and Kuala Lumpur, Malaysia. While the Company believes that it is operating at a high utilization rate, existing facilities could support increased capacity with additional machinery and workers. The Company's manufacturing facility in Temecula, California houses 77 injection molding machines. During the past several years, many of the machines have been replaced with more efficient models, which have increased capacity. Tubing is produced on 11 extrusion lines: 6 corrugated, 4 vinyl and 1 repellitizer/regrinder. The Temecula facility uses approximately 19 million pounds of over 30 different kinds of resin annually; the most prominent are PVC, polyethylene, polypropylene and polystyrene. Sterile prefilled humidification and nebulization products are manufactured using 9 blow/fill/seal machines in the Company's facility in Arlington Heights, Illinois. The Company's Argyle, New York facility houses 4 extrusion lines, 4 blow molding machines and 8 assembly lines designed to produce the SHERIDAN(R) brand of endotracheal tubes. The SHERIDAN(R) product line was acquired in October, 2000 from Tyco Healthcare Group LP ("Tyco"). The Company leases approximately fifty percent of the Argyle facility from Tyco under a three year lease ending in October, 2003. During 2001, the Company made the decision to relocate the Argyle production facility to Tecate, Mexico, beginning in 2002 and anticipates completing the move by October, 2003. The Company's facility located in Ensenada, Mexico is primarily used for the assembly of certain products molded and/or extruded at the Temecula facility. The facility is a maquiladora, and therefore there are minimal tariffs associated with the transport of products and components across the United States-Mexico border. The Company's facility located in Kuala Lumpur, Malaysia assembles virtually all of the HME and filter products marketed by the Company. The components assembled by the Malaysian operation are generally molded by outside vendors in Malaysia. The Company monitors the quality of its products at its manufacturing facilities by statistical sampling and visual and dimensional inspection. The Company also inspects incoming raw materials for inconsistencies, rating its vendors on quality and delivery time. The Company is routinely audited by the FDA and has received no significant regulatory actions. The Company is in substantial compliance with the GMP/QSR regulations of the FDA and the United States and Mexico operations have qualified for an "advanced notification" program allowing the Company to be informed of FDA inspections in advance. The Company utilizes outside facilities for sterilization of products produced in Temecula, Argyle, Arlington Heights, Kuala Lumpur and Ensenada. Certain Arlington Heights products are manufactured in a sterile environment and are certified sterile as a result of the production process. The Ensenada, Kuala Lumpur, Argyle and Arlington Heights facilities are certified as ISO 9002 compliant and the Temecula and Sweden facilities are certified as ISO 9001 compliant. 5 Suppliers and Raw Materials The Company's primary raw materials are various resins, which are formed into the Company's products. The top 10 purchased products in 2001 were tubing grade PVC, clear PVC, LDPE-EVA, polypropylene, pre-cut elastic, mask grade PVC, acrylic resin, hose-end grade PVC, manual resuscitator assembly, and breathing bag assembly. The Company believes that it is able to purchase materials at a cost no higher than its competitors. The Company believes that sufficient availability exists for its raw materials, as they consist of mainly readily available plastic resins. Research and Development The Company's research and development department consists of 20 people, including 14 engineers. The Company's engineering efforts are split between developing new products and process improvements to its manufacturing operations. The Company develops new products to expand its product line in anticipation of changes in demand. Significant products introduced in the last five years include the line of heat-moisture exchangers, the SHERIDAN(R) brand of endotracheal tubes, CONCHATHERM(R) IV heated humidification system, expansion of the Company's ventilator circuit and nebulizer line, a demand oxygen regulator and CONCHATHERM(R) 2000. CONCHATHERM(R) 2000 is a heated humidification system for the sleep apnea market. The Company constantly works to reduce costs through continuous process improvements. The Company incurred research and development expenses of approximately $2.0 million, $2.4 million and $2.0 million in fiscal 2001, 2000 and 1999, respectively. Competition The U.S. medical supply industry is characterized by intense competition. The Company's primary competitor in the respiratory care sector is Allegiance Healthcare (a subsidiary of Cardinal Health, Inc.) and its primary competitors in the anesthesia sector include Tyco, Smiths Industries Medical Systems, Inc. ("SIMS"), and Vital Signs, Inc. Many of the products manufactured by the Company are available from several sources, and many of the Company's customers tend to have relationships with several manufacturers. The Company competes on the basis of brand name, product design and quality, breadth of product line, service and price. Patents and Trademarks The Company has historically relied primarily on its technological and engineering abilities and on its design and production capabilities to gain competitive business advantages, rather than on patents or other intellectual property rights. However, the Company does file patent applications on concepts and processes developed by the Company's personnel. The Company has 27 patents in the United States. Many of the U.S. patents have corresponding patents issued in Canada, Europe and various other countries. Government Regulation and Environmental Matters The Company and its customers and suppliers are subject to extensive Federal and state regulation in the United States, as well as regulation by foreign governments, and the Company cannot predict the extent to which future legislative and regulatory developments concerning its practices and products for the health care industry may affect the Company. Most of the Company's products are subject to government regulation in the United States and other countries. In the United States, the FD&C Act and other statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, record keeping, marketing, advertising and promotion of such products. Failure to comply with applicable requirements can result in fines, recall or seizure of products, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices and criminal prosecution. Under the FD&C Act and similar foreign laws, the Company, as a marketer, distributor and manufacturer of health care products, is required to obtain the clearance or approval of Federal and foreign governmental agencies, including the FDA, prior to marketing, distributing and manufacturing certain of those products. The Company may also need to obtain FDA clearance before modifying marketed products or making new promotional claims. Delays in receipt of or failure to receive required approvals or 6 clearances, the loss of previously received approvals or clearances, or failures to comply with existing or future regulatory requirements in the United States or in foreign countries could have a material adverse effect on the Company's business. Foreign sales are subject to similar requirements. The Company is required to comply with pertinent sections of the Code of Federal Regulations, 21CFR GMP/QSR, which set forth requirements for, among other things, the Company's manufacturing process, design control and associated record keeping, including testing and sterility. Further, the Company's plants and operations are subject to review and inspection by state, Federal and foreign governmental entities. The distribution of the Company's products may also be subject to state regulation. The impact of FDA regulation on the Company has increased in recent years as the Company has increased its manufacturing operations. The Company's suppliers, including contract sterilization facilities, are also subject to similar governmental requirements. There can be no assurance that changes to current regulations or additional regulations imposed by the FDA will not have an adverse impact on the Company's business and financial condition in the future. The FDA also has the authority to issue special controls for devices manufactured by the Company. In the event that such special controls were issued, the Company's products would be required to conform, which could result in significant additional expenditures for the Company. The Company is also subject to numerous federal, state and local laws and regulations relating to such matters as safe working conditions, manufacturing practices, fire hazard control and the handling and disposal of hazardous or infectious materials or substances and emissions of air pollutants. The Company owns and leases properties which are subject to environmental laws and regulations. There can be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon the Company's business, financial condition or results of operations. In addition, the Company cannot predict the extent to which future legislative and regulatory developments concerning its practices and products for the health care industry may affect the Company. Employees As of May 31, 2002, the Company employed approximately 2,342 employees, substantially all of whom were full-time employees. None of the Company's employees are represented by unions and the Company considers its employee relations to be good. Item 2. Properties. The Company owns approximately 30 acres of land in Temecula, California on which its headquarters, one of three principal manufacturing centers and three other buildings totaling approximately 245,000 square feet are located. Plastic and vinyl components and corrugated tubing are manufactured in Temecula and assembled into finished goods at a 77,000 square foot facility in Ensenada, Mexico. The Company owns the Ensenada facility and the underlying land is held in a 30-year trust that expires in 2019. The Company leases an 86,000 square foot manufacturing facility in Arlington Heights, Illinois under a lease that expires in 2005 with an option to extend an additional 5 years. Prefilled sterile solutions and electronics are manufactured in Arlington Heights. The Company leases a 73,000 square foot distribution warehouse in Elk Grove, Illinois under a lease that expires in May, 2010, and a 25,375 square foot distribution facility in Atlanta, Georgia under a lease that expires in February 2006. In August 2001, the Company made a decision to close the Atlanta distribution center. The company leases a 99,100 square foot distribution facility in Temecula, California under a lease that expires in September 2005. The Company leases sales and marketing offices in Stockholm, Sweden; Ashby de la Zouch, U.K.; Lyon, France; and Lohmar, Germany under leases that expire in September 30, 2002, April 25, 2006 and April, 2005, respectively. The Company leases a 33,260 square foot facility in Kuala Lumpur, Malaysia, under a lease that expires in July 2002. This facility primarily assembles finished products for the HME and filter product lines. The Company is currently in discussions with the owners of the Swedish and Malaysia properties and expects the leases to be renewed on a favorable basis. The Company also leases approximately fifty percent of an 80,218 square foot facility in Argyle, New York under a lease that expires in October, 2003. This facility manufacturers the SHERIDAN(R) line of endotracheal tubes. During 2001, the Company made a decision to relocate the endotracheal product line from its manufacturing plant in Argyle, New York to Tecate, Mexico. The Company has acquired an approximately 99,000 square foot facility in Tecate, under a lease that expires in March 2005. 7 The Company believes that its current facilities are adequate for its present level of operations. Item 3. Legal Proceedings. The Company is not a party to any material lawsuits or other proceedings, including suits relating to product liability and patent infringement. While the results of the Company's existing lawsuits and other proceedings cannot be predicted with certainty, management does not expect that the ultimate liabilities, if any, will have a material adverse effect on the financial position or results of operations of the Company. Item 4. Submissions of Matters to a Vote of Security Holders. None. 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. There is no established public trading market for the Company's Common Stock. All of the Common Stock of the Company is held by Holding and the shareholder of the Company prior to the recapitalization. The Company has not paid cash dividends to Holding in the past two years, and does not intend to pay cash dividends to Holding in the foreseeable future. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for a discussion of restrictions on the Company's ability to pay cash dividends. Item 6. Selected Financial Data. The selected fiscal year end historical financial data has been derived from the audited financial statements of the Company. The information contained in this table as of December 31, 2000 and 2001, and for each of the three years in the period ended December 31, 2001 should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included elsewhere in this Report.
Fiscal Year ------------------------------------------------------------------ 2001 2000 1999(a) 1998 1997 -------- -------- --------- ------- ------ Operating Data: Net sales ............................................. $ 157,112 $159,278 $128,803 $100,498 $99,509 Cost of sales ......................................... 108,054 84,923 75,418 56,802 54,575 -------- ------- ------- -------- ------- Gross profit .......................................... 49,058 74,355 53,385 43,696 44,934 Operating expenses: Selling expenses ...................................... 19,496 18,262 13,122 10,350 9,643 Distribution expenses ................................. 11,429 10,109 4,647 3,336 3,170 General and administrative expenses ................... 30,205 (e) 27,343 14,732 10,284 11,456 Impairment of goodwill ................................ 33,128 (f) -- -- -- -- Impairment of fixed assets ............................ 4,469 (g) -- -- -- -- Research and development expenses ..................... 2,043 2,387 2,031 976 1,072 Provision for equity participation plan ............... -- -- -- 63,939 (b) 6,954 Provision for retention payments ...................... -- -- -- 4,754 (c) -- -------- ------- ------- -------- ------- Operating income (loss) ............................... (51,712) 16,254 18,853 (49,943) 12,639 -------- ------- ------- -------- ------- Other (income) and expenses: .......................... -- -- -- Interest expense ...................................... 20,542 21,089 17,263 11,327 1,834 Other (income) expense ................................ 1,563 1,159 1,232 406 (638) -------- ------- ------- -------- ------- Total other expense ................................... 22,105 22,248 18,495 11,733 1,196 -------- ------- ------- -------- ------- Income (loss) before provision for income taxes ....... (73,817) (5,994) 358 (61,676) 11,443 Provision for income taxes ............................ 69,854 (h) 3,203 1,586 8,405 150 -------- ------- ------- -------- ------- Income (loss) before extraordinary item ............... (143,671) (9,197) (1,228) (70,081) 11,293 Extraordinary item (loss on extinguishment of debt) ... -- -- -- 104 (d) -- -------- ------- ------- -------- ------- Net income (loss) ..................................... $(143,671) $ (9,197) $ (1,228) $(70,185) $11,293 ======== ======= ======= ======== =======
continued on following page 9
Fiscal Year ---------------------------------------------------------------- 2001 2000 1999(a) 1998 1997 --------- --------- --------- --------- -------- Balance Sheet Data: (dollar amounts in thousands) Total assets .......................................... $ 137,055 $ 275,234 $ 251,819 $ 165,321 $ 77,554 Total debt ............................................ 226,147 221,914 211,694 159,000 20,250 Mandatorily-redeemable preferred stock 44,989 40,061 35,421 31,513 -- Shareholders' equity (deficit) ........................ (167,821) (22,775) (14,649) (37,735) 22,515 Working capital ....................................... (160) 29,559 35,971 29,533 6,430 Other Financial Data: Net cash provided by (used in) operating activities ......................................... $ 5,564 $ 10,379 $ 7,097 $ (83,024) $ 19,269 Net cash used in investing activities ................. (9,017) (26,941) (75,818) (6,444) (3,673) Net cash provided by (used in) financing activities ......................................... 7,330 17,464 71,529 89,624 (16,398) Operating margin before EPP and Retention Payments (l) ....................................... (32.9)% 10.2% 14.6% 18.7% 19.7% Depreciation and amortization ......................... $ 12,224 $ 11,719 $ 8,315 $ 6,101 $ 5,847 Capital expenditures .................................. 9,029 11,329 10,973 3,111 4,659 Ratio of earnings to fixed charges (j) ................ --x 0.7x 1.0x --x 6.0x Deficiency of earnings to cover fixed charges ......... $ (73,817) $ -- $ -- $ (61,676) $ -- Ratio of earnings to fixed charges and preferred stock dividends (k) ...................... --x 0.8x --x --x 6.0x Deficiency of earnings to cover fixed charges and preferred stock dividends ...................... $ (73,817) $ -- $ (6,160) $ (65,863) $ --
- ---------------------- (a) Includes results of operations for (i) Hudson RCI AB, since it was acquired in July 1999, (ii) Medimex, since certain of its assets were acquired in October 1999 and (iii) VOLDYNE(R), since certain of its assets were acquired in November 1999. (b) Reflects payments made under the equity participation plan ("EPP"), which was terminated upon consummation of the recapitalization in April 1998. (c) Reflects retention payments made to substantially every employee of the Company in connection with the recapitalization. These payments were intended to ensure the continued employment of all employees after the recapitalization and no future payments are anticipated. (d) Reflects the write-off of deferred financing fees related to the payoff of outstanding debt under the Company's previous credit agreement. (e) Consist of (i) general and administrative expense of $23,889, (ii) amortization of goodwill of $3,490 and (iii) provision for bad debts of $2,826. (f) Reflects impairment of goodwill based on management's analysis described in the "Fourth Quarter Charges" section in "Item 7 - Results of Operations." (g) Reflects the write-off of certain assets management has determined have no value as described in the Fourth Quarter Charges section of the Results of Operations. (h) Includes the write-off of deferred taxes of $68,881 as described in the Fourth Quarter Charges section of the Results of Operations. 10 (i) Represents ratio of operating income before EPP and retention payments to net sales. (j) For the purpose of determining the ratio of earnings to fixed charges, earnings consist of earnings before income taxes and fixed charges. Fixed charges consist of interest on indebtedness, the amortization of debt issue costs and that portion of operating rental expense representative of the interest factor. (k) For the purpose of determining the ratio of earnings to fixed charges and preferred stock dividends, earnings consist of earnings before income taxes and fixed charges. Fixed charges consist of interest on indebtedness, the amortization of debt issue costs and that portion of operating rental expense representative of the interest factor. Preferred stock dividends have been "grossed up" to a pre-income tax basis to provide comparability to other components of the ratio. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion of the Company's consolidated historical results of operations and financial condition should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere in this Form 10-K. General 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, 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 and variability in the number of shipping days in a given quarter. Recent Developments During 2001, management implemented several initiatives designed to improve the Company's proficiency with its new management information system, to decrease the Company's ongoing operating expenses, improve collections and administration of accounts receivables, and to reduce inventory levels. While the Company continues to experience some of the issues associated with the implementation of the new system, management believes customer service levels and relationships have improved since the business disruption resulting from difficulties in the implementation of the system in 2000. In the fourth quarter of 2001, the Company incurred charges of $115.1 million, as described more completely in the "Fourth Quarter Charges" section of this item. As of December 31, 2001, based on the Company's financial results, the Company was not in compliance with certain financial covenants under its Credit Facility. As a result of this non-compliance and resulting defaults, on March 30, 2002, the Company did not make a scheduled term loan payment to the lenders as required under the Credit Facility and, as a result, the Company was prevented from making a scheduled interest payment to its Subordinated Note holders on April 15, 2002. 11 As of December 31, 2001, the Company's wholly-owned Swedish subsidiary, Hudson RCI AB, was not in compliance with certain financial covenants of the Hudson RCI AB bank facility. The Company and Hudson RCI AB are currently in discussions with the lender and expect to receive a waiver curing all defaults (see the "Liquidity and Capital Resources" section of this Item). Due to the uncertainty of receiving this waiver from the lenders, the Company has classified the entire Hudson RCI AB bank facility as a current liability on the consolidated balance sheet. The Credit Facility and Senior Subordinated notes are not cross-defaulted to the Hudson RCI AB bank facility. On May 14, 2002, the Company amended and restated the Credit Facility to (i) waive all existing events of default; (ii) extend the final maturity of the term and revolving facilities under the Credit Facility to June 30, 2004; (iii) amend existing term loan and acquisition facility amortization to $3.8 million in 2002, $9.3 million in 2003 and $37.0 million in 2004; and (iv) amend financial covenants. to include only a limitation on capital expenditures and a minimum EBITDA test. In connection with this amendment, the Company and HRC Holding, its wholly-owned subsidiary, issued a total of $20.0 million in senior unsecured notes to affiliates of Holding's majority stockholder. These notes bear interest at 12%, with interest and principal due upon maturity on December 31, 2004. During 2001, the Company made the decision to close the Argyle, New York facility and move its operations to a new facility located in Tecate, Mexico, beginning in 2002. It is anticipated that this move will cost approximately $4.6 million, of which $0.9 million relating to severance costs was recorded in 2001. Critical Accounting Policies Accounts Receivable: Management performs various analyses to evaluate accounts receivable balances to ensure that recorded amounts reflect estimated net realizable value. Management applies specified percentages to the accounts receivable aging to estimate the amount that will ultimately be uncollectible and, therefore, should be reserved. The percentages are increased as the accounts age. Management establishes and monitors these percentages through extensive analyses of historical realization data, accounts receivable aging trends, other operating trends and the extent of contracted business and business combinations. Also considered are relevant business conditions, including general economic factors as they relate to the company's international customers. If indicated by such analyses, management may periodically adjust the uncollectible estimate and corresponding percentages. Further, focused reviews of certain large and/or problematic payors are performed to determine if additional reserves are required. In the fourth quarter of fiscal year 2001, management decided to not pursue certain aged accounts receivable for collection and to allocate resources to other customer receivables and collection activities. As a result, the Company provided for such identified accounts receivables totaling $2.2 million. Inventory: Inventories are stated at the lower of cost (first-in, first-out ("FIFO") method) or market. Management utilizes various analyses based on forecasts, historical sales and inventory levels to ensure that the current carrying value of inventory accurately reflects the current and expected requirements of the Company within a reasonable timeframe. During the fourth quarter of 2001, management embarked upon a new strategic initiative to eliminate certain products that were either unprofitable or marginally profitable. In addition, management initiated a similar strategic initiative to eliminate inventory on hand which exceeded more than a reasonable level of projected future demand. As a result of the above actions, the Company recorded a charge of $4.6 million in the fourth quarter related to the write-off and disposal of obsolete and excess inventory. Revenue Recognition: The Company recognizes revenue when product is shipped and title passes to customer, as the earnings process is substantially complete. The Company establishes reserves for sales returns and other allowances based on historical experience. The Company sells its products to its distributors without right of return based on a listed price. Distributors charge the service providers, or the Company's end customers, a contract price (which is determined by their GPO affiliation or individual contract price) plus a service margin. As is customary within the industry, the Company rebates the difference between the list price and the specific contract price to the distributor. 12 The Company records revenue and receivables net of rebatable amounts. In the event no rebate is payable, the amount is reversed and recognized as revenue. Deferred Taxes: The Company applies the asset and liability method in recording income taxes, under which deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using currently enacted tax rates and laws. Additionally, deferred tax assets are evaluated and a valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. As a result of significant losses in the fourth quarter and cumulative losses in recent years, management reevaluated its ability to realize the future benefit of its deferred tax assets in light of the historical operating results. Accordingly, the Company recorded a full valuation allowance against its deferred tax assets of approximately $68.9 million. Impairment of Goodwill and Other Intangibles: The Company periodically reviews the recoverability of the carrying value of goodwill, intangibles and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of these assets is determined by analysis of the asset's fair value by comparing the forecasted future net cash flows from the operations to which the assets relate, based on management's best estimates using the appropriate assumptions and projections at the time, to the carrying amount of the assets. If the carrying value is determined not to be recoverable from future operating cash flows, the asset is deemed impaired and an impairment loss is recognized equal to the amount by which the carrying amount exceeds the estimated fair value of the assets. In addition, goodwill is assessed for recoverability at an entity level, based on fair value determined by estimated future cash flows discounted at a rate commensurate with the risk involved. In the fourth quarter of 2001, as a result of significant losses from operations, the Company recorded a goodwill impairment charge of approximately $33.1 million. Recent Accounting Pronouncements Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No.133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments. The statement requires that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value, and that changes in the derivative's fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. The adoption of this new standard did not have a material impact on the Company's consolidated financial statements. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"). This Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations," and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. Any acquisitions made by the Company after June 2001 will be accounted for in accordance with SFAS 141. Also in June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." This pronouncement addresses, among other things, how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Goodwill would no longer be amortized but would be assessed at least annually for impairment using a fair value methodology. The Company stopped amortizing goodwill, effective January 1, 2002 and, as a result, an equivalent charge for goodwill amortization will not be made in 2002. The Company is still evaluating the impact of the standard on impairment, which is expected to be completed by the end of the second quarter of 2002. The amortization of goodwill for 2001 was $3.5 million. Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting obligations associated with the retirement of tangible 13 long-lived assets and the associated asset retirement costs. It requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful live of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs gain or loss upon settlement. SFAS 143 is effective January 1, 2003. The Company does not expect the adoption of SFAS 143 to have a material impact on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - - Reporting the Effects of a Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 was effective January 1, 2002. The adoption of SFAS 144 is not expected to have a material impact on the Company's consolidated financial statements. 14 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.
Fiscal Year ---------------------------------------- 2001 2000 1999 ---------- ---------- ------- (dollars in thousands) Net sales ...................................................... $ 157,112 $ 159,278 $ 128,803 Cost of sales .................................................. 108,054 84,923 75,418 ---------- --------- ----------- Gross profit ............................................... 49,058 74,355 53,385 Selling expenses ............................................... 19,496 18,262 13,122 Distribution expenses .......................................... 11,429 10,109 4,647 General and administrative expenses ............................ 23,889 20,917 12,829 Amortization of goodwill ....................................... 3,490 3,320 1,463 Impairment of goodwill ......................................... 33,128 -- -- Impairment of fixed assets ..................................... 4,469 -- -- Research and development expenses .............................. 2,043 2,387 2,031 Provision for bad debts ........................................ 2,826 3,106 440 ---------- --------- --------- Total operating expenses ....................................... 100,770 58,101 34,532 ---------- --------- --------- Operating income (loss) ........................................ $ (51,712) $ 16,254 $ 18,853 ========== ========= ========= Fiscal Year ---------------------------------------- 2001 2000 1999 ---------- --------- -------- Net sales ...................................................... 100.0% 100.0% 100.0% Cost of sales .................................................. 68.8 53.3 58.5 ---------- --------- -------- Gross profit ............................................... 31.2 46.7 41.5 Selling expenses ............................................... 12.4 11.5 10.2 Distribution expenses .......................................... 7.3 6.3 3.6 General and administrative expenses ............................ 15.2 13.1 10.0 Amortization of goodwill ....................................... 2.2 2.1 1.1 Impairment of goodwill ......................................... 21.1 -- -- Impairment of fixed assets ..................................... 2.8 -- -- Research and development expenses .............................. 1.3 1.5 1.6 Provision for bad debts ........................................ 1.8 2.0 0.3 ---------- --------- --------- Total operating expenses ....................................... 64.1 36.5 26.8 ---------- --------- --------- Operating income (loss) ........................................ (32.9)% 10.2% 14.7% ========== ========= =========
15 Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Net sales, reported net of rebates, were $157.1 million in 2001, a decrease of $2.2 million or 1.4% from 2001. On a consolidated basis, domestic hospital sales decreased by $5.5 million during 2001, or 5.9% as compared to 2000. The decrease in net sales is attributable to the following: (i) reduced seasonal demand worldwide for certain products due to mild levels of flu-related illnesses and unusually warm weather in the fourth quarter of 2001; (ii) lower than normal demand from U.S. hospitals following the September 11, 2001 terrorist attacks in New York and Washington as a result of reduced hospital admissions and lower levels of elective surgeries; and (iii) a decision by the Company in 2001 not to offer purchasing incentives at year end to distributors. Alternate site sales increased by $2.0 million or 8.8% due to market growth and lower prior year sales which were the result of shipping difficulties encountered in 2000 relating to the implementation of the management information system. Original Equipment Manufacturing ("OEM") sales decreased by $1.0 million or 16.3% during 2001, primarily due to changes in purchasing patterns from some of its OEM customers and their reduced demand as a result of the weak influenza season. European sales increased slightly by $0.3 million or 1.5% as compared to 2000 as a result of incremental sales of the SHERIDAN(R) product line (acquired in October 2000) as well as increased sales in certain European markets now served on a direct basis through the Company's European distribution center located in the Netherlands. Pacific Rim sales increased by $2.0 million or 21.5% as compared to 2000 as a result of incremental sales of the SHERIDAN(R) product line and continued growth in the use of the Company's products in this marketplace. The Company's gross profit for 2001 was $49.1 million, a decrease of $25.3 million or 34.0% from 2000. As a percentage of net sales, the Company's gross profit for 2001 was 31.2% as compared to 46.7% for 2000. This decrease was primarily due to the following: (i) sale of inventory recorded a higher net realizable value rather than manufacturing cost as a result of the SHERIDAN(R) acquisition; (ii) increased shipping costs as a result of shipping difficulties caused by problems associated with the new management information system; (iii) an unfavorable mix variance caused by higher sales of products with lower gross margins; (iv) higher level of unabsorbed manufacturing costs resulting from lower than expected demand and decreased inventories and (v) charges in the fourth quarter of 2001 relating to an initiative put in place to discontinue and dispose of less profitable products. Selling expenses were $19.5 million for 2001, a $1.2 million or 6.8% increase over 2000. This increase was primarily driven by additions to the sales and marketing departments to support recently acquired product lines, as well as an increase in fees associated with certain GPO's. As a percentage of sales, selling expenses were 12.4% in 2001 as compared to 11.5% in 2000. Distribution expenses were $11.4 million in 2001, which represents a $1.3 million or 13.1% increase over 2000. As a percentage of sales, distribution expenses were 7.3% in 2001 versus 6.3% in 2000. This increase was a result of the establishment of the European distribution center in the first quarter of 2001. General and administrative expenses were $23.9 million for 2001, an increase of $3.0 million or 14.3% over 2000. This increase resulted primarily from increased staffing levels required to maintain acceptable customer service levels and operate the business with the new management information system, expenses related to the closure of the Atlanta distribution center, higher depreciation associated with the new management information system and other professional fees and charges related to implementing the new management information system. Amortization of goodwill was $3.5 million in 2001, a $0.2 million or 5.1% increase over 2000. The increase was the result of a full year of amortization related to the SHERIDAN(R) acquisition made during the fourth quarter of 2000. As a result of significant losses in the fourth quarter, the Company reassessed future cash flows and determined that goodwill was not recoverable. Accordingly, the Company recorded a goodwill impairment charge of approximately $33.1 million. Research and development expenses were $2.0 million in 2001 as compared to $2.4 million in 2000, the result of eliminating several positions in the Company's facility operated by Hudson RCI AB, the Company's Swedish subsidiary, during 2001. 16 Interest expense was $20.5 million in 2001, a $0.5 million or 2.6% decrease from 2000. The decrease was primarily due to a general decrease in interest rates. Income tax provision was $69.8 million for 2001 as compared to $3.2 million in 2000. As a result of losses in the fourth quarter of 2001 and cumulative losses in recent years, the Company recorded a full valuation allowance of $68.9 million in 2001. Fourth Quarter Charges The following is a summary of the charges incurred by the Company in the fourth quarter of 2001 (amounts in thousands): Write-off of deferred tax asset ...................... $ 68,881 Goodwill impairment .................................. 33,128 Impairment of fixed assets ........................... 4,469 Destruction of obsolete inventory .................... 4,582 Write-off of uncollectible accounts receivable ....... 2,189 Distribution center closure .......................... 930 Relocation of manufacturing facilities ............... 900 --------- Total fourth quarter charges ......................... $ 115,079 ========= As a result of significant losses in the fourth quarter and cumulative losses in recent years, the Company has reevaluated its ability to realize the future benefit of its net deferred tax assets held in light of the historical operating losses. Accordingly, the Company recorded a full valuation allowance against its deferred tax assets of approximately $68.9 million. As a result of significant losses in the fourth quarter, the Company reassessed future cash flows and determined that goodwill was not recoverable. Accordingly, the Company recorded a goodwill impairment charge of approximately $33.1 million. As a result of the Company's analysis of fixed assets in the fourth quarter, it was determined that certain machinery and equipment was no longer needed to support current business operations and had no value. Additionally, certain software development costs incurred in 2001 related to the management information system failed to achieve their intended results and, as a result, were determined to have no future value. As a result, the Company recorded an impairment charge of approximately $4.5 million. As a result of an analysis of product lines during the fourth quarter of 2001, the Company concluded that it would no longer support a certain number of individual products, resulting in the related inventories of those products no longer having value. The Company recorded charges of $4.6 million related to the destruction of obsolete inventory resulting from this strategic decision. The Company made a decision in the fourth quarter of 2001 to not pursue certain aged accounts receivable for collection and to allocate resources to other customer receivables and collection activities. As a result, the Company increased its provision for write-offs based on analysis of those aged customer receivables. The Company recorded a charge of approximately $0.9 million related to the 4th quarter closure of its Atlanta distribution center. This charge primarily consisted of future rent commitments. During fiscal 2001, the Company made a decision to relocate from its manufacturing operation in Argyle, New York to Tecate, Mexico. In addition, the Company made a decision to move certain product manufacturing 17 from Temecula, California to Ensenada, Mexico. The Company recorded approximately $0.9 million in severance costs related to the relocations. During the fourth quarter of 2000, the Company embarked on a detailed review of the accounts receivable. Upon completion of such analysis, the Company recorded an additional $2.3 million of provision for bad debts to recognize certain accounts receivable, which became uncollectible in the fourth quarter. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Net sales, reported net of rebates, were $159.3 million in 2000, an increase of $30.5 million or 23.7% over 1999. Of the $30.5 million increase, $9.2 million related to the VOLDYNE(R) incentive breathing exerciser product line acquisition made in November 1999, and $3.2 million was the result of the acquisition of the SHERIDAN(R) endotracheal tube product line in October of 2000. In addition, the Louis Gibeck AB (now Hudson RCI AB) acquisition, completed in July 1999, accounted for an additional $5.4 million of sales in 2000. For the base Hudson RCI business, alternate site sales increased $1.5 million or 7.1% as a result of the continued focus on this important and growing marketplace. Domestic hospital sales increased by $9.7 million or 13.0% as the result of new GPO relationships, as well as increased purchases from existing GPO relationships. Sales to Europe declined by $2.2 million or 18.0%, driven primarily by backorders and sales losses created during the implementation of a new management information computer system. Sales to Latin America increased by $0.4 million, while sales to the Pacific Rim increased by $2.6 million. OEM sales increased by $0.8 million or 18.6%, the result of new relationships with several customers. The Company's gross profit for 2000 was $74.4 million, an increase of $21.0 million or 39.3% from 1999. As a percentage of net sales, the Company's gross profit for 2000 was 46.7% as compared to 41.4% for 1999. This increase was primarily due to increased sales of higher profit margin products, such as the acquired Louis Gibeck AB and VOLDYNE(R) incentive breathing exerciser product lines. This was somewhat offset by increased freight costs required to service customer needs during a period of shipping difficulties caused by problems associated with the new computer system installation. Selling expenses were $18.3 million for 2000, a $5.1 million or 39.2% increase over 1999. This increase was primarily driven by the inclusion of full year results in 2000 of Hudson RCI AB, as well as establishment of sales offices in France and the United Kingdom during 2000. As a percentage of net sales, selling expenses were 10.2% and 11.5% in 1999 and 2000, respectively. Distribution expenses were $10.1 million in 2000, which represents a $5.5 million or 117.5% increase over 1999. This increase was caused by implementation of a second shift at all domestic distribution centers, increased overtime and the addition of a new distribution warehouse in Temecula, California. These increased costs were driven by shipping issues caused by the new system implementation, as well as higher volumes of products shipped during 2000 as compared to 1999. Additionally, freight for products shipped between distribution facilities increased significantly in order to meet increased demand, as well as to better serve customers affected by shipping problems associated with the new system implementation. General and administrative expenses were $20.9 million for 2000, an increase of $8.0 million or 62.0% over 1999. This increase resulted primarily from increased staffing required to maintain acceptable customer service levels and operate the business with the new computer system. Additionally, due to increased aging of receivables resulting from lack of experience and visibility within the new management information system, the Company increased its reserves for doubtful accounts. In addition, general and administrative expense increases also resulted from the establishment of sales offices in France and the United Kingdom, as well as the full year effect of Hudson RCI AB. Amortization of goodwill was $3.3 million in 2000, a $1.9 million or 126.9% increase over 1999. This increase was driven primarily by the Hudson RCI AB and VOLDYNE(R) incentive breathing exerciser acquisitions in 1999, as well as the SHERIDAN(R) endotracheal tube product line acquisition in 2000. 18 Research and development expenses were $2.4 million in 2000 as compared to $2.0 million in 1999. This increase is solely due to the inclusion of Hudson RCI AB results for a full year in 2000. Interest expense was $21.1 million in 2000, a $3.8 million or 22.2% increase over 1999. This increase was primarily due to increased borrowings to fund the Hudson RCI AB, VOLDYNE(R) incentive breathing exerciser and SHERIDAN(R) acquisitions. In addition, borrowings were higher under the working capital revolver due to increased working capital requirements that resulted from growth in the Company, as well as from issues relating to the new computer system implementation. The Company experienced significant changes in the composition and complexity of accounts receivable that were aggravated by the Company's implementation of its new ERP system. During the fourth quarter of 2000, the Company embarked on a detailed review of accounts receivable. Upon completion of such analysis, the Company recorded an additional $2.3 million of provision for bad debts to recognize certain accounts receivable, which became uncollectible in the fourth quarter. During 2000, the Company also experienced a shift in customer product and product mix to a higher rebate percentage. Similar to the problems associated with the allowance for doubtful accounts, the shift was obscured by difficulties associated with the implementation of the Company's new ERP system, which resulted in the Company's reevaluation of the amount of rebates recognized. Seasonality The Company's results of operations exhibit some measure of seasonality. Generally, the Company's sales and EBITDA are higher in the first and fourth quarters and lower in the second and third quarters. This is due primarily to the higher incidence of breathing ailments, such as colds and flu, during the winter months, which results in increased hospitalization and respiratory care, especially among higher-risk individuals, such as infants and the elderly. Fourth quarter sales are generally the Company's highest, as distributors increase inventory in anticipation of the cold and flu seasons. First quarter results are generally affected by the length and severity of flu seasons. Liquidity and Capital Resources The Company's primary sources of liquidity are cash flow from operations and borrowings under its working capital bank facility and, historically, investments from its shareholders. Cash provided by operations totaled $5.6 million, $10.4 million and $7.1 million in 2001, 2000 and 1999, respectively. The decrease from 2000 to 2001 is attributable to lower profitability and reduction in trade accounts payable offset in part by decreases in inventories and accounts receivable. The Company had operating working capital, excluding cash and short-term debt, of $13.4 million and $38.7 million as of the end of fiscal 2001 and 2000, respectively. Inventories were $25.2 million and $44.6 million as of the end of fiscal 2001 and 2000, respectively. In 2000, inventories increased to unplanned levels due to problems related to the implementation of a new management information system, as well as higher sales levels. The Company significantly reduced inventory levels in 2001, to levels more consistent with the current operating requirements of the Company, but over time, the Company expects its level of inventories to increase as the Company's sales in the international market increase. Accounts receivable, net of allowances, were $19.3 million and $28.3 million at the end of fiscal 2001 and 2000, respectively. In 2001 and 2000, the Company recorded bad debt expense of $2.8 million and $3.1 million, respectively. The average days sales in accounts receivable outstanding was approximately 55 days for 2001, compared to 65 days for 2000 and 86 days for 1999. The Company offers 30 day credit terms to its U.S. hospital distributors. Alternate site and international customers typically receive 60 to 90 day terms and, as a result, as the Company's alternate site and international sales have increased, the amount and aging of its accounts receivable have increased. The Company anticipates that the amount and aging of its accounts receivable will increase gradually over time as alternate site and international sales become a larger percentage of the Company's total sales. The Company established a European distribution center in the first quarter of 2001. While this has had the effect of increasing inventory, the Company believes that it will also result in improved service to international customers, as well as in lower international accounts receivable than would otherwise be the case, because customers will receive products and, consequently, pay for them more quickly. 19 Net cash used in investing activities was $9.0 million, $26.9 million and $75.8 million in 2001, 2000 and 1999, respectively. These funds were primarily used to finance customary purchases of property, plant and equipment in 2001, the SHERIDAN(R) endotracheal tube product line acquisition in 2000, and Hudson RCI AB and the VOLDYNE(R) incentive breathing exerciser product line acquisition in 1999, and for capital expenditures. Capital expenditures, consisting primarily of new manufacturing equipment purchases, computer systems purchases, production of heaters, and expansion of the Ensenada facility, totaled $9.0 million, $11.3 million and $11.0 million in 2001, 2000 and 1999, respectively. The higher levels of spending in 2000 and 1999 relate to the acquisition and implementation of a new computer system. The Company currently estimates that capital expenditures will be approximately $8.0 million in 2002, consisting primarily of additional and replacement manufacturing equipment and new heater placements. Net cash provided by financing was $7.3 million in 2001, reflecting net borrowings by the Company and the issuance of $3.0 million in Junior Preferred Stock and $100,000 in common stock. Net cash provided by financing activities in 2000 of $17.4 million, reflecting net borrowings and the issuance of $6.0 million in common stock, was used primarily to finance the Tyco SHERIDAN(R) endotracheal tube product line acquisition. Net cash provided by financing activities was $71.5 million in 1999, reflecting net borrowings and equity issuances by the Company, which was used primarily to finance the Hudson RCI AB, Medimex and VOLDYNE(R) acquisitions. As of December 31, 2001, the Company had outstanding $226.1 million of indebtedness, consisting of $115.0 million of Subordinated Notes, borrowings of $77.0 million under the Company's Credit Facility, $17.2 million in notes payable to affiliates and $16.9 million in outstanding borrowings under the bank facility of Hudson RCI AB, its Swedish subsidiary. The following is a summary of the Company's consolidated contractual obligations as of December 31, 2001:
(amounts in thousands) Payments Due by Period -------------------------------------------------------------------- Less Than 1-3 4-5 After 5 Total 1 Year Years Years Years ----------- ----------- ------------ ------------ ----------- Long-term debt ................................ $ 226,147 $ 20,680 $ 88,201 $ 2,266 $ 115,000 Mandatorily redeemable preferred securities ... 44,989 -- -- -- 44,989 Leases and other commitments .................. 12,336 2,247 6,065 1,792 2,232 ----------- ----------- ------------ ------------ ----------- Total contractual obligations ............. $ 283,472 $ 22,927 $ 94,266 $ 4,058 $ 162,221 =========== =========== ============ ============ ===========
The Credit Facility currently consists of a $40.0 million Term Loan Facility and a $55.0 million Revolving Loan Facility of which up to $40.0 million (all of which has been borrowed and is outstanding) may be used for permitted acquisitions ("Acquisition Facility") and up to $15 million (the "Working Capital Portion") may be used for general corporate purposes (other than acquisitions). The Revolving Loan Facility has a letter of credit sub-limit of $7.5 million. The Term Loan Facility and Acquisition Facility, amended as discussed below, mature on June 30, 2004 and require quarterly principal installments totaling $3.8 million in 2002, $9.3 million in 2003 and $37.0 million in 2004. The Revolving Loan Facility matures on June 30, 2004. Total borrowings as of December 31, 2001 and 2000 were $55.0 million and $53.0 million under the Revolving Loan Facility and Acquisition Facility and $22.0 million and $29.5 million under the Term Loan Facility, respectively. As of December 31, 2001, the Company had utilized all available credit under the Revolving Credit Facility. No additional borrowing was available under the Term Loan Facility at December 31, 2001. 20 The interest rate under the Credit Facility is 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 as follows: Margin ------------------------ Period and Loan Type Base Rate Eurodollar -------------------- ------------------------ Through June 2002 Term and Working Capital 3.00% 4.00% Acquisition 3.25% 4.25% July 2002 through March 2003 Term and Working Capital 3.50% 4.50% Acquisition 3.75% 4.75% Thereafter Term and Working Capital 4.00% 5.00% Acquisition 4.25% 5.25% For periods after June 2002, the margins set forth above are subject to pricing reductions depending on the Company's then existing leverage ratio. Borrowings under the Credit Facility are required to be prepaid, subject to certain exceptions, with (i) 75% (or 50% for years when the Company's ratio of Debt to EBITDA (as defined) is less than 5:1) of Excess Cash Flow (as defined); (ii) 50% of the net cash proceeds of an equity issuance by Holding or the Company in connection with an initial public offering or 100% of the net cash proceeds of an equity issuance by Holding or the Company other than in connection with an initial public offering (subject in each case to certain exceptions); (iii) 100% of the net cash proceeds of the sale or other disposition of any properties or assets of Holding and its subsidiaries (subject to certain exceptions); (iv) 100% of the net proceeds of certain issuances of debt obligations of the Company and its subsidiaries and (v) 100% of the net proceeds from insurance recoveries and condemnations. The Revolving Loan Facility must be repaid upon payment in full of the Term Loan Facility. The Credit Facility is guaranteed by Holding and certain of the Company's subsidiaries. The Credit Facility is secured by a first priority lien in substantially all of the properties and assets of the Company and the guarantors now owned or acquired later, including a pledge of all of the capital stock of the Company owned by Holding and all of the shares held by the Company of its existing and future restricted subsidiaries, including its Mexican subsidiaries; provided, that (except for the Mexican subsidiaries) such pledge is limited to 65% of the shares of any foreign subsidiary to the extent a pledge of a greater percentage would result in adverse tax consequences to the Company. The Credit Facility contains covenants restricting the ability of Holding, the Company and the Company's 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. Hudson RCI is also required to comply with financial covenants with respect to (a) limits on annual aggregate capital expenditures (as defined) and (b) as amended a minimum EBITDA test. The Company was not in compliance with certain financial covenants of the Credit Facility as of December 31, 2001 and did not make the scheduled March 31, 2002 amortization payment of the Term Loan Facility on its due date. As a result, in early April, 2002, the lenders under the Credit Facility blocked the Company from making either the April 15, 2002 interest payment required under the Senior Subordinated Notes or the April 15, 2002 dividend payment required under the 11-1/2% Senior Exchangeable PIK Preferred Stock due 2010. On May 14, 2002, the Company and banks amended and restated the Credit Facility to (i) waive all existing events of default; (ii) extend the final maturity of the term and revolving facilities under the Credit Facility to June 30, 2004; (iii) amend existing Term Loan and Acquisition Facility amortization to $3.8 million in 2002, $9.3 million in 2003 and $37.0 million in 2004, and (iv) amend the 21 financial covenants to include only a limitation on capital expenditures and a minimum EBITDA test. As a result of the amendment, the Company is currently in compliance with the terms and provisions of the Credit Facility. As of May 31, 2002, there was approximately $3.5 million of availability on the revolving Loan Facility under the Credit Facility. The Senior Subordinated Notes bear interest at the rate of 9-1/8%, payable semiannually on each April 15 and October 15, and will require no principal repayments until maturity. The Senior Subordinated Notes are general unsecured obligations of the Company and contain covenants that place limitations on, among other things, (i) the ability of the Company, any subsidiary guarantors and other restricted subsidiaries to incur additional debt, (ii) the making of certain restricted payments including investments, (iii) the creation of certain liens, (iv) the issuance and sale of capital stock of restricted subsidiaries, (v) asset sales, (vi) payment restrictions affecting restricted subsidiaries, (vii) transactions with affiliates, (viii) the ability of the Company and any subsidiary guarantor to incur layered debt, (ix) the ability of Holding to engage in any business or activity other than those relating to ownership of capital stock of the Company and (x) certain mergers, consolidations and transfers of assets by or involving the Company. As discussed above, the Company was prevented from making the April 15, 2002 interest payment to holders of the Senior Subordinated Notes pending the completion of the amendment to the Credit Facility on May 14, 2002. Because the Company made the interest payment due under the Senior Subordinated Notes within the 30-day grace period, no event of default occurred by reason thereof. The Company is currently in compliance with the terms and provisions of the Senior Subordinated Notes. In connection with the acquisition of Hudson RCI AB during 1999, one of the Company's subsidiaries borrowed $22.0 million under an unsecured 12% note payable to Holding's majority stockholder. The note is due August 1, 2006. During 1999, the Company paid approximately $14.5 million in principal on the note. In April 2001 an additional $6.0 million in principal on the note was repaid. Proceeds from the April 2001 repayment were then reinvested by Holding's majority stockholder in new notes issues by the Company, as described below. During 2000, the Company borrowed an additional $2.0 million from Holding's majority stockholder under an unsecured 14% note payable due on demand. In August of 2001, this note was exchanged for a new long-term note as described below. In August 2001, the Company issued approximately $15.0 million of new unsecured senior subordinated convertible notes to affiliates for $7.0 million in cash and an exchange of $8.0 million in existing short-term unsecured notes. The new notes bear interest at 10% and are due in March 2005. The interest may be paid or deferred to the due date at the option of the Company and the notes are convertible to the Company's common stock at the demand of the holder. The notes are subordinated to borrowings under the Credit Facility and the new senior unsecured notes discussed below and rank pari-passu with the Senior Subordinated Notes. As of December 31, 2001 and May 31, 2002, the Company and its subsidiaries had a total of $17.2 million and $29.2, million, respectively, in notes outstanding due to affiliates. As part of the May 2002 amendment and restatement of the Credit Facility discussed above, the Company issued $12.0 million of the senior unsecured notes in exchange for $12.0 million of bank term loans purchased by affiliates of Holding's majority stockholder. Additionally, HRC Holding issued $8.0 million of unsecured senior notes to affiliates of Holding's majority stockholder. HRC Holding used the proceeds of the notes issued by it to acquire certain intercompany receivables from the Company. These notes bear interest at 12% annually with interest and principal due upon maturity on December 31, 2004. Proceeds from these transactions were used to pay the April 2002 interest due under the Subordinated Notes, fund expenses associated with the Amended and Restated Credit Facility and provide funds for ongoing general corporate purposes The Company, through its wholly-owned Swedish Subsidiary, Hudson RCI AB, has incurred bank debt in Sweden (the "HRCI AB Facility") that totaled $16.9 million as of December 31, 2001. The HRCI AB Facility, which is denominated in Swedish krona, bears interest at three-month STIBOR (the interest rate at or about 11:00 a.m. Stockholm time, two banking days before a draw-down date or the relevant interest period, quoted for deposits in krona) plus 1.25% to 1.85% (5.14% to 5.74% at December 31, 2001), matures in September 2005, and is guaranteed by Steamer Holding 22 AB, Hudson RCI AB's parent, and is secured by the common stock of Hudson RCI AB. As of December 31, 2001, Hudson RCI AB was not in compliance with certain financial covenants under the HRCI AB Facility. The Company and Hudson RCI AB are currently in negotiations with the lender concerning an amendment curing these defaults and expects to receive from the lender a waiver curing all past covenant violations, but no assurance can be given that an agreement will be reached. Accordingly, the outstanding balance is classified as a current liability at December 31, 2001. The Company's Credit Facility and the Senior Subordinated Notes are not cross-defaulted to the Hudson RCI AB facility. If a waiver of such default is not obtained, the lender may pursue its remedies under the facility, including, among other things, immediate acceleration of all borrowings of the facility. In addition, the default entitles the lender to take control of all the common stock of Hudson RCI AB and its European parent companies. In April 1998, the Company issued to Holding 300,000 shares of its 11-1/2% Senior PIK Preferred Stock due 2010 with an aggregate liquidation preference of $30.0 million, which has terms and provisions materially similar to those of the Holding Preferred Stock. Under the terms of the Senior PIK Preferred Stock, at the election of the Company, dividends may be paid in kind until April 15, 2003 and thereafter must be paid in cash. In August 2001, the Company issued 3,000 shares of Junior Convertible cumulative preferred stock (the "Junior Preferred Stock") to Holding for cash consideration of $3.0 million. The May 2002 Amended and Restated Credit Facility prohibits the Company from paying cash dividends on its Senior PIK Preferred Stock. Factors Affecting Liquidity As the result of a number of factors affecting the Company in fiscal 2000 and 2001 resulting from the implementation of the Company's new information system, management undertook numerous actions during 2001 to improve the liquidity and improve the operating performance of the Company. Such actions included: elimination of a distribution warehouse, the elimination of non-essential management personnel, a reduction in inventory levels, aggressive collection and write-off of accounts receivable and other cost reduction measures as management deemed necessary to fund the operations of the Company, meet anticipated capital expenditures and make required payments of principal and interest on its debt. In addition, existing shareholders and key management personnel contributed a total of $10.1 million in new cash in the form of convertible subordinated debt and equity in 2001, and as discussed above, in May 2002, affiliates of Holding's majority stockholder partially invested an additional $20.0 million in senior unsecured notes, $12.0 million of which was exchanged for bank term loans previously acquired. Proceeds from these notes were used to pay interest due on the Subordinated Notes, pay for expenses associated with the amendment of the Credit Facility and provide for ongoing working capital requirements. Based on these actions, as well as anticipated improved operating performance, management believes it will have sufficient sources of liquidity to meet its obligations for the remainder of 2002. 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 asset sales, additional debt or equity issuances and/or curtail operations. The Company currently 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 secured if required. Failure to achieve expected cash flows or, if necessary, to obtain additional debt or equity investment would have a material adverse affect on the Company. 23 RISK FACTORS Substantial Leverage; Shareholders' Deficit As of December 31, 2001, the Company had $226.1 million of outstanding indebtedness and a shareholders' deficit of approximately $167.8 million. This level of indebtedness is substantially higher than the Company's historical debt levels and may reduce the flexibility of the Company to respond to changing business and economic conditions. In addition, subject to the restrictions in the Credit Facility and the indenture governing the Subordinated Notes (the "Indenture"), the Company may incur additional senior or other indebtedness from time to time to finance acquisitions or capital expenditures or for other general corporate purposes. See "--Liquidity and Capital Resources." The Credit Facility and the Indenture restrict, but do not prohibit, the payment of dividends by the Company to Holding to finance the payment of dividends on the Holding Preferred Stock. The Company's high degree of leverage may have significant consequences for the Company, including: (i) the ability of the Company to obtain additional financing for working capital, capital expenditures, acquisitions or other purposes, if necessary, may be impaired; (ii) a substantial portion of the Company's cash flow will be dedicated to the payment of interest and principal on its indebtedness and will not be available to the Company for its operations and future business opportunities; (iii) the covenants contained in the indenture and the Credit Facility will limit the Company's ability to, among other things, borrow additional funds, dispose of assets or make investments and may affect the Company's flexibility in planning for, and reacting to, changes in business conditions; (iv) indebtedness under the Credit Facility will be at variable rates of interest, which will cause the Company to be vulnerable to increases in interest rates; and (v) the Company's high degree of leverage may make it more vulnerable to a downturn in its business or the economy generally or limit its ability to withstand competitive pressures. If the Company is unable to generate sufficient cash flow from operations in the future to service its indebtedness, it may be required to refinance all or a portion of its existing debt or to obtain additional financing. There can be no assurance that any such actions could be effected on a timely basis or on satisfactory terms or that these actions would enable the Company to continue to satisfy its capital requirements. The Company's ability to meet its debt service obligations and to reduce its total indebtedness will be dependent upon the Company's future performance, which will be subject to general economic conditions and to financial, business and other factors affecting the operations of the Company, many of which are beyond its control. The terms of the Company's indebtedness, including the Credit Facility and the Indenture, also may prohibit the Company from taking such actions. Medical Cost Containment In recent years, widespread efforts have been made in both the public and private sectors to control health care costs, including the prices of products such as those sold by the Company, in the United States and abroad. Cost containment measures have resulted in increased customer purchasing power, particularly through the increased presence of GPOs in the marketplace and increased consolidation of distributors. Health care organizations are evaluating ways in which costs can be reduced by decreasing the frequency with which a treatment, device or product is used. Cost containment has also caused a shift in the decision-making function with respect to supply acquisition from the clinician to the administrator, resulting in a greater emphasis being placed on price, as opposed to features and clinical benefits. The Company has encountered significant pricing pressure from customers and believes that it is likely that efforts by governmental and private payers to contain costs through managed care and other efforts and to reform health systems will continue and that such efforts may have an adverse effect on the pricing and demand for the Company's products. There can be no assurance that current or future reform initiatives will not have a material adverse effect on the Company's business, financial conditions or results of operations. The Company's products are sold principally to a variety of health care providers, including hospitals and alternate site providers, that receive reimbursement for the products and services they provide from various public and private third party payors, including Medicare, Medicaid and private insurance programs. As a result, while the Company does not receive payments directly from such third party payors, the demand for the Company's products in any specific care setting is dependent in part on the reimbursement policies of the various payors in that setting. In order to be reimbursed, the products generally must be found to be reasonable and necessary for the treatment of medical 24 conditions and must otherwise fall within the payor's list of covered services. In light of increased controls on Medicare spending, there can be no assurance on the outcome of future coverage or payment decisions for any of the Company's products by governmental or private payors. If providers, suppliers and other users of the Company's products are unable to obtain sufficient reimbursement, a material adverse impact on the Company's business, financial condition or operations may result. The Company expects that the trend toward cost containment that has impacted the domestic market will also be experienced in international health care markets, impacting the Company's growth in foreign countries, particularly where health care is socialized. Industry Consolidation; Customer Concentration Cost containment has resulted in significant consolidation within the health care industry. A substantial number of the Company's customers, including group purchasing organizations, hospitals, national nursing home companies and national home health care agencies, have been affected by this consolidation. The acquisition of any of the Company's significant customers could result in the loss of such customers by the Company, thereby negatively impacting its business, financial condition and results of operations. For example, in 1996, three GPOs that accounted for aggregate sales of approximately $11.0 million combined and, as a result of a decision of the combined entity to enter into a sole distributorship arrangement in 1997 with one of the Company's competitors, the Company has experienced some decrease in sales and may experience additional sales decreases in the future. In addition, the consolidation of health care providers often results in the renegotiation of terms and in the granting of price concessions. The Company's customer relationships, including exclusive or preferential provider relationships, are terminable at will by either party without advance notice or penalty. Because larger purchasers or groups of purchasers tend to have more leverage in negotiating prices, this trend has caused the Company to reduce prices and could have a material adverse effect on the Company's business, financial condition or results of operations. As GPOs and integrated health care systems increase in size, each relationship represents a greater concentration of market share and the adverse consequences of losing a particular relationship increases considerably. For fiscal 2001, the Company's ten largest group purchasing arrangements accounted for approximately 38.7%. Distributors have also consolidated in response to cost containment. For fiscal 2001, approximately 29.4% of the Company's net sales were to two distributors, Owens & Minor Inc. and McKesson, which accounted for 19.4% and 10.0%, respectively, of the Company's net sales. The loss of the Company's relationship with these distributors would have a material adverse effect on the Company's business, financial condition and results of operations. The Company and its customers and suppliers are subject to extensive federal and state regulation in the United States, as well as regulation by foreign governments. The Company cannot predict the extent to which future legislative and regulatory developments concerning practices and products for the health care industry may affect the Company. Most of the Company's products are subject to government regulation in the United States and other countries. In the United States, the Federal Food, Drug, and Cosmetic Act, as amended (the "FD&C Act"), and other statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, record keeping, marketing, advertising and promotion of such products. Failure to comply with applicable requirements can result in fines, recall or seizure of products, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices and criminal prosecution. Under the FD&C Act and similar foreign laws, the Company, as a marketer, distributor and manufacturer of health care products, is required to obtain the clearance or approval of Federal and foreign governmental agencies, including the Food and Drug Administration ("FDA"), prior to marketing, distributing and manufacturing certain of those products, which can be time consuming and expensive. The Company may also need to obtain FDA clearance before modifying marketed products or making new promotional claims. Delays in receipt of or failure to receive required approvals or clearances, the loss of previously received approvals or clearances, or failures to comply with existing or future regulatory requirements in the United States or in foreign countries could have a material adverse effect on the Company's business. Foreign sales are subject to similar requirements. The Company is required to comply with pertinent sections of the Code of Federal Regulations, 21CFR GMP/QSR, which set forth requirements for, among other things, the Company's manufacturing process, design control 25 and associated record keeping, including testing and sterility. Further, the Company's plants and operations are subject to review and inspection by state, federal and foreign governmental entities. The distribution of the Company's products may also be subject to state regulation. The impact of FDA regulation on the Company has increased in recent years as the Company has increased its manufacturing operations. The Company's suppliers, including contract sterilization facilities, are also subject to similar governmental requirements. There can be no assurance that changes to current regulations or additional regulations imposed by the FDA will not have an adverse impact on the Company's business and financial condition in the future. If the FDA believes that a company is not in compliance with applicable regulations, it can institute proceedings to detain or seize products, issue a recall, impose operating restrictions, enjoin future violations and assess civil and criminal penalties against the company, its officers or its employees and can recommend criminal prosecution to the Department of Justice. Other regulatory agencies may have similar powers. In addition, product approvals could be withdrawn due to the failure to comply with regulatory standards or the occurrence of unforeseen problems following initial marketing. The FDA also has the authority to issue special controls for devices manufactured by the Company. In the event that such additional special controls were issued, the Company's products would be required to conform, which could result in significant additional expenditures for the Company. The Company is subject to numerous federal, state and local laws and regulations relating to such matters as safe working conditions, manufacturing practices, fire hazard control and the handling and disposal of hazardous or infectious materials or substances and emissions of air pollutants. The Company owns and leases properties which are subject to environmental laws and regulations. There can be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon the Company's business, financial condition or results of operations. In addition, the Company cannot predict the extent to which future legislative and regulatory developments concerning its practices and products for the health care industry may affect the Company. Risks Related to International Sales; Foreign Operations Sales made outside the United States represented approximately 26.0% of the Company's 2001 net sales and the Company intends to increase international sales as a percentage of total net sales. Foreign operations are subject to special risks that can materially affect the sales, profits, cash flows and financial position of the Company, including increased regulation, extended payment periods, competition from firms with more local experience, currency exchange rate fluctuations and import and export controls. The Company has sales operations in Germany, Sweden, the United Kingdom, France and other countries where sales are made in local currency. While the Company may choose to hedge its foreign currency exposures by attempting to purchase goods and services with the proceeds from sales in local currencies where possible, and purchase forward contracts to hedge receivables denominated in foreign currency, there can be no assurance that the Company's hedging strategies will allow the Company to successfully mitigate its foreign exchange exposures. The Company's foreign exchange exposure has historically not been significant, and was not considered to be significant in fiscal 2001. The Company also maintains a manufacturing and assembly facility in Ensenada, Mexico and an assembly and distribution facility in Kuala Lumpur, Malaysia and, as a result, is subject to operational risks such as changing labor trends and civil unrest in those countries. In the event the Company were required to transfer its foreign operations to the United States or were otherwise unable to benefit from its lower cost foreign operations, its business, financial condition and results of operations would be adversely affected. Product Liability The manufacturing and marketing of medical products entails an inherent risk of product liability claims. Although the Company has not experienced any significant losses due to product liability claims and currently maintains umbrella liability insurance coverage, there can be no assurance that the amount or scope of the coverage maintained by the Company will be adequate to protect it in the event a significant product liability claim is successfully asserted against the Company. In addition, the Company cannot predict the extent to which future legislative and regulatory developments concerning its practices and products for the health care industry may affect the Company. 26 Dependence on Key Personnel; Management of Expanding Operations The Company's success will, to a large extent, depend upon the continued services of its executive officers. The loss of services of any of these executive officers could materially and adversely affect the Company. The Company's plans to expand its business may place a significant strain on the Company's operational and financial resources and systems. To manage its expanding operations, the Company may be required to, among other things, improve its operational, financial and management information systems. The Company may also be required to attract, train and retain additional highly qualified management, technical, sales and marketing and customer support personnel. The process of locating such personnel with the combination of skills and attributes required to implement the Company's strategy is often lengthy. The inability to attract and retain additional qualified personnel could materially and adversely affect the Company. Competition The medical supply industry is characterized by intense competition. Certain of the Company's competitors have greater financial and other resources than the Company and may succeed in utilizing these resources to obtain an advantage over the Company. The general trend toward cost containment in the health care industry has had the effect of increasing competition among manufacturers, as health care providers and distributors consolidate and as GPOs increase in size and importance. The Company competes on the basis of brand name, product quality, breadth of product line, service and price. Risks Generally Associated with Acquisitions An element of the Company's business strategy is to pursue strategic acquisitions that either expand or complement the Company's business. Acquisitions involve a number of special risks, including the diversion of management's attention to the assimilation of the operations and the assimilation and retention of the personnel of the acquired companies, and potential adverse effects on the Company's operating results. The Company may require additional debt or equity financing for future acquisitions, which may not be available on terms favorable to the Company, if at all. In addition, the Credit Facility and the Indenture contain certain restrictions regarding acquisitions. The Indenture restricts acquisitions to those companies in the same line of business as the Company, and requires that all such acquired companies be designated Restricted Subsidiaries (as defined therein). The Credit Facility restricts all acquisitions. The inability of the Company to successfully finance, complete and integrate strategic acquisitions in a timely manner could have an adverse impact on the Company's ability to effect a portion of its growth strategy. Patents and Trademarks The Company has historically relied primarily on its technological and engineering abilities and on its design and production capabilities to gain competitive business advantages, rather than on patents or other intellectual property rights. However, the Company does file patent applications on concepts and processes developed by the Company's personnel. The Company has 27 patents in the U.S. Many of the U.S. patents have corresponding patents issued in Canada, Europe and various Asian countries. The Company's success will depend in part on its ability to maintain its patents, add to them where appropriate, and to develop new products and applications without infringing the patent and other proprietary rights of third parties and without breaching or otherwise losing rights in technology licenses obtained by the Company for other products. There can be no assurance that any patent owned by the Company will not be circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications will be issued with claims of the scope sought by the Company, if at all. If challenged, there can be no assurance that the Company's patents (or patents under which it licenses technology) will be held valid or enforceable. In addition, there can be no assurance that the Company's products or proprietary rights do not infringe the rights of third parties. If such infringement were established, the Company could be required to pay damages, enter into royalty or licensing agreements on onerous terms and/or be enjoined from making, using or selling the infringing product. Any of the foregoing could have a material adverse effect upon the Company's business, financial condition or results of operations. 27 Energy Costs and Availability Over the past several years, there has been a shortfall of available electricity in several areas of California. This shortage has resulted in increased energy costs and temporary interruptions in electrical service in several geographic areas of California, including the area in which the Company maintains its headquarters and principal manufacturing center. Furthermore, the Company participates in a program with the utility that provides electricity to its California facilities whereby the Company receives discounted service rates in exchange for its consent to temporary interruptions in electrical service to the California facilities during peak periods of electricity use. There is a possibility that, with increased demand for electricity in California the cost of obtaining electricity for the Company's California facilities could continue to increase and electrical service could result in decreased productivity at the Company's California facilities. The Company has implemented at its California facility a generator capable of operating the administrative offices, including all computer systems, which are required to effectively conduct business at all locations in the United States and Mexico. Item 7A. Quantitative and Qualitative Disclosure About Market Risk. Quantitative Disclosures. With the continued growth in Europe, the Company has greater foreign currency exposure with respect to its international operations. In the past, the Company's only international exposure was its manufacturing operation in Mexico. All sales were previously denominated in U.S. dollars. Currently, the Company has operations in Germany, Sweden, France and the United Kingdom and other countries where sales are made in local currency. The Company may hedge its foreign currency exposures by attempting to purchase goods and services with the proceeds from sales in local currencies where possible. The Company may also purchase forward contracts to hedge receivables denominated in foreign currency that are expected to be collected and converted into another currency. However, there can be no assurance that the Company's hedging strategies will allow the Company to successfully mitigate its foreign exchange exposures. The Company is exposed to certain market risks associated with interest rate fluctuations on its debt. All debt arrangements are entered into for purposes other than trading. The Company's exposure to interest rate risk arises from financial instruments entered into in the normal course of business that, in some cases, relate to the Company's acquisitions of related businesses. Certain of the Company's financial instruments are fixed rate, short-term investments which are held to maturity. The Company's fixed rate debt consists primarily of outstanding balances on the Subordinated Notes and its variable rate debt relates to borrowings under the Credit Facility (see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources"). With respect to the Company's fixed rate debt, changes in interest rates generally affect the fair value of such debt, but do not have an impact on earnings or cash flows. Because the Company generally cannot prepay its fixed rate debt prior to maturity, interest rate risk and changes in fair value should not have a significant impact on this debt until the Company is required to refinance. With respect to variable rate debt, changes in interest rates affect earnings and cash flows, but do not impact fair value. The impact on the Company's interest expense in the upcoming year of a one-point interest rate change on the outstanding balance of the Company's variable rate debt would be approximately $0.9 million. 28 The following table presents the future principal cash flows and weighted-average interest rates expected on the Company's existing long-term debt instruments. The fair value of the Company's fixed rate debt is estimated based on quoted market prices. Expected Maturity Date (amended and restated as of December 31, 2001)
Fiscal Fiscal Fiscal Fiscal Fiscal There- Fair 2002 2003 2004 2005 2006 after Total Value ------ ---- ------- ------- -------- ------- --------- ------- (Dollars in thousands) Fixed Rate Debt ................. $ -- $ -- $ 12,000 $ 14,951 $ 2,266 $115,000 $ 144,217 $ 106,317 Average Interest Rate --% --% --% --% 9.0% 9.1% Variable Rate Debt .............. $20,680 $24,250 $ 37,000 $ -- $ -- $ -- $ 81,930 $ 81,930 Average Interest Rate 5.8% 5.4% 5.7% --% --% --%
Qualitative Disclosures. The Company's primary exposure relates to (1) interest rate risk on long-term and short-term borrowings, (2) the Company's ability to pay or refinance long-term borrowings at maturity at market rates, (3) the impact of interest rate movements on the Company's ability to meet interest expense requirements and exceed financial covenants and (4) the impact of interest rate movements on the Company's ability to obtain adequate financing to fund future acquisitions. The Company manages interest rate risk on its outstanding long-term and short-term debt through the use of fixed and variable rate debt. While the Company can not predict or manage its ability to refinance existing debt or the impact interest rate movements will have on its existing debt, management evaluates the Company's financial position on an ongoing basis. Item 8. Financial Statements. See the Index included at "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K." Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. On January 25, 2002, the Company dismissed Arthur Andersen LLP ("Andersen") as its independent accountant. Andersen provided both accounting and audit services to the Company, and was the primary consultant for the implementation of the Company's SAP software platform. The reports of Andersen on the Company's financial statements for the past two fiscal years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. The Company's Board of Directors approved the decision to change accountants on January 17, 2002, and the Audit Committee of the Board of Directors approved the decision to change accountants on January 25, 2002. The Board of Directors believes that it is in the best interests of the Company to make a change in the Company's certifying accountants to meet the growing requirements of the future. In connection with its audits for the two most recent fiscal years and through January 25, 2002, there have been no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Andersen, would have caused Andersen to make reference thereto in its report on the financial statements of the Company for such time periods, except as follows: During the audit of its financial statements for the year ended December 31, 2000, the Company had a disagreement with Andersen regarding the reserves for accounts receivable (doubtful accounts and rebates) as of December 31, 2000. Andersen informed the Company of its concerns as to the methodology utilized to establish the level 29 of these reserves as well as that inadequate support had been provided for these reserves. Upon further review and analysis by the Company, and continuing discussions with Andersen, these reserves were adjusted, and backup substantiation developed, to the satisfaction of Andersen, which issued its report on the Company's financial statements for the year ended December 31, 2000. Members of the Audit Committee of the Board of Directors of the Company met with Andersen to discuss these matters. The Company believes that the concerns expressed by Andersen with respect to the foregoing issue have been addressed, as evidenced by the fact that Andersen has issued an unqualified report covering the Company's 2000 financial statements, and that the Company now has policies and procedures in place to properly establish reserve balances, and substantiation, in respect of its accounts receivable in accordance with GAAP. The Company has authorized Andersen to respond fully to the inquiries of the successor accountant concerning this matter. During the two most recent fiscal years and through January 25, 2002, except as described below, there have been no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. Andersen informed the Company in a letter dated July 30, 2001 that the following material weaknesses in internal control existed during fiscal year ended December 31, 2000: The Company did not prepare on a timely basis reconciliations for substantially all of the Company's balance sheet accounts, and the Company's internal process for review and approval of reconciliations was informal and inconsistent. The Company's support for the required reserves for accounts receivable (doubtful accounts and rebates) was initially inadequate; upon further review, adjustments required to properly state such reserves as of December 31, 2000 were material to the Company's consolidated financial statements. The Company's consolidated financial statements were not prepared on a timely basis and eliminating entries were not initially well-supported. The Company had a shortage of accounting and finance personnel, and had retained accounting and finance personnel who lacked the appropriate expertise; as a result, the Company's former Chief Financial Officer was responsible for a disproportionate amount of the Company's financial reporting process, and the efficiency, timeliness and accuracy of the Company's financial reporting was adversely impacted. Members of the Audit Committee of the Board of Directors of the Company discussed these matters with Andersen. Except as described above, these conditions did not result in any disagreements or differences in opinion between the Company and Andersen. Andersen advised the Company in the July 30, 2001 letter that it understood that the Company had taken certain steps subsequent to December 31, 2000 to mitigate these material weakness conditions. The Company provided Andersen with a copy of the disclosures made by the Company in this report and requested that Andersen furnish the Company with a letter addressed to the SEC stating whether or not Andersen agrees with the above statements, and if not, stating the respects in which it does not agree. A copy of such letter was filed as an exhibit to the 8-K report filed by the Company on February 1, 2002, in which the Company initially reported this change in auditors. New Independent Auditor On January 31, 2002, the Company engaged Deloitte & Touche LLP ("Deloitte") as the Company's new principal independent auditor to audit the Company's financial statements, to replace Andersen. During the two most recent fiscal years and through January 31, 2002, the Company has not consulted with Deloitte regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements; or (ii) any matter that was either the subject of a 30 disagreement (as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K), or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K). 31 PART III Item 10. Directors and Executive Officers of the Registrant. The following individuals are the executive officers and directors of Holding and Hudson RCI as of May 31, 2002: Name Age Position - ------------------------------ --- -------------------------------------- Charles A. French ............ 59 President, Chief Executive Officer and Director Lougene Williams ............. 57 Senior Vice President Patrick G. Yount ............. 42 Chief Financial Officer Ola G. Magnusson ............. 53 Senior Vice President Jeffery D. Brown ............. 44 Vice President, Marketing and Sales Helen Hudson Lovaas .......... 63 Director Jon D. Ralph ................. 37 Director Charles P. Rullman ........... 54 Director Ronald P. Spogli ............. 54 Director Sten Gibeck .................. 58 Director Charles A. French is President, Chief Executive Officer and a Director of the Company. Mr. French assumed these positions with both the Company and Holding in August 2001, and was a consultant to the Company since January 2001. Prior to joining the Company, he had been a private investor focused on healthcare and technology companies. Previously, he held senior management positions at Spectramed, Inc., Caremark, Inc. and Bentley Laboratories, Inc. Lougene Williams is a Senior Vice President of the Company responsible for its product development, quality assurance and manufacturing operations, having served in this capacity since 1996, and assumed the same position with Holding after consummation of the recapitalization. Prior to 1996, he was the Company's Vice President, Manufacturing, having held a similar position with Respiratory Care Inc. From 1976 to 1987, he held manufacturing management positions of increasing responsibility at various manufacturing plants of The Kendall Company. Patrick G. Yount became the Company's Chief Financial Officer in March, 2001. Prior to joining the company, he held the positions of Chief Financial Officer and Chief Operating Officer of Good Source Solutions - a nationwide distributor of specialty food items. Prior to joining Good Source Solutions in 1998, he held positions as a senior member of the Merchant Banking Group for Banque Paribas where we was employed in the San Francisco office from 1995 to 1998. Ola G. Magnusson is a Senior Vice President and serves as President of Hudson RCI AB in Sweden. Mr. Magnusson joined the company in 1999 in connection with the acquisition of Louis Gibeck AB where he was the President and Chief Executive Officer since 1996. Prior to joining Louis Gibeck AB, Mr. Magnusson held several different positions, primarily in marketing with Pharmacia, a Swedish pharmaceutical company. Jeffery D. Brown, Vice President of Marketing and Sales, assumed this position in January, 2000. From 1997 to 2000 Mr. Brown served as the Company's Director of Sales. From 1993 to 1997, Mr. Brown served as National Sales Manager and from 1991 to 1993, as Regional Sales Manager . Mr. Brown has also held positions of National Account Manager from 1982 to 1991, and Territorial Sales Manager from 1980 to 1982. Helen Hudson Lovaas is a director of the Company and became a director of Holding after consummation of the recapitalization in April 1998. Mrs. Lovaas began her career at the Company in 1961. She has been Chairman since 1987, when she inherited ownership of the Company and served as Chief Executive Officer from 1987 until May 1997. Mrs. Lovaas had served previously as the Vice President of Administration of Hudson Oxygen for 15 years. 32 Jon D. Ralph became a director of the Company and of Holding in connection with the recapitalization in April 1998. Mr. Ralph joined Freeman Spogli in 1989 and became a Principal in January 1998. Prior to joining Freeman Spogli, Mr. Ralph spent three years at Morgan Stanley & Co. Incorporated where he served as an analyst in the Investment Banking Division. Mr. Ralph is also a director of Century Maintenance Supply, Inc., and The Pantry, Inc. Charles P. Rullman became a director of the Company and of Holding in connection with the recapitalization in April 1998. Mr. Rullman joined Freeman Spogli as a Principal in 1995. From 1992 to 1995, Mr. Rullman was a General Partner of Westar Capital, a private equity investment firm specializing in middle-market transactions. Prior to joining Westar, Mr. Rullman spent twenty years at Bankers Trust Company and its affiliate BT Securities Corporation where he was a Managing Director and Partner. Mr. Rullman is also a director of The Pantry, Inc. Ronald P. Spogli became a director of the Company and of Holding in connection with the recapitalization in April 1998. He is a founding Principal of Freeman Spogli, which was founded in 1983. Mr. Spogli is also a director of AFC Enterprises, Inc., Century Maintenance Supply, Inc., and Gaylan's Trading Co. Inc. Sten Gibeck became a director of the Company and of Holding in connection with the July 1999 acquisition of Hudson RCI AB. Mr. Gibeck has been employed by Hudson RCI AB since 1965, and since 1997 has served as its Vice President of Research and Development. From 1971 through 1996, Mr. Gibeck served as the President of Hudson RCI AB. Directors of the Company and Holding are elected annually and hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified. 33 Item 11. Executive Compensation. The following table sets forth the compensation for each of the fiscal years in the three-year period ended December 31, 2001 of the following persons: . Each individual who served as the chief executive officer or acted in a similar capacity during 2001; . The four most highly compensated executive officers other than the chief executive officer at December 31, 2001; and . Two former executive officers that would have been among the four most highly compensated executive officers at December 31, 2001 if they were still serving as officers at December 31, 2001. Compensation is presented only for the years in which each person was an executive officer. Summary Compensation Table
Annual Compensation ------------------------------------------------- Fiscal Other Annual All Other Year Salary Bonus Compensation Compensation (1) (2) ---------------------------------------------------------------------------- Charles A. French. ............. (3) 2001 $ 66,923 $ -- $ -- -- President and Chief Executive Officer Lougene Williams ............... 2001 $ 221,751 $ -- $ -- $ 10,200 Senior Vice President 2000 186,592 -- -- 10,500 1999 190,862 64,798 73,020 9,600 Jeffery D. Brown ............... (4) 2001 $ 157,701 -- $ -- $ 9,462 Vice President, Marketing & Sales 2000 126,023 -- -- 7,561 Patrick G. Yount ............... (5) 2001 $ 145,385 $ -- $ -- $ -- Chief Financial Officer Ola Magnusson .................. 2001 $ 105,963 $ -- $ 9,099 $ 53,331 Senior Vice President 2000 121,582 -- 10,087 61,901 1999 62,343 -- 5,564 127,828 Richard W. Johansen ............ (6) 2001 $ 310,918 $ -- $ -- 10,200 Former President and Chief Executive Officer 2000 290,438 -- -- 10,500 1999 294,945 53,100 177,334 9,600 Jay R. Ogram ................... (7) 2001 $ 234,985 $ -- $ -- $ 9,261 Former Chief Information Officer 2000 153,674 -- -- 9,220 1999 148,314 43,159 -- 8,889
- --------------------- (1) During 2001, no Named Executive Officer named received perquisites and other personal benefits, security or property in an aggregate amount in excess of the lesser of $50,000 or 10% of the total of such officer's salary and bonus nor did any such officer receive any restricted stock award or stock appreciation right. (2) Represents payments by the Company under its defined contribution plan. (3) Charles A French became the Company's President and Chief Executive Officer in August 2001. The compensation amount shown is based on a partial year of employment at an annualized salary rate of $200,000. 34 (4) Prior to 2000, the Named Executive was not an officer of the Company. (5) Patrick G. Yount became the Company's Chief Financial Officer in March 2001. His compensation shown is based on a partial year of employment at an annualized salary rate of $210,000. (6) Richard W. Johansen was terminated as President and Chief Executive Officer in September 2001. He remained on the Board until January 2002. His compensation is included because had Mr. Johansen been an executive officer at December 31, 2001, he would have been one of the four most highly compensated officers of the Company for the fiscal year ended December 31, 2001. (7) Jay R. Ogram was Chief Financial Officer until March 2001 at which time he became the Chief Information Officer. He resigned from the Company in January 2002. Executive Employment Agreements On April 7, 1998, the Company entered into employment agreements with Richard W. Johansen, Jay R. Ogram, Brian W. Morgan and Lougene Williams. Each Named Executive Officer receives a base salary in an amount and on substantially the same terms and conditions as was being paid by the Company on that date and an annual cash bonus in accordance with the Company's existing incentive programs. Pursuant to the employment agreements, in the event that employment is terminated by the Company other than for cause (as such term is defined in the employment agreements), or if the Named Executive Officer resigns pursuant to a "qualifying resignation" (as such term is defined in the employment agreements), the Company will be required to pay such Named Executive Officer's base salary for a period of between 12 and 24 months. The employment agreements also provide for nondisclosure of confidential information, that the Named Executive Officer shall not engage in any prohibited activity (as such term is defined in the employment agreement) during the term of employment and that the Named Executive Officer will refrain from interfering with the Company's contractual relationships or soliciting the Company's employees for 12 months following the Named Executive Officer's termination. Compensation of Directors Directors of the Company receive no compensation as directors. Directors are reimbursed for their reasonable expenses in attending meetings. Management Bonus Plans The Company offers a management bonus plan for its executives and senior management. The plan is based solely on the financial goals of the Company. The goals for 2001 required the Company to reach a minimum of 95% of a budgeted EBITDA target. During 2001, the Company did not meet this objective and no bonuses were paid. The Company periodically offers additional incentive compensation to individuals who demonstrate superior performance. This compensation was not material in 2001. The Company has put a similar plan into place for 2002. Retirement Plans The Company sponsors two programs that assist its employees in planning for retirement. The Company offers a defined contribution pension plan that is funded by the Company. Employees must be at least 21 years of age and have completed two years of service to be eligible to participate in the pension plan. The Company annually contributes an amount equal to 6% of a participating employee's base earnings to a participant's account, prorated for any part of a year that a participant was ineligible for a contribution. The funding also includes a proportionate share of any increase or decrease in the fair market value of the assets in the trust fund as of the immediately preceding last day of the plan year. During 2001, the Company determined that the pension plan for 1999 and 2000 was not fully funded. Accordingly, the Company recorded $350,000 in associated penalties and fully funded the plan through 2000. The Company anticipates fully funding the 2001contribution in 2002. During 2002, the Company froze the current pension plan and developed a new plan that provides for discretionary funding determined annually by the Board of Directors. All other aspects of the new plan are substantially similar to the old plan. In addition, employees may contribute to a 401(k) plan that allows matching contributions by the Company. Employees must have six months of service to be eligible to participate in the 35 401(k) plan and may contribute up to 10% of their annual compensation, or 6% if the employee is a highly compensated participant. 36 Compensation Committee Interlocks and Insider Participation The Board of Directors of the Company determines the compensation of the executive officers. During fiscal 2001, certain members of the Board of Directors determined the compensation of the Company's Chief Executive Officer and certain members of the Board of Directors and Mr. French determined the compensation of the Company's other executive officers. Stock Subscription Plans In April 1998, Holding adopted an Employee Stock Subscription Plan and an Executive Stock Subscription Plan (collectively, the "Stock Subscription Plans") pursuant to which executives of the Company purchased 800,000 shares of common stock of Holding valued at $10.00 per share. The Stock Subscription Plans provide for a repurchase option in favor of Holding upon termination of employment at stated repurchase prices. In addition, the Stock Subscription Plans provide for restrictions on the transferability of shares prior to the fifth anniversary of the recapitalization or Hudson RCI's initial public offering. The shares are also subject to a right of first refusal in favor of Holding as well as obligations to sell at the request of Freeman Spogli and co-sale rights if Freeman Spogli and Affiliates sells its shares to a third party. No additional shares of Holding common stock were sold under the Stock Subscription Plans in fiscal 2001. In 2001, the Board of Directors of Holding approved the adoption of a Stock Option Plan for eligible employees, officers and consultants of the Company. The plan allows for the issuance of up to 2,000,000 shares of Holding common stock pursuant to the exercise of incentive stock options or non-qualified options. The exercise price of options granted under the plan shall be set at fair market value at the time of the grant as determined by the Board of Directors. As of the date of this filing, no options have been granted under this plan. 37 Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information, as of May 31, 2002, with respect to the beneficial ownership of capital stock of the Company by (i) each person who beneficially owns more than 5% of such shares, (ii) each of the Named Executive Officers, (iii) each director of Hudson RCI and (iv) all Named Executive Officers and directors of Hudson RCI as a group.
Shares of Shares of Shares of Junior Common Percent of Preferred Percent of Preferred Percent of Name of Beneficial Owner Stock Class Stock Class Stock Class - ----------------------------------------------- ---------- ---------- --------- ---------- --------- ---------- River Holding Corp.(1) ........................ 9,454,293 30.6% 470,307 100% 3,000 100% Jon D. Ralph(1) ............................. Charles P. Rullman(1) ....................... Ronald P. Spogli(1) ......................... FS Equity Partners IV, LP (2) ................. 20,000,000 64.6% -- -- Jon D. Ralph (2) ............................ Charles P. Rullman (2) ...................... Ronald P. Spogli (2) ........................ Helen Hudson Lovaas(3) ........................ 1,500,000 4.8% -- -- Sten Gibeck(4) ................................ -- -- -- Richard W. Johansen(4) ........................ -- -- -- -- Lougene Williams(4) ........................... -- -- -- -- Jay R. Ogram(4) ............................... -- -- -- -- Brian W. Morgan(4) ............................ -- -- -- -- Charles A. French(4) .......................... -- -- -- -- Patrick G. Yount(4) ........................... -- -- -- -- Jeffrey D. Brown(4) ........................... -- -- -- -- Ola Magnusson(5) .............................. -- -- -- -- All Named Executive Officers and directors of the Company as a group (9 individuals) ...... 30,954,293 100.00% 470,307 3,000 100%
- ----------------- (1) As beneficial owner of 85.9% of the common stock of Holding, Freeman Spogli has the power to vote and dispose of the shares held by Holding. Includes 300,000 shares issuable upon the conversion of 3,000 shares of Junior Preferred Stock by Holding. 1,441,251 shares, 58,749 shares and 6,364,648 shares of common stock of Holding is held of record by FS Equity Partners III, L.P. ("FSEP III"), FS Equity Partners International, L.P. ("FSEP International") and FS Equity Partners IV, L.P. ("FSEP IV"), respectively. As general partner of FS Capital Partners, L.P. ("FS Capital"), which is general partner of FSEP III, FS Holdings, Inc. ("FSHI") has the sole power to vote and dispose of the shares owned by FSEP III. As general partner of FS&Co. International, L.P. ("FS&Co. International"), which is the general partner of FSEP International, FS International Holdings Limited ("FS International Holdings") has the sole power to vote and dispose of the shares owned by FSEP International. As general partner of FSEP IV, FS Capital Partners LLC ("FS Capital LLC") has the sole power to vote and dispose of the shares owned by FSEP IV. Messrs. Spogli and Rullman and Bradford M. Freeman, William M. Wardlaw, J. Frederick Simmons and John M. Roth are the sole directors, officers and shareholders of FSHI, FS International Holdings and Freeman Spogli & Co. Incorporated and such individuals, in addition to Mr. Ralph and Todd W. Halloran and Mark J. Doran, are the sole managing members of FS Capital LLC, and as such may be deemed to be the beneficial owners of the shares of the common stock and rights to acquire the common stock owned by FSEP III, FSEP International and FSEP IV. The business address of Freeman Spogli & Co. Incorporated, FSEP III, FSEP IV, FS Capital, FSHI, FS Capital LLC, and its sole directors, officers, shareholders and managing members is 11100 Santa Monica Boulevard, Suite 1900, Los Angeles, California 90025 and the business address of FSEP International, FS&Co. International and FS International Holdings is c/o Padget-Brown & Company, Ltd., West Winds Building, Third Floor, Grand Cayman, 38 Cayman Islands, British West Indies. Holding has pledged all shares of the Company's capital stock held by it to secure its guarantee of the Company's obligations under the New Credit Facility. (2) Includes 20,000,000 shares of common stock issuable upon exercise of an immediately exercisable warrant (3) Represents 1,073,560 shares held of record by the Helen Lovaas Separate Property Trust U/D/T dated 7/16/97 ("Trust No. 1") and 426,440 shares held of record by the Helen Lovaas Trust No. 2 U/D/T dated as of January 10, 2000 ("Trust No. 2"). As sole trustee of Trust No. 1, Mrs. Lovaas has the sole power to vote and dispose of the shares owned by Trust No. 1. As co-trustee of Trust No. 2, Mrs. Lovaas has shared power to vote and dispose of the shares owned by Trust No. 2. The address of each of Trust No. 1 and Trust No. 2 is c/o Hudson Respiratory Care Inc., 27711 Diaz Road, P.O. Box 9020, Temecula, California 92589. (4) The business address of these individuals is Hudson Respiratory Care Inc., 27711 Diaz Road, P.O. Box 9020, Temecula, California 92589. (5) The business address of this individual is Hudson AB, Central Vagen 1, P.O. Box 711, SE-194 27, Uplands Vasby, Sweden. Item 13. Certain Relationships and Related Transactions. Shareholders' Agreement Helen Hudson Lovaas (The "Continuing Shareholder") and Holding have entered into a Shareholders' Agreement, as amended (the "Shareholders' Agreement"). The Shareholder Agreement provides that i) Holding and the Continuing Shareholder have the right to purchase their pro rata share of certain new issuances, ii) in consideration for the contribution of consideration received from Holding for certain issuances of the common stock of Holding, the Company will issue an equivalent shares of Company common stock to Holding, iii) in the event of a sale of Company stock by Holding or Freeman Spogli, the Continuing Shareholder is obligated to sell all or part of her shares at the request of Holding and the Continuing Shareholder has the right to participate in such sale on a pro rata basis, iv) the restriction on the tranferability of the shares for a two year period following the recapitalization and provides for a right of first offer on the Continuing Shareholder's common stock and v) in the event the Company participates in an IPO, the Company will exchange all of the Company's existing common stock for newly issued common stock. Note to Freeman Spogli In connection with the acquisition of Hudson RCI AB during 1999, one of the Company's subsidiaries borrowed $22.0 million under an unsecured 12% note payable to Holding's majority stockholder. The Note is due August 1, 2006. During 1999, the Company paid approximately $14.5 million in principal on the note. In April 2001, the Company repaid an additional $6.0 million in principal on the note. Proceeds from the repayment were then reinvested by Holding's majority stockholder in new notes issued by the Company, as described below. During 2000, the Company borrowed an additional $2.0 million from Freeman Spogli under an unsecured 14% note payable due on demand. In August of 2001, this note was exchanged for a new long term note as described below. In August 2001, the Company issued approximately $13.2 million of new unsecured senior subordinated convertible notes consisting of $5.2 million in new cash and an exchange of $8.0 million in existing short-term unsecured notes to Freeman Spogli. The notes bear interest at 10% and are due in March 2005. The interest may be paid or deferred to the due date at the option of the Company and the notes are convertible to common stock at the demand of the holder. The notes are subordinated to borrowings under the Credit Facility and rank pari-passu with the Senior Subordinated Notes. As of December 31, 2001, the Company had an aggregate of $13.2 million in long-term notes payable to Freeman Spogli. In May 2002, the Company issued an additional $20 million in senior unsecured notes payable to Freeman Spogli. The notes bear interest at 12% annually with interest and principal due upon maturity at December 31, 2004. 39 In May 2002, the Company issued warrants to purchase 20 million shares of the Company's common stock. 40 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K. (a) Documents filed as part of this Report:
Page (1) Financial Statements Financial Statements are filed as part of this Form 10-K ............... F-1 (2) Financial Statement Schedules Report of Independent Public Accountants ............................... II-1 Schedule II -- Valuation and Qualifying Accounts ....................... II-2
All other schedules have been omitted because they are not applicable, not required, or the information is included in the consolidated financial statements or notes thereto. (3) Exhibits 2.1(1) Agreement dated May 7, 1999 between Sten Gibeck, Hudson RCI and Holding. 2.2(1) Agreement dated May 7, 1999 between Euroventures Nordica I B.V., Hudson RCI and Holding. 2.3(1) Agreement dated May 7, 1999 between Forsakrings AB Skandia and Livforsakrings AB Skandia, Hudson RCI and Holding. 2.4(1) Agreement dated May 7, 1999 between Maud Gibeck, Hudson RCI and Holding. 2.5(1) Stock Subscription Agreement dated August 4, 1999 between Sten Gibeck, Holding, FSEP III, FSEP International and FSEP IV. 2.6(2) Asset Purchase Agreement dated September 18, 2000 between Hudson RCI and Tyco Healthcare Group L.P. 2.7(3) Amendment to Asset Purchase Agreement dated September 27, 2000 between Hudson RCI and Tyco Healthcare Group L.P. 2.8(4) Amendment No. 2 to Asset Purchase Agreement dated October 28, 2000 between Hudson RCI and Tyco healthcare Group L.P. 3.1(5) Amended and Restated Articles of Incorporation of Hudson RCI, as amended to date. 3.2(5) Bylaws of Hudson RCI. 4.1(5) Indenture dated as of April 7, 1998 among Hudson RCI, Holding and United States Trust Company of New York, as Trustee, with respect to the 9-1/8% Senior Subordinated Notes due 2008 (including form of 9-1/8% Senior Note due 2008). 4.2(5) Exchange Indenture dated as of April 7, 1998 among Hudson RCI, Holding and United States Trust Company of New York, as Trustee, with respect to the 11-1/2% Subordinated Exchange Debentures due 2010 (including form of 11-1.2% Senior Subordinated Exchange Debenture due 2010). 10.1 Amended and Restated Credit Agreement dated as of May 14, 2002 among Hudson RCI, Holding, the lenders party thereto, and Deutsche Bank Trust Company Americas ("Deutsche Bank"), as administrative agent and collateral agent. 10.2 Form of Amended and Restated Security Agreement dated as of May 14, 2002 between Hudson RCI and Deutsche Bank. 10.3(5) Pledge Agreement dated as of April 7, 1998 (the "Pledge Agreement") between Holding and Bankers Trust. 10.4(5) Deed of Trust, Security Agreement, Fixture Filing and Assignment of Leases and Rents dated April 7, 1998 between Hudson RCI and Chicago Title Insurance Company fbo Bankers Trust. 10.5(5) Holding Guarantee Agreement dated as of April 7, 1998 between Holding and Bankers Trust. 41 10.6(5) Indemnity, Subrogation and Contribution Agreement dated as of April 7, 1998 among Hudson RCI, Holding and Bankers Trust. 10.7(5) Shareholders Agreement dated April 7, 1998 among Holding, The Helen Hudson Lovaas Separate Property Trust U/D/T dated July 17, 1997 (the "Hudson Trust"), FS Equity Partners III, L.P. ("FSEP III"), FS Equity Partners International, L.P. ("FSEP International"), FS Equity Partners IV, L.P. ("FSEP IV"), and Hudson RCI. 10.8(5) Stock Subscription Agreement dated April 7, 1998 between Holding and River Acquisition Corp. 10.9(5) Employment Agreement dated April 7, 1998 between Hudson RCI and Richard W. Johansen. 10.10(5) Employment Agreement dated April 7, 1998 between Hudson RCI and Jay R. Ogram. 10.11(5) Employment Agreement dated April 7, 1998 between Hudson RCI and Lougene Williams. 10.12(5) Employment Agreement dated April 7, 1998 between Hudson RCI and Brian W. Morgan. 10.13 Form of Nonrecourse Pledge Agreement dated as of May 14, 2002 among the Pledgor and Deutsche Bank, as collateral agent for the lenders. 10.14(6) Amendment No. 1 to Shareholders Agreement dated April 8, 1998 among Holding, the Hudson Trust, FSEP III, FSEP IV and Hudson RCI. 10.15 Tecate Facility Sub-Lease. 10.16 Form of Supplement No. 1 dated as of May 14, 2002, to the Pledge Agreement. 10.17 Form of Master Assignment and Exchange Agreement dated as of May 14, 2002 by and among Holding, Hudson RCI, the financials institutions listed on the signature pages thereof, Deutsche bank, as administrative agent for the lenders and FSEP IV. 10.18 Letter agreement dated August 17, 2001 between Hudson RCI and Charles French. 10.19 Form of Stock Option Plan 10.20 Form of Stock Option Agreement. 10.21 Receivables Purchase Agreement dated May 14, 2002 by and between Hudson RCI and HRC Holding. 12.1 Statement re Computation of Earnings to Fixed Charges Ratio. (see page II-3 of this document) 21.1 Subsidiaries of Hudson RCI. 24.1 Power of Attorney (included on the signature pages hereof). ____________________ (1) Incorporated by reference to the exhibit designated by the same number in the Form 8-K filed by the Company on August 6, 1999 (date of earliest event: July 22, 1999) (File No. 333-56097). (2) Incorporated by reference to the exhibit designated by number 2.1 in the Form 8-K filed by the Company on November 13, 2000 (date of earliest event: October 28, 2000) (File No.: 333-56097). (3) Incorporated by reference to the exhibit designated by number 2.2 in the Form 8-K filed by the Company on November 13, 2000 (date of earliest event: October 28, 2000) (File No.: 333-56097). (4) Incorporated by reference to the exhibit designated by number 2.3 in the Form 8-K filed by the Company on November 13, 2000 (date of earliest event: October 28, 2000) (File No.: 333-56097). (5) Incorporated by reference to the exhibit designated by the same number in the Form S-4 filed by the Company on June 5, 1998 (File No. 333-56097). (6) Incorporated by reference to the exhibit designated by the same number in to the Form 10-K filed by the Company for the fiscal year ended December 25, 1998. (b) Current Reports on Form 8-K. None. 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HUDSON RESPIRATORY CARE INC. Date: June 19, 2002 By: /s/ Patrick G. Yount ---------------------------------------------- Patrick G. Yount Chief Financial Officer and Secretary KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Patrick G. Yount his true and lawful attorney-in-fact with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in and any all capacities, to sign any and all amendments to this Report on Form 10-K and to file same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Charles A. French Chief Executive Officer and Director June 19, 2002 ------------------------- (Principal Executive Officer) Charles A. French /s/ Patrick G. Yount Chief Financial Officer and Secretary June 19, 2002 ------------------------- (Principal Financial Officer) Patrick G. Yount /s/ Helen Hudson Lovaas June 19, 2002 ------------------------- Helen Hudson Lovaas Director /s/ Ronald P. Spogli June 19, 2002 ------------------------- Ronald P. Spogli Director /s/ Charles P. Rullman June 19, 2002 ------------------------- Charles P. Rullman Director /s/ Jon D. Ralph June 19, 2002 ------------------------- Jon D. Ralph Director /s/ Sten Gibeck June 19, 2002 ------------------------- Sten Gibeck Director
S-1 Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act No annual report or proxy material has been sent to security holders. S-2 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2001 PAGE - ---------------------------------------------------------------------- ---- Report of Independent Auditors....................................................................................... F-2 Consolidated Balance Sheet as of December 31, 2001................................................................... F-3 Consolidated Statements of Operations and Comprehensive Loss for the year ended December 31, 2001.................... F-4 Consolidated Statement of Stockholders' Deficit for the year ended December 31, 2001................................. F-5 Consolidated Statement of Cash Flows for the year ended December 31, 2001............................................ F-6 Notes to Consolidated Financial Statements........................................................................... F-8 Additional Unaudited Quarterly Financial Information................................................................. F-24 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2000 - ---------------------------------------------------------------------- Report of Independent Public Accountants............................................................................. F-25 Consolidated Balance Sheets as of December 31, 1999 and December 31, 2000............................................ F-26 Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 1998, December 31, 1999 and December 31, 2000.................................................. F-27 Consolidated Statements of Stockholders' Equity (Deficit)............................................................ F-28 Consolidated Statements of Cash Flows for the years ended December 31, 1998, December 31, 1999 and December 31, 2000..................................................................... F-29 Notes to Consolidated Financial Statements........................................................................... F-31
F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of Hudson Respiratory Care Inc.: We have audited the accompanying consolidated balance sheet of Hudson Respiratory Care Inc., (a California Corporation) (a majority-owned subsidiary of River Holding Corp.) and subsidiaries as of December 31, 2001, and the related consolidated statements of operations and comprehensive loss, stockholders' deficit and cash flows for the year then ended. Our audit also included the financial statement schedule for the year ended December 31, 2001 listed in Item 14. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Hudson Respiratory Care Inc. and subsidiaries as of December 31, 2001, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such 2001 financial statement schedule, when considered in relation to the basic 2001 consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. DELOITTE & TOUCHE LLP Costa Mesa, California May 15, 2002 F-2 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES (a majority-owned subsidiary of River Holding Corp.) CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
ASSETS December 31, 2001 ------------ CURRENT ASSETS: Cash .............................................................................................. $ 7,085 Accounts receivable, less allowance for doubtful accounts of $1,801 ............................... 19,287 Inventories ....................................................................................... 25,218 Other current assets .............................................................................. 1,483 --------- Total current assets .......................................................................... 53,073 --------- PROPERTY, PLANT AND EQUIPMENT, net .................................................................. 46,268 --------- INTANGIBLE ASSETS, net .............................................................................. 28,498 DEFERRED FINANCING COSTS, net of accumulated amortization of $5,981 ................................. 8,316 OTHER ASSETS ........................................................................................ 900 --------- Total assets .................................................................................. $ 137,055 ========= LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable .................................................................................. $ 15,251 Accrued liabilities ............................................................................... 17,302 Notes payable to banks - current portion .......................................................... 20,680 --------- Total current liabilities ..................................................................... 53,233 NOTE PAYABLE TO AFFILIATE ........................................................................... 17,217 NOTES PAYABLE TO BANKS, net of current portion ...................................................... 73,250 SENIOR SUBORDINATED NOTES PAYABLE ................................................................... 115,000 OTHER NON-CURRENT LIABILITIES ....................................................................... 1,187 --------- Total liabilities ............................................................................. 259,887 --------- COMMITMENTS AND CONTINGENCIES (Note 7) MANDATORILY-REDEEMABLE PREFERRED STOCK: $0.01 par value: 1,800 shares authorized; 445 shares issued and outstanding; liquidation preference--$44,474 ................................................................... 43,847 Accrued preferred stock dividends, payable in kind .................................................. 1,142 --------- 44,989 --------- STOCKHOLDERS' DEFICIT: Common stock, no par value: 15,000 shares authorized; 10,654 shares issued and outstanding ........ 98,258 Junior preferred stock, $0.01 par value; 6 shares authorized; 3 shares issued and outstanding ................................................................................... 3,137 Other comprehensive loss-- Cumulative translation adjustment ...................................... (698) Accumulated deficit ............................................................................... (268,518) --------- Total stockholders' deficit ................................................................... (167,821) --------- Total liabilities, mandatorily-redeemable preferred stock and stockholders' deficit .... $ 137,055 =========
See notes to consolidated financial statements. F-3 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES (a majority-owned subsidiary of River Holding Corp.) CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands) Fiscal Year Ended December 31, 2001 ------------ NET SALES ....................................................... $ 157,112 COST OF SALES ................................................... 108,054 ------------ Gross profit ............................................... 49,058 ------------ OPERATING EXPENSES: Selling ...................................................... 19,496 Distribution ................................................. 11,429 General and administrative ................................... 23,889 Amortization of goodwill ..................................... 3,490 Impairment of goodwill ....................................... 33,128 Impairment of fixed assets ................................... 4,469 Research and development ..................................... 2,043 Provision for bad debts ...................................... 2,826 ------------ Total operating expenses ................................... 100,770 ------------ Loss from operations ......................................... (51,712) OTHER EXPENSES: Interest expense ............................................. 20,542 Other, net ................................................... 1,563 ------------ 22,105 ------------ Loss before provision for income taxes .......................... (73,817) PROVISION FOR INCOME TAXES ...................................... 69,854 ------------ Net loss ........................................................ (143,671) OTHER COMPREHENSIVE LOSS: Foreign currency translation gain ............................... 453 ------------ Comprehensive loss ........................................... $ (143,218) ============ See notes to consolidated financial statements. F-4 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES (a majority-owned subsidiary of River Holding Corp.) CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT (In thousands)
Other Comprehensive Loss-- Cumulative Common Stock Junior Preferred Stock Translation Accumulated ------------------- ------------------------ Shares Amount Shares Amount Adjustment Deficit Total -------- --------- ---------- ---------- -------------- ------------ ----------- BALANCE, December 31, 2000 ........... 10,644 $ 98,158 $ (1,151) $ (119,782) $ (22,775) Issuance of common stock ............. 10 100 100 Issuance of junior preferred stock ... 3 $ 3,000 3,000 Pay-in-kind junior preferred stock dividends ............................ 137 (137) -- Foreign currency translation gain .... 453 453 Issued or accrued pay-in-kind preferred stock dividends ............ (4,928) (4,928) Net loss ............................. (143,671) (143,671) -------- --------- ---------- ---------- -------------- ------------ ----------- BALANCE, December 31, 2001 ........... 10,654 $ 98,258 3 $ 3,137 $ (698) $ (268,518) $ (167,821) ======== ========= ========== ========== ============== ============ ===========
See notes to consolidated financial statements. F-5 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES (a majority-owned subsidiary of River Holding Corp.) CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
Fiscal Year Ended December 31, 2001 ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ............................................................. $ (143,671) Adjustments to reconcile net loss to net cash provided by operating activities-- Depreciation and amortization .................................... 12,223 Amortization/write-off of deferred financing costs and other ..... 1,676 Loss on disposal of equipment .................................... 681 Change in deferred tax asset ..................................... 68,881 Provision for bad debts .......................................... 2,826 Impairment of goodwill ........................................... 33,128 Impairment of fixed assets ....................................... 4,469 Changes in operating assets and liabilities: Accounts receivable .............................................. 6,916 Inventories ...................................................... 17,304 Other current assets ............................................. 257 Other assets ..................................................... 503 Accounts payable ................................................. (4,614) Accrued liabilities .............................................. 3,675 Other non-current liabilities .................................... 1,310 ------------ Net cash provided by operating activities .................... 5,564 ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ........................... (9,029) Proceeds from sale of property, plant and equipment .................. 12 ------------ Net cash used in investing activities ......................... (9,017) ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable to bank ................................... (21,209) Proceeds from bank borrowings ........................................ 20,136 Additions to deferred financing costs ................................ (403) Proceeds from note payable to affiliate .............................. 14,951 Repayment of note payable to affiliate ............................... (8,000) Bank overdraft ....................................................... (1,245) Net proceeds from sale of common, mandatorily-redeemable and junior preferred stock, net of transaction costs ......................... 3,100 ------------ Net cash provided by financing activities ..................... 7,330 ------------ Effect of exchange rate changes on cash ................................. (322) ------------ NET INCREASE IN CASH .................................................... 3,555 CASH, beginning of year ................................................. 3,530 ------------ CASH, end of year ....................................................... $ 7,085 ============
See notes to consolidated financial statements. F-6
December 31, 2001 ------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for-- Interest ......................................................... $ 18,856 ============= Income taxes ..................................................... $ 2,315 ============= NON-CASH FINANCING ACTIVITIES: Payment of preferred dividends through issuance of stock ............ $ 4,703 ============= Capital lease obligation incurred for purchase of equipment ......... 295 =============
See notes to consolidated financial statements. F-7 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES (a majority-owned subsidiary of River Holding Corp.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2001 1. General Hudson Respiratory Care Inc. ("Hudson" or the "Company"), a California corporation founded in 1945, is a manufacturer and marketer of disposable medical products utilized in the respiratory care and anesthesia segments of the domestic and international health care markets. The Company is a majority-owned subsidiary of River Holding Corp., a Delaware corporation ("River"). River has no operations of its own, other than its investment in the Company. The Company's respiratory care and anesthesia product lines include such products as oxygen masks, humidification systems, nebulizers, cannulae and tubing. In the United States, the Company markets its products to a variety of health care providers, including hospitals and alternate site service providers, such as outpatient surgery centers, long-term care facilities, physician offices and home health care agencies. Internationally, the Company sells its products to distributors that market to hospitals and other health care providers. The Company's products are sold to distributors and alternate site service providers throughout the United States and internationally. The Company's respiratory product operations are conducted from its primary facility in Temecula, California; facilities in Arlington Heights and Elk Grove, Illinois; and a facility in Ensenada, Mexico. Management Plans to Improve Financial Condition and Results of Operations The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, during the year ended December 31, 2001, the Company incurred a net loss of $143.7 million. The Company historically has had sufficient assets to continue operations despite the losses. As of December 31, 2001, the Company was in violation of certain financial covenants. Management believes that the Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms and covenants of its financing agreements, to obtain additional financing as may be required and, ultimately to attain profitable operations. As further discussed in Note 12, on May 14, 2002, the Company reached an agreement with its senior lenders to amend the Credit Facility to bring the Company into compliance with all terms and provisions of this agreement. As part of this amendment, the Company issued $20 million in new senior term notes with warrants to the Company's majority shareholder. In addition, management has taken numerous actions to improve the operating performance of the Company. Such actions included: the elimination of a distribution warehouse, elimination of non-essential management personnel, reductions in inventory levels, aggressive collection of accounts receivable and elimination of individual products that did not attain acceptable levels of profitability. Management believes that the results of its plans and the agreement reached and funding received on May 14, 2002 discussed above will enable the Company to meet its ongoing obligations on a timely basis and continue operations for at least the next twelve months. F-8 Reporting Requirements The Company is privately owned and has no class of securities registered under the Securities Act of 1934 or any publicly traded equity securities. The Company complies with Securities and Exchange Commission filing requirements on a voluntary basis, as required in the indenture for its senior subordinated notes. 2. Summary of Significant Accounting Policies Fiscal Year-End The Company reports its operations on a calendar year basis, with the year ending on December 31. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Hudson and its wholly-owned subsidiaries. Intercompany account balances and transactions have been eliminated in consolidation. Hudson and its wholly-owned subsidiaries are collectively referred to herein as the Company. Accounts Receivable Accounts receivable are stated net of allowances for doubtful accounts of approximately $1.8 million at December 31, 2001, for those accounts from which payment is not expected to be received, although services were provided and revenue was earned. Management performs periodic analyses to evaluate the net realizable value of accounts receivable. Specifically, management considers historical realization data, accounts receivable aging trends, other operating trends and relevant business conditions. Inventories Inventories are stated at the lower of cost (first-in, first-out (FIFO) method) or market. At December 31, 2001, inventories consisted of the following (amounts in thousands): Raw materials ............................. $ 7,377 Work-in-process ........................... 5,392 Finished goods ............................ 14,481 ----------- 27,250 Provision for obsolescence ................ (2,032) ----------- $ 25,218 =========== Raw materials principally consist of bulk resins. Work-in-process and finished goods include raw materials, labor and overhead costs. Certain finished goods are purchased for resale and are not manufactured. The Company considers deterioration, obsolescence and historical trends in evaluating net realizable value of inventory. Internal Software Development Costs The Company capitalizes costs incurred to develop internal-use computer software in accordance with Statement of Position (SOP) 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". Such costs are amortized on a straight-line basis over the economic useful lives of the software, which range from three to five years. The Company applies the provisions of SOP 98-1 in assessing any potential impairment of its capitalized software costs. F-9 Property, Plant and Equipment Property is stated at cost. Major renewals and betterments are capitalized while maintenance costs and repairs are expensed in the year incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or term of the related lease, if shorter. Estimated useful lives range from 3 to 7 years for furniture and fixtures; 5 to 7 years for machinery, equipment and purchased software; and 31.5 years for buildings. Total depreciation expense related to property was $8,733,000 for the year ended December 31, 2001. The Company reviews property for impairment whenever events or changes in circumstances indicate that an asset's book value exceeds the undiscounted expected future cash flows to be derived from that asset. Whenever undiscounted expected future cash flows are less than the book value, the asset will be reduced to fair value based on the net present value of the expected future cash flows, and an impairment loss will be recognized. Goodwill and Other Intangible Assets Goodwill and other intangible assets are amortized under a straight-line method over the estimated useful lives. The Company periodically reviews the recoverability of the carrying value of goodwill, intangibles and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of these assets is determined by analysis of the assets' fair value by comparing the forecasted future undiscounted net cash flows from the operations to which the assets relate, based on management's best estimates using the appropriate assumptions and projections at the time, to the carrying amount of the assets. If the carrying value is determined not to be recoverable from future operating cash flows, the asset is deemed impaired and an impairment loss is recognized equal to the amount by which the carrying amount exceeds the estimated fair value of the assets. In addition, goodwill is assessed for recoverability at an entity level, based on fair value determined by estimated future cash flows, discounted at a rate commensurate with the risk involved. In the fourth quarter of 2001, as a result of significant losses from operations, the Company reassessed future cash flows and operating results and recorded a goodwill impairment charge of approximately $33,128,000. Amortization expense related to goodwill and other intangibles was approximately $3,490,000 for the year ended December 31, 2001. Revenue Recognition The Company recognizes revenue when product is shipped and title passes to the customer, as the earnings process is substantially complete. The Company establishes reserves for sales returns and other allowances based on historical experience. The Company sells its products to its distributors without right of return based on a listed price. Distributors charge the service providers, or the Company's end customers, a contract price (which is determined by their group purchasing organization affiliation or individual contract price) plus a service margin. As is customary within the industry, the Company rebates the difference between the list price and the specific contract price to the distributor. The Company records this revenue and receivables net of rebatable amounts. In the event no rebate is payable, the rebate amount is reversed and recognized as revenue. Income Taxes The Company applies the asset and liability method in recording income taxes, under which deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using currently enacted tax rates and laws. Additionally, deferred tax assets are evaluated for recoverability and a valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. Foreign Currency Translation The Company uses the local currency as the functional currency of its foreign operating subsidiaries. Accordingly, all assets and liabilities at the Company's subsidiaries located outside the United States are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Income and expense items are translated at the weighted-average exchange rate prevailing during the period. The resulting translation gains and losses are recorded as other comprehensive income (loss) in stockholders' deficit in the accompanying consolidated financial statements. F-10 Concentration of Credit Risk The Company sells its products primarily to customers in the United States and Europe. Historically, the Company has not experienced significant losses related to trade receivables from concentrations of individual customers or from groups of customers in any geographic area. Fair Value of Financial Instruments The fair value of long-term debt is determined based on quoted market prices for issues listed on exchanges. The carrying amounts of cash, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short maturity. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. New Accounting Pronouncements Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No.133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments. The statement requires that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value, and that changes in the derivative's fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. The adoption of this new standard did not have a material impact on the Company's consolidated financial statements. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"). This Statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principals Board ("APB") Opinion No. 16, "Business Combinations," and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. Any acquisitions made by the Company after June 2001 will be accounted for in accordance with SFAS 141. Also in June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." This pronouncement addresses, among other things, how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Goodwill will no longer be amortized but will be assessed at least annually for impairment using a fair value methodology. The Company stopped amortizing goodwill, effective January 1, 2002, and as a result an equivalent charge for goodwill amortization will not be made in 2002. The Company is still evaluating the impact of the standard on impairment, which is expected to be completed by the end of the second quarter of 2002. The amortization of goodwill for 2001 was $3.5 million. Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the F-11 capitalized cost is depreciated over the useful live of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS 143 will become effective January 1, 2003. The Company does not expect the adoption of SFAS 143 to have a material impact on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of a Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 became effective January 1, 2002. The adoption of SFAS 144 is not expected to have a material impact on the Company's consolidated financial statements. 3. Detail of Selected Balance Sheet Accounts Property, Plant and Equipment The following is a summary as of December 31, 2001 (amounts in thousands): Land.............................................. $ 2,044 Buildings ........................................ 15,965 Leasehold improvements............................ 1,849 Machinery, equipment and purchased software....... 91,078 Furniture and fixtures............................ 2,900 ----------- 113,836 Less-- Accumulated depreciation and amortization.. (68,281) ----------- 45,555 Construction in process........................... 713 ----------- Property and equipment, net....................... $ 46,268 =========== Intangible Assets The following is a summary of the components of intangible assets as of December 31, 2001 (amounts in thousands): Goodwill ......................................... $ 37,354 Other identifiable intangibles ................... 4,022 ----------- 41,376 Less-- Accumulated amortization .................. (12,878) ----------- $ 28,498 =========== Deferred Financing Costs, net The following is a summary of the components of deferred financing costs as of December 31, 2001 (amounts in thousands): Deferred financing costs ......................... $ 14,297 Less: Accumulated amortization ................... (5,981) ---------- Deferred financing costs, net ................... $ 8,316 ========== F-12 Accrued Liabilities Accrued liabilities consisted of the following as of December 31, 2001 (amounts in thousands): Payroll and related.............................. $ 5,784 Interest......................................... 4,260 Vacation......................................... 1,905 Taxes............................................ 1,630 Pension.......................................... 1,077 Medical self-insurance........................... 876 GPO fees......................................... 821 Closure of distribution facility................. 738 Other............................................ 211 ---------- $ 17,302 ========== 4. Mandatorily-Redeemable Preferred Stock In connection with the recapitalization in April 1998, the Company issued 300,000 shares of mandatorily-redeemable 11-1/2% senior exchangeable pay-in-kind ("PIK") preferred stock due 2010. Net proceeds from the original issuance were $29.0 million. The preferred stock is exchangeable for subsequent offerings of Company preferred stock or subordinated notes. Dividends are payable semi-annually in arrears on April 15 and October 15 each year. Dividends will be payable in cash, except on dividend payment dates occurring on or prior to April 15, 2003, for which the Company has the option to issue additional shares of preferred stock (including fractional shares) having an aggregate liquidation preference equal to the amount of such dividends. The stock is mandatorily redeemable as of 2010. Accordingly, the Company is accreting the original issuance costs of $1,000,000 over a 10 year period to PIK preferred stock to current redemption value on the consolidated financial statements through a charge to accumulated deficit. As of December 31, 2001, the Company had accreted to PIK preferred stock $373,000 of the issuance costs. The preferred stock ranks junior in right of payment to all obligations of the Company and its subsidiaries. The Company issued PIK preferred stock with a liquidation preference of approximately $4,703,000 to satisfy the dividend requirements in 2001. As of December 31, 2001, the Company accrued for PIK preferred stock dividends in the amount of $1,142,000. 5. Junior Preferred Stock In August 2001, the Company issued 3,000 shares of 12% Junior Convertible Cumulative Preferred Stock (the "Junior Preferred Stock") to River for cash consideration of $3,000,000. 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 the 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. F-13 6. Long-Term Debt Obligations The Company's long-term debt obligations as of December 31, 2001, as amended and restated (see Note 12) consist of the following (amounts in thousands): Borrowings under revolving credit facility........... $ 55,000 Term loan payable to domestic banks.................. 10,000 Term loan payable to domestic banks to be exchanged for notes payable to affiliates................. 12,000 Term and revolving loan payable to Swedish bank ..... 16,930 Senior subordinated notes............................ 115,000 Note payable to affiliate............................ 17,217 ---------- 226,147 Less--current portion................................ (20,680) ---------- Long-term debt....................................... $ 205,467 ========== Credit Facility The Credit Facility as of December 31, 2001 consists of a $40.0 million Term Loan Facility and a $55.0 million Revolving Loan Facility. The Revolving Loan Facility permits borrowings of up to $40.0 million (all of which has been borrowed and is outstanding) which may be used for permitted acquisitions (the "Acquisition Facility") and up to $15 million (the "Working Capital " portion) which may be used for general corporate purposes (other than acquisitions). The Revolving Loan Facility has a letter of credit sublimit of $7.5 million. The Term Loan Facility matures on June 30, 2003 and requires quarterly principal installments totaling $3.0 million in 1999, $5.5 million in 2000, $7.5 million in 2001, $9.5 million in 2002 and $14.5 million in 2003. The Revolving Loan Facility matures on June 30, 2003. The interest rate under the Credit Facility is 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 as follows: Margin --------------------- Period and Loan Type Base Rate Eurodollar -------------------- --------- ---------- Through June 2002 Term and Working Capital............ 3.00% 4.00% Acquisition......................... 3.25% 4.25% July 2002 through March 2003 Term and Working Capital............ 3.50% 4.50% Acquisition......................... 3.75% 4.75% Thereafter Term and Working Capital............ 4.00% 5.00% Acquisition......................... 4.25% 5.25% For periods after June, 2002, the margins set forth above are subject to pricing reductions depending on the Company's then existing leverage ratio. F-14 The following summarizes interest rate data on the Credit Facility as of December 31, 2001: Revolving credit facility rate....................... 6.511% Term and acquisition loan facility rate.............. 5.938% Borrowings under the Credit Facility are required to be prepaid from Excess Cash Flow (as defined in the Credit Agreement). The Credit Facility is secured by a first priority lien in substantially all of the properties and assets of the Company and the guarantors now owned or acquired later, including a pledge of all of the capital stock of the Company owned by Holding and all of the shares held by the Company of its existing and future subsidiaries; provided, that such pledge is limited to 65% of the shares of any foreign subsidiary to the extent a pledge of a greater percentage would result in adverse tax consequences to the Company. The Credit Facility is guaranteed jointly and severally by River Holding Inc. ("Holding") and certain of the Company's subsidiaries. The Credit Facility contains covenants restricting the ability of Holding, the Company and the Company's 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), (b) a fixed charge coverage ratio, (c) a maximum leverage ratio, (d) a minimum EBITDA test and (e) an interest coverage ratio. The Company was not in compliance with these covenants as of December 31, 2001. On May 14, 2002 the Company amended its Credit Facility with its senior lenders. Under this amendment, the lenders agreed to waive past violations of convents, amend future covenants, extend the final maturity to June 30, 2004 and reduce scheduled amortization of the Term Loan (see Note 12.) Total borrowings as of December 31, 2001 were $55 million under the Revolving Loan Facility and Acquisition Facility and $22 million under the Term Loan Facility. As of December 31, 2001, the Company had utilized all available credit under the Revolving Credit Facility. No additional borrowing is available under the Term Loan Facility. As of December 31, 2001, the fair value of the Revolving Credit Facility and Term Loan Facility approximated the face value. Senior Subordinated Notes The Company has $115.0 million of senior subordinated notes (the "Notes"). The Notes are fully transferable and are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior debt, as defined, of the Company. The Notes bear interest at a rate equal to 9-1/8% per annum from the date of issuance of the Notes. Interest is payable semi-annually on April 15 and October 15 of each year, commencing October 15, 1998. The Notes mature on April 15, 2008 and will be redeemable at the option of the Company, in whole or in part, on or after April 15, 2003 at a redemption price of 100.0% to 104.6% of face value depending on the date of the redemption. The Notes are guaranteed jointly and severally by Hudson Respiratory Care Inc. and its Mexican subsidiaries. The fair value of the Company's senior subordinated notes at December 31, 2001 was approximately $77.1 million. The fair value is estimated based on the quoted market prices for issues listed on exchanges and is not intended to, and does not, represent the underlying fair value of the Company. Note Payable to Affiliate In connection with the acquisition of Hudson RCI AB during 1999, the Company borrowed $22.0 million under an unsecured 12% note payable to an affiliate of the Company's existing majority stockholder. The note is due August 1, 2006. During 1999, the Company paid approximately $14.5 million in principal on the note. In April 2001, the Company repaid an additional $6.0 million in principal on the note. Proceeds from the repayment of this note were then reinvested by the Company's majority shareholder in new long term notes issued by the Company as described below. F-15 During 2000, the Company borrowed an additional $2.0 million from the existing majority shareholder under an unsecured 14% note payable due on demand. In August of 2001, this note was exchanged for a new long-term note as described below. In August, 2001, the Company issued approximately $15.0 million of new unsecured senior subordinated convertible notes consisting of $7.0 million in new cash and an exchange of $8.0 million in existing short-term unsecured notes to certain managers and shareholders. The notes bear interest at 10% and are due in March 2005. The interest may be paid or deferred to the due date at the option of the Company and the notes are convertible to common stock at the demand of the holder. The notes are subordinated to borrowings under the Credit Facility and rank pari-pasu with the Senior Subordinated Notes. The fair value of the notes to affiliate approximates the face value. In May of 2002, the Company issued an additional $20.0 million in senior notes payable to affiliates (see note 12). Bank Notes Payable On March 21, 2001, the Company's primary European subsidiary, Hudson RCI AB, replaced its existing lending agreement denominated in Swedish krona with a new loan that allows for borrowings (the "Hudson AB Bank Notes") of up to approximately $17.0 million. The principal is amortized over 18 equal quarterly payments commencing June 30, 2001 with a final maturity of September 30, 2005. Interest is based on the STIBOR rate plus 1.25% to 1.85%, based on the outstanding balance of the loan. The loan is guaranteed jointly and severally by Hudson Euro SarL, a wholly-owned subsidiary of the Company and 100% owner of Hudson RCI AB and subsidiaries, Hudson RCI UK Ltd. and Hudson France S.A.S. The loan contains certain affirmative and restrictive provisions including, but not limited to, restrictions on additional indebtedness and compliance with certain financial covenants. The loan also restricts Hudson RCI AB's ability to dividend to its parent companies. At December 31, 2001, borrowings under the Hudson AB Bank Notes equaled $16.9 million. The interest rate on the Bank Notes Payable as of December 31, 2001 was 5.74%. At December 31, 2001, the Company was not in compliance with certain financial covenants of the Hudson AB Bank Notes. The Company is currently in discussions with the lender and expects the lender to agree to provide a waiver curing all defaults as of December 31, 2001. Due to the uncertainty of obtaining this waiver from the lenders, all amounts payable under the Hudson AB Bank Notes have been classified as current on the accompanying consolidated balance sheet. The following summarizes future principal amounts payable on all of the Company's debt at December 31, 2001 (amounts in thousands): 2002.................... $ 20,680 2003.................... 24,250 2004.................... 49,000 2005.................... 14,951 2006.................... 2,266 Thereafter ............. 115,000 ----------- $ 226,147 =========== 7 Commitments and Contingencies The Company has capital and operating leases for certain facilities, automobiles and office equipment under non-cancelable leases, with the majority of the automobile leases having a term of one year with annual renewal provisions. Rental expense for the year ended December 31, 2001 amounted to $4,657,000. Generally, the facility leases include escalation clauses. F-16 The following is a schedule, by year, of the future minimum payments under capital and operating leases, together with the present value of the net minimum payments as of December 31, 2001 (in thousands). Capital lease amounts are included in the non-current liabilities line item on the accompanying consolidated balance sheet:
Capital Operating Leases Leases ----------- ----------- Year ending December 31, 2002 .............................................. $ 59 $ 2,188 2003 .............................................. 59 2,152 2004 .............................................. 59 2,087 2005 .............................................. 59 1,649 2006 .............................................. -- 896 Thereafter ........................................ -- 3,128 ----------- ----------- Total minimum lease payments ............................ 236 $ 12,100 =========== Less amount representing interest ....................... 53 ----------- Total present value of minimum payment .................. 183 Less current portion of such obligations ................ 39 ----------- Long-term obligations with interest rate of 11.0% ....... $ 144 ===========
Assets recorded under capital leases as of December 31, 2001 are as follows (amounts in thousands): Machinery and equipment .................................. $ 297 Less accumulated depreciation ............................ 31 ----------- Net property, plant and equipment ........................ $ 266 ===========
Self-Insurance The Company self-insures the majority of its medical benefit programs. Reserves for medical claim losses totaling approximately $876,000 at December 31, 2001 were established based upon estimated obligations and are included in accrued liabilities in the accompanying consolidated balance sheet. The Company maintains excess coverage on an aggregate claim basis. Effective November 1, 2001, the Company became self-insured for workers' compensation. Reserves for workers' compensation claim losses totaling approximately $350,000 at December 31, 2001 were established based upon estimated obligations and are included in accrued liabilities in the accompanying consolidated balance sheet. Legal The Company is not a party to any material lawsuits or other proceedings, including suits relating to product liability and patent infringement. While the results of the Company's other existing lawsuits and proceedings cannot be predicted with certainty, management does not expect that the ultimate liabilities, if any, will have a material adverse effect on the financial position or results of operations of the Company. Other Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash investments with high quality financial institutions and limits the amount of credit exposure to any one institution. F-17 8. Income Taxes The Company is included in the consolidated income tax returns of its parent. The Company provides for income taxes on a stand-alone basis in accordance with the asset and liability method pursuant to an informal tax-sharing agreement. The components of the deferred tax asset as of December 31, 2001 are (amounts in thousands): Basis differences arising from Section 338(h)(10) election .. $ 64,102 Net operating loss carryforwards ............................ 32,785 Other ....................................................... 1,285 ------------ 98,172 Valuation allowance ......................................... (98,172) ------------ $ -- ============ As of December 31, 2001, the Company had net deferred tax assets before any valuation allowance of $98.2 million. This asset relates primarily to basis differences in goodwill and net operating loss carryforwards for tax purposes. As of December 31, 2001, the Company had federal and state net operating loss carryforwards of approximately $86.0 million and $56.0 million, which begin to expire in 2018 and 2003, respectively. Under SFAS No. 109, "Accounting for Income Taxes," the Company is required to place a valuation allowance against any deferred tax assets unless it is more likely than not that the asset will be realized. In accordance with this standard, the Company has placed a valuation allowance against its deferred tax assets of approximately $98.2 million as of December 31, 2001. The reconciliation of the actual tax expense to tax computed at the statutory federal rate for the year ended December 31, 2001 (amounts in thousands): Income taxes at statutory rate ...... $ (25,098) Other. .............................. 4,298 Foreign taxes ....................... 959 Valuation allowance ................. 89,695 ------------- $ 69,854 ============= The provision for income taxes for the year ended December 31, 2001 consists of the following (amounts in thousands):
United States Foreign Total ------------- ------------ ----------- Current .......................... $ - $ 959 $ 959 Deferred ......................... 68,895 - 68,895 ------------- ------------ ----------- $ 68,895 $ 959 $ 69,854 ============= ============ ===========
F-18 9. Deferred Compensation and Benefit Plans Pension and 401(k) Plans The Company has a defined-contribution pension plan covering substantially all its employees who are 21 years of age with two years of service. The Company contributes an amount equal to 6% of employees' basic compensation. Contribution expense relating to this plan totaled approximately $943,000 for the fiscal year ended December 31, 2001. During 2001, the Company determined that the pension plan for 1999 and 2000 was not fully funded. Accordingly, the Company recorded $350,000 in associated penalties and fully funded the plan through 2000. Additionally, the Company has a defined contribution 401(k) plan covering substantially all of its employees who are 21 years of age with 30 days of service. Participants may contribute up to 10% of base compensation to this plan, subject to certain Internal Revenue Code (IRC) limitations, each year. The Company makes no contributions under this plan. Deferred Compensation Effective December 1, 1994, the Company established a deferred compensation plan for certain key employees. As of December 31, 2001 no material amount of compensation has been deferred. Management Bonus Plans The Company offers a management bonus plan for its executives and senior management. The plan is based solely on the financial goals of the Company. The plan for 2001 required reaching a minimum of 95% of budgeted EBITDA. During 2001, the Company did not meet this objective and no bonuses were paid. The Company periodically offers additional incentive compensation to individuals who demonstrate superior performance. This compensation was not material in 2001. Stock Subscription Plans In April 1998, River adopted an Employee Stock Subscription Plan and an Executive Stock Subscription Plan (collectively, the "Stock Subscription Plans") pursuant to which executives of the Company purchased 800,000 shares of common stock of River valued at $10.00 per share. The Stock Subscription Plans provide for a repurchase option in favor of River upon termination of employment at stated repurchase prices. In addition, the Stock Subscription Plans provide for restrictions on the transferability of shares prior to the fifth anniversary of the recapitalization or Hudson RCI's initial public offering. The shares are also subject to a right of first refusal in favor of River, as well as obligations to sell at the request of Freeman Spogli and co-sale rights if Freeman Spogli sells its shares to a third party. No additional shares of River common stock were sold under the Stock Subscription Plans in fiscal 2001. Shareholder Agreement Helen Hudson Lovaas (The "Continuing Shareholder") and River have entered into a Shareholders' Agreement, as amended (the "Shareholders' Agreement"). The Shareholder Agreement provides that i) River and the Continuing Shareholder have the right to purchase their pro rata share of certain new issuances, ii) in consideration for the contribution of consideration received from River for certain issuances of the common stock of River, the Company will issue an equivalent shares of Company common stock to River, iii) in the event of a sale of Company stock by River or Freeman Spogli, the Continuing Shareholder is obligated to sell all or part of her shares at the request of River and the Continuing Shareholder has the right to participate in such sale on a pro rata basis, iv) the restriction on the transferability of the shares for a two year period following the recapitalization and provides for a right of first offer on the Continuing Shareholder's common stock and v) in the event the Company participates in an IPO, the Company will exchange all of the Company's existing common stock for newly issued common stock. In 2001, the Board of Directors of River approved adoption of a Stock Option plan for eligible employees, officers and consultants of the Company. The plan allows for the issuance of up to 2,000,000 of River common stock in the form of F-19 unqualified or incentive stock options under which shares shall have been reserved for by River. Exercise price shall be set at fair market value as determined by the Board of Directors. As of the date of this filing, no options have been granted under this plan. 10. Geographic, Segment and Major Customer Information The Company presents segment information externally based on how management uses financial data internally to make operating decisions and assess performance. The Company also reports information about the revenues derived from the enterprise's products or services (or groups of similar products and services), about the countries in which the enterprise earns revenues and holds assets, and about major customers, regardless of whether that information is used in making operating decisions. The Company has two operating and reporting segments: United States, or guarantor, and international or non-guarantor (see Note 11 for segment disclosure). 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 sells respiratory care products to distributors and medical facilities throughout the United States and internationally. During 2001, the Company had foreign sales of approximately $40,772,000, which constituted approximately 26.0% of total sales. The Company's percentage of sales by geographic region for the fiscal year ended December 31, 2001 is as follows: Domestic ......................................................... 74.1% Europe ........................................................... 13.9 Pacific Rim (Japan, Southeast Asia, Australia/New Zealand) ....... 7.2 Canada ........................................................... 1.6 Other international .............................................. 3.2 ---------- 100.0% ==========
The Company's percentage of sales by product category for the fiscal year ended December 31, 2001 is as follows: Oxygen therapy ................................................... 32.6% Airway management ................................................ 29.2 Humidification and filtration .................................... 21.6 Aerosol therapy .................................................. 16.6 ---------- 100.0% ==========
The following summarizes the net book value of fixed assets at the respective locations as of December 31, 2001 (amounts in thousands): Ensenada, Mexico ................................................. $ 1,229 Stockholm, Sweden ................................................ 422 Kuala Lumpur, Malaysia ........................................... 721 United States .................................................... 43,896 ---------- $ 46,268 ==========
For the fiscal year ended December 31, 2001, the Company had sales to one domestic distributor in the amount of $30,435,000, which represented approximately 19.4% of sales. Additionally, the Company had sales to another domestic distributor of approximately $15,656,000, that accounted for approximately 10.0% of sales in 2001. F-20 11. Subsidiaries Debt Guarantee and Segment Data The Company is the 100% owner of certain subsidiaries, which do not guarantee the Company's senior subordinated notes. The non-guarantor subsidiaries consist principally of the assets, liabilities and operations of Hudson RCI AB and subsidiaries. The following tables disclose the required consolidating financial information for the guarantor, including the Company, and non-guarantor subsidiaries (amounts in thousands): HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES CONSOLIDATING BALANCE SHEET DATA
As of December 31, 2001 ------------------------------------------------------- Non- Guarantor Guarantor Eliminations Total ----------- ---------- ------------ ----------- ASSETS CURRENT ASSETS: Cash ................................................. $ 4,713 $ 2,372 $ -- $ 7,085 Accounts receivable .................................. 13,989 5,298 -- 19,287 Receivables from non-guarantor ....................... 6,515 -- (6,515) -- Inventories .......................................... 20,377 7,030 (2,189) 25,218 Other current assets ................................. 2,976 13,553 (15,046) 1,483 ----------- ---------- ------------ ----------- Total current assets .............................. 48,570 28,253 (23,750) 53,073 PROPERTY, PLANT AND EQUIPMENT, net ...................... 45,125 1,143 -- 46,268 INTANGIBLE ASSETS, net ............................... -- 57,743 (29,245) 28,498 DEFERRED FINANCING COSTS, net ........................ 8,316 -- -- 8,316 INVESTMENT IN NON-GUARANTOR SUBSIDIARIES ............. 28,623 -- (28,623) -- OTHER ASSETS ......................................... 676 224 -- 900 ----------- ---------- ----------- ----------- Total other assets ................................ 37,615 57,967 (57,868) 37,714 ----------- ---------- ----------- ----------- $ 131,310 $ 87,363 $ (81,618) $ 137,055 =========== ========== =========== =========== LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable ...................................... $ 14,069 $ 1,182 $ -- $ 15,251 Accrued liabilities ................................... 14,366 15,356 (12,420) 17,302 Notes payable to banks - current portion .............. 3,750 16,930 -- 20,680 Payables to guarantor ................................. -- 6,515 (6,515) -- ----------- ---------- ----------- ----------- Total current liabilities .......................... 32,185 39,983 (18,935) 53,233 NOTE PAYABLE TO AFFILIATE ................................ 14,951 2,266 -- 17,217 NOTES PAYABLE TO BANKS, net of current portion ........... 73,250 -- -- 73,250 SENIOR SUBORDINATED NOTES PAYABLE ........................ 115,000 -- -- 115,000 OTHER NON-CURRENT LIABILITIES ............................ 146 1,041 -- 1,187 ----------- ---------- ----------- ----------- Total liabilities .................................. 235,532 43,290 (18,935) 259,887 ----------- ---------- ----------- ----------- Mandatorily-redeemable preferred stock ................... 44,989 -- -- 44,989 STOCKHOLDERS' DEFICIT .................................... (149,211) 44,073 (62,683) (167,821) ----------- ---------- ----------- ----------- $ 131,310 $ 87,363 $ (81,618) $ 137,055 =========== ========== =========== ===========
F-21 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2001 ------------------------------------------------------------- Non- Guarantor Guarantor Eliminations Total --------- --------- ------------ ---------- NET SALES ...................................................... $ 143,555 $ 28,319 $ (14,762) $ 157,112 COST OF SALES .................................................. 105,789 15,749 (13,484) 108,054 --------- --------- --------- --------- Gross profit ................................................... 37,766 12,570 (1,278) 49,058 OPERATING EXPENSES: Selling ..................................................... 13,470 6,026 -- 19,496 Distribution ................................................ 9,514 1,915 -- 11,429 General and administrative .................................. 21,505 2,384 -- 23,889 Amortization of goodwill .................................... 1,561 1,929 -- 3,490 Impairment of goodwill ...................................... 26,217 6,911 -- 33,128 Impairment of fixed assets .................................. 4,469 -- -- 4,469 Research and development .................................... 1,015 1,028 -- 2,043 Provision for bad debts ..................................... 2,768 58 -- 2,826 --------- --------- --------- --------- Total operating expenses 80,519 20,251 -- 100,770 --------- --------- --------- --------- Income (loss) from operations .................................. (42,753) (7,681) (1,278) (51,712) OTHER EXPENSES: Interest expense ............................................ 18,890 1,652 -- 20,542 Other, net .................................................. 1,005 675 (117) 1,563 --------- --------- --------- --------- Total other expense ...................................... 19,895 2,327 (117) 22,105 --------- --------- --------- --------- Income (loss) before provision (benefit) for income taxes ...... (62,648) (10,008) (1,161) (73,817) PROVISION (BENEFIT) FOR INCOME TAXES ........................ 69,097 757 -- 69,854 --------- --------- --------- --------- Net income (loss) .............................................. $(131,745) $ (10,765) $ (1,161) $(143,671) ========= ========= ========= =========
HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2001 ------------------------------------------- Non- Guarantor Guarantor Total --------- --------- --------- Net cash provided by operating activities ................... $ 3,740 $ 1,824 $ 5,564 Net cash (used in) provided by investing activities ......... (8,366) (651) (9,017) Net cash provided by financing activities ................... 8,902 (1,572) 7,330 Effect of exchange rate changes on cash ..................... -- (322) (322) ------------- ----------- ---------- NET INCREASE IN CASH ........................................ 4,276 (721) 3,555 CASH, beginning of year 437 3,093 3,530 ------------- ----------- ---------- CASH, end of year ........................................... $ 4,713 $ 2,372 $ 7,085 ============= =========== ==========
F-22 12. Subsequent Events As of December 31, 2001, based on the Company's financial results, the Company was not in compliance with certain financial covenants under its Credit Facility. As a result of this non-compliance and resulting defaults, on March 30, 2002, the Company did not make a scheduled Term Loan payment to its senior lenders as required under the Credit Facility and, as a result, the Company was prevented from making a scheduled interest payment due its Subordinated Note holders on April 15, 2002. On May 14, 2002, the Company amended and restated the Credit Facility to (i) waive all existing events of default; (ii) extend the final maturity of the term and revolving facilities under the Credit Facility to June 30, 2004; (iii) amend existing term and acquisition loan amortization to $3.8 million in 2002 and $9.3 million in 2003 and $37.0 million in 2004; and (iv) amend financial covenants to include only a limitation on capital expenditures and a minimum EBITDA test. In connection with this amendment, the Company and HRC Holding, its wholly-owned subsidiary, issued a total of $20.0 million in senior unsecured notes to affiliates of River's majority stockholder, of which $12.0 million was used to pay down the Term Loan of the Credit Facility. These notes bear interest at 12%, with interest and principal due upon maturity on December 31, 2004. F-23 Additional Unaudited Quarterly Financial Information Summarized quarterly financial data for 2001 is as follows (amounts in thousands):
Quarters Ended ------------------------------------------------------- March 31 June 30 September 30 December 31 ------------ ----------- ------------ ----------- Net sales ...................................... $ 37,805 $ 40,801 $ 45,095 $ 33,411 Gross profit ................................... 9,775 15,840 20,789 2,654 Net income (loss) .............................. (12,863) (5,819) 1,953 (126,942)
Fourth Quarter Adjustments As a result of significant losses in the fourth quarter and cumulative losses in recent years, the Company has reevaluated its ability to realize the future benefit of its net deferred tax assets held in light of the historical operating losses. Accordingly, the Company recorded a full valuation allowance against its deferred tax assets of approximately $68.9 million. As a result of significant losses in the fourth quarter, the Company reassessed future cash flows and determined that goodwill was not recoverable. Accordingly, the Company recorded a goodwill impairment charge of approximately $33.1 million. As a result of the Company's analysis of fixed assets in the fourth quarter, it was determined that certain machinery and equipment was no longer needed to support current business operations and had no value. Additionally, certain software development costs incurred in 2001 related to the management information system failed to achieve their intended results and, as a result, were determined to have no future value. As a result, the Company recorded an impairment charge of approximately $4.5 million. As a result of an analysis of product lines during the fourth quarter of 2001, the Company concluded that it would no longer support a certain number of individual products, resulting in the related inventories of those products no longer having value. The Company recorded charges of $4.6 million related to the destruction of obsolete inventory resulting from this strategic decision. The Company made a decision in the fourth quarter of 2001 to not pursue certain aged accounts receivable for collection and to allocate resources to other customer receivables and collection activities. As a result, the Company increased its provision for write-offs based on analysis of those aged customer receivables. The Company recorded a charge of approximately $0.9 million related to the fourth quarter closure of its Atlanta distribution center. This charge primarily consisted of future rent commitments. During fiscal 2001, the Company made a decision to relocate from its manufacturing operation in Argyle, New York to Tecate, Mexico. In addition, the Company made a decision to move certain product manufacturing from Temecula, California to Ensenada, Mexico. The Company recorded approximately $0.9 million in severance costs related to the relocations. F-24 Arthur Andersen LLP (Andersen) is the former auditor of the Company. As a result of recent events at Andersen, Andersen declined the Company's request to reissue their audit report dated July 30, 2001 for the fiscal years ended December 31, 2000 and 1999 for inclusion in the Company's 10-K filing for the fiscal year ended December 31, 2001. As such, pursuant to the guidance given in the Temporary Final Rule and Final Rule: Requirements for Arthur Andersen LLP Auditing Clients, Release Nos. 33-8070; 34-45590; 35-27503; 39-2395; IA-2018; IC-25464; FR-62; File No. S7-03-02, the Company is filing this copy of the latest signed and dated accountant's report issued by Andersen for such periods. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Hudson Respiratory Care Inc.: We have audited the accompanying consolidated balance sheets of HUDSON RESPIRATORY CARE INC., (a California Corporation) and subsidiaries as of December 31, 1999 and 2000, and the related consolidated statements of operations and comprehensive loss, stockholders' equity (deficit) and cash flows for the years ended December 25, 1998, December 31, 1999 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hudson Respiratory Care Inc. and subsidiaries as of December 31, 1999 and 2000, and the results of their operations and their cash flows for the years ended December 25, 1998, December 31, 1999 and 2000 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Orange County, California July 30, 2001 F-25 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS
December 31, December 31, 1999 2000 ------------ ------------ CURRENT ASSETS: Cash ........................................................................................... $ 2,917 $ 3,530 Accounts receivable, less allowance for doubtful accounts of $973 and $3,500 at December 31, 1999 and 2000, respectively ................................................................... 30,425 28,307 Inventories .................................................................................... 24,043 44,610 Other current assets ........................................................................... 4,612 1,832 ---------- ---------- Total current assets ........................................................................ 61,997 78,279 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, net ............................................................... 42,476 49,425 ---------- ---------- OTHER ASSETS: Intangible assets, net ......................................................................... 66,970 67,573 Deferred financing costs, net of accumulated amortization of $2,528 and $4,306 at December 31, 1999 and December 31, 2000, respectively ................................................ 11,134 9,587 Deferred tax asset ............................................................................. 68,943 69,105 Other assets ................................................................................... 299 1,265 ---------- ---------- Total other assets .......................................................................... 147,346 147,530 ---------- ---------- Total assets .................................................................... $ 251,819 $ 275,234 ========== ========== LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Notes payable to banks ........................................................................ $ 6,673 $ 10,686 Accounts payable .............................................................................. 6,168 20,320 Accrued liabilities ........................................................................... 11,700 12,707 Notes payable to affiliates ................................................................... - 2,000 Other current liabilities ..................................................................... 1,485 3,007 ---------- ---------- Total current liabilities ................................................................... 26,026 48,720 NOTE PAYABLE TO AFFILIATE, net of current portion ................................................ 7,508 8,266 NOTES PAYABLE TO BANKS, net of current portion ................................................... 82,513 85,962 SENIOR SUBORDINATED NOTES PAYABLE ................................................................ 115,000 115,000 ---------- ---------- Total liabilities ........................................................................... 231,047 257,948 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Note 7) MANDATORILY-REDEEMABLE PREFERRED STOCK, $.01 par value: 1,800 shares authorized; 356 and 398 shares issued and outstanding at December 31, 1999 and 2000, respectively; liquidation preference--$35,558 and $39,783 respectively (Note 4) ......................................................................... 34,558 39,043 Accrued preferred stock dividends, payable in kind ............................................... 863 1,018 ---------- ---------- 35,421 40,061 ---------- ---------- STOCKHOLDERS' EQUITY (DEFICIT): Common stock, no par value: 15,000 shares authorized; 10,044 and 10,387 shares issued and outstanding at December 31, 1999 and 2000, respectively ...................................... 92,158 98,158 Cumulative translation adjustment ............................................................. (862) (1,151) Accumulated deficit ........................................................................... (105,945) (119,782) ---------- ---------- Total stockholders' equity (deficit) ........................................................ (14,649) (22,775) ---------- ---------- Total liabilities, mandatorily-redeemable preferred stock and stockholders' equity (deficit) .............................................................. $ 251,819 $ 275,234 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. F-26 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands)
For the Years Ended ------------------------------------------------------ December 25, December 31, December 31, 1998 1999 2000 ---------------- ---------------- ---------------- NET SALES ................................................................ $ 100,498 $ 128,803 $ 159,278 COST OF SALES ............................................................ 56,802 75,418 84,923 ------------ ------------ ------------ Gross profit ........................................................ 43,696 53,385 74,355 ------------ ------------ ------------ OPERATING EXPENSES: Selling ............................................................... 10,350 13,122 18,262 Distribution .......................................................... 3,336 4,647 10,109 General and administrative ............................................ 10,125 13,269 24,023 Amortization of goodwill .............................................. 159 1,463 3,320 Research and development .............................................. 976 2,031 2,387 ------------ ------------ ------------ Total operating expenses ............................................ 24,946 34,532 58,101 ------------ ------------ ------------ PROVISION FOR EQUITY PARTICIPATION PLAN AND RETENTION PAYMENTS .............................................................. (68,693) - - (Loss) Income from operations ....................................... (49,943) 18,853 16,254 OTHER EXPENSES: Interest expense ...................................................... (11,327) (17,263) (21,089) Other, net ............................................................ (406) (1,232) (1,159) ------------ ------------ ------------ (11,733) (18,495) (22,248) ------------ ------------ ------------ (Loss) income before provision for income taxes and extraordinary item ... (61,676) 358 (5,994) PROVISION FOR INCOME TAXES ............................................... 8,405 1,586 3,203 ------------ ------------ ------------ Loss before extraordinary item ........................................... (70,081) (1,228) (9,197) EXTRAORDINARY ITEM-loss on extinguishment of debt ........................ 104 - - ------------ ------------ ------------ Net loss ................................................................. (70,185) (1,228) (9,197) OTHER COMPREHENSIVE LOSS: Foreign currency translation loss ..................................... (119) (398) (289) ------------ ------------ ------------ Comprehensive loss ....................................................... $ (70,304) $ (1,626) $ (9,486) ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-27 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (In thousands)
Cumulative Retained Earnings Common Stock Translation (Accumulated ----------------- Shares Amount Adjustment Deficit Total ------ ------ ----------- ----------------- ----- BALANCE, December 25, 1997 ................................... 14,469 $ 3,789 $ (345) $ 19,071 $ 22,515 Stockholder redemption ..................................... (12,969) (3,379) - (124,244) (127,623) Foreign currency translation loss .......................... - - (119) - (119) Recapitalization investment ............................ 6,300 63,000 - - 63,000 Issuance of common stock ................................... 13 125 - - 125 Pay-in-kind preferred stock dividends .................... - - - (2,512) (2,512) Effect of Section 338(h)(10) election on deferred taxes .... - - - 77,064 77,064 Net loss ................................................... - - - (70,185) (70,185) -------- --------- ----------- ---------- ---------- BALANCE, December 25, 1998 ................................... 7,813 63,535 (464) (100,806) (37,735) Issuance of common stock to parent for cash and contribution of Hudson RCI AB Stock (see Note 2) ........... 2,231 28,623 - - 28,623 Foreign currency translation loss .......................... - - (398) - (398) Pay-in-kind preferred stock dividends ...................... - - - (3,911) (3,911) Net loss ................................................... - - - (1,228) (1,228) -------- --------- ----------- ---------- ---------- BALANCE, December 31, 1999 ................................... 10,044 92,158 (862) (105,945) (14,649) Issuance of common stock to parent for cash ................ 343 6,000 - - 6,000 Foreign currency translation loss .......................... - - (289) - (289) Pay-in-kind preferred stock dividends ...................... - - - (4,640) (4,640) Net loss ................................................... - - - (9,197) (9,197) -------- --------- ----------- ---------- ---------- BALANCE, December 31, 2000 ................................... 10,387 $ 98,158 $ (1,151) $ (119,782) $ (22,775) ======== ========= =========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-28 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the Years Ended -------------------------------------------- December 25, December 31, December 31, 1998 1999 2000 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .............................................................. $ (70,185) $ (1,228) $ (9,197) Adjustments to reconcile net loss to net cash (used in) provided by operating activities-- Depreciation and amortization .................................... 6,101 8,315 11,719 Amortization/write-off of deferred financing costs and other ..... 1,119 1,374 991 Loss (gain) on disposal of equipment ............................. 14 (5) 9 Change in deferred tax asset ..................................... 6,735 1,385 (161) Changes in operating assets and liabilities: Accounts receivable .............................................. (4,547) (2,701) 2,118 Inventories ...................................................... (1,411) (2,865) (12,351) Other current assets ............................................. 437 (1,194) 2,780 Other assets ..................................................... 247 13 (966) Accounts payable ................................................. 2,482 (741) 14,152 Accrued liabilities .............................................. 1,687 4,277 1,008 Management bonus accrual ......................................... (20,000) - - Other current liabilities ........................................ - 1,426 1,522 Other non-current liabilities .................................... - (959) - Accrued equity participation plan (EPP) .......................... 83,939 - - Payment of EPP liabilities and retention bonuses ................. (89,642) - - ---------- ---------- ---------- Net cash (used in) provided by operating activities ............ (83,024) 7,097 11,624 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ............................ (3,111) (10,973) (11,329) Proceeds from sale of property, plant and equipment ................... 18 23 4 (Advances) collections on notes receivable and other .................. - (200) 2,384 Acquisition of certain assets of Gibeck, Inc. ......................... (3,351) - - Acquisition of certain assets of Medimex .............................. - (2,168) - Acquisition of certain assets of Tyco ................................. - (23,750) (18,000) Acquisition of Louis Gibeck AB stock, net of cash acquired of $8,208 ............................................................. - (38,750) - ---------- ---------- ---------- Net cash used in investing activities .......................... (6,444) (75,818) (26,941) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable to bank .................................... (43,250) (17,355) - Proceeds from bank borrowings ......................................... 67,000 59,376 7,461 Additions to deferred financing costs ................................. (12,918) - - Redemption of stockholder interest .................................... (127,623) - - Proceeds from senior subordinated notes payable ....................... 115,000 - - Proceeds from note payable to affiliate ............................... - 22,000 2,758 Repayment of note payable to affiliate ................................ - (14,492) - Net proceeds from sale of common and mandatorily-redeemable preferred stock, net of transaction costs ........................ 91,415 22,000 6,000 ---------- ---------- ---------- Net cash provided by financing activities ...................... 89,624 71,529 16,219 ---------- ---------- ---------- Effect of exchange rate changes on cash .................................. (119) (398) (289) NET INCREASE IN CASH ..................................................... 37 2,410 613 CASH, beginning of year .................................................. 470 507 2,917 ---------- ---------- ---------- CASH, end of year ........................................................ $ 507 $ 2,917 $ 3,530 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-29
For the Years Ended ---------------------------------------------- December 25, December 31, December 31, 1999 1999 2000 -------- -------- -------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for-- Interest .................................. $ 8,742 $ 15,333 $ 17,726 ============= ============= ============= Income taxes .............................. $ 1,699 $ 27 $ 898 ============= ============= ============= DETAILS OF ACQUISITIONS (Note 2): Acquisition price .......................... $ 3,351 $ 79,499 $ 18,000 Less: Common stock issued for acquisition ....... - (6,623) - Cash acquired ............................. - (8,208) - ------------- -------------- ------------- Net cash paid for acquisitions ........ $ 3,351 $ 64,668 $ 18,000 ============= ============= =============
NON-CASH OPERATING ACTIVITIES: Net income includes approximately $2,825,000 and $1,199,000 of non-cash expense related to the recognition of the portion of the purchase price allocation related to acquired inventories in 1999 and 2000, respectively. NON-CASH FINANCING ACTIVITIES: The Company satisfies its preferred dividend requirements by the issuance of additional shares of preferred stock. Such accrued dividend requirements totaled $9,765,000 from the date of issuance of the preferred stock through December 31, 2000; preferred stock with an approximate face value of $1,801,000 was issued in 1998, $3,757,000 was issued in 1999, $4,207,000 was issued in 2000. The Company issued common stock to its parent in partial consideration for the contribution of Hudson RCI AB stock (see Note 2). The accompanying notes are an integral part of these consolidated financial statements. F-30 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 1. Company Background Hudson Respiratory Care Inc. ("Hudson" or the "Company"), a California corporation founded in 1945, is a manufacturer and marketer of disposable medical products utilized in the respiratory care and anesthesia segments of the domestic and international health care markets. The Company is a wholly-owned subsidiary of River Holding Corp., a Delaware corporation ("River"). River has no operations of its own, except the Company. The Company's respiratory care and anesthesia product lines include such products as oxygen masks, humidification systems, nebulizers, cannulae and tubing. In the United States, the Company markets its products to a variety of health care providers, including hospitals and alternate site service providers such as outpatient surgery centers, long-term care facilities, physician offices and home health care agencies. Internationally, the Company sells its products to distributors that market to hospitals and other health care providers. The Company's products are sold to distributors and alternate site service providers throughout the United States and internationally. The Company's respiratory product operations are conducted from its primary facility in Temecula, California, facilities in Arlington Heights and Elk Grove, Illinois, and a facility in Ensenada, Mexico. The Company's anesthesia product operations are conducted from facilities located principally in Sweden and Malaysia, which were acquired in July 1999 (see Note 2). Recapitalization In April 1998, the Company consummated a plan pursuant to which a majority interest in the Company was sold in accordance with an agreement and plan of merger (the "Recapitalization"). Key components of the Recapitalization included: (1) Common and preferred equity investments in consideration for an 80.8% ownership in the Company's common stock and preferred stock with an initial liquidation preference of $30.0 million (2) Issuance of 9-1/8% senior subordinated notes with a par value of $115.0 million, maturing in 2008 (see Note 5) (3) Execution of a new term loan facility and revolving loan facility (see Note 5) (4) Repayment of existing indebtedness (5) Payment of amounts due under the Equity Participation Plan (see Note 10) (6) Payment for common shares acquired from the existing shareholder; this shareholder retained a 19.2% interest in the common shares outstanding (7) Potential contingent payments based on 1998 performance, payable to the continuing shareholder and former participants in the Equity Participation Plan; however, as a result of the Company's 1998 performance, no additional amounts were due. The Company has terminated the Equity Participation Plan and has adopted an executive stock purchase plan. Additionally, Hudson's sole shareholder prior to the Recapitalization, who owned the remaining 21.0% of Industrias Hudson ("Industrias"), a subsidiary of the Company, transferred this interest to the Company in consideration of one dollar. Because of the commonality of ownership, the 21.0% minority interest has been included in the financial statements for all periods presented. The Company effected a 245:1 stock split concurrent with the Recapitalization. The stock split has been reflected in the stock amounts shown herein for all periods presented. F-31 The Recapitalization resulted in no change to the carrying amounts of the Company's existing assets and liabilities. The Company recorded a deferred tax asset due to the conversion from S to C corporation status and a tax election to revalue the basis of assets and liabilities for tax purposes. 2. Acquisitions Gibeck, Inc. During 1998, the Company acquired certain assets of Gibeck Inc. ("Gibeck"), a subsidiary of Louis Gibeck AB, for a cash purchase price of $3.4 million. Gibeck engages primarily in the business of manufacturing, marketing, and selling custom anesthesia circuits. The acquisition was accounted for as a purchase and the purchase price was allocated as follows (amounts in thousands): Goodwill ................................. $ 1,817 Inventory ................................ 871 Machinery and equipment .................. 663 ---------- $ 3,351 ========== Hudson RCI AB On July 22, 1999, the Company acquired substantially all of the outstanding capital stock of Hudson RCI AB (formerly Louis Gibeck AB or "LGAB") and subsidiaries, a Swedish company engaged primarily in the business of manufacturing, marketing and selling respiratory and anesthesia equipment. The purchase price was approximately $53.6 million, which included cash consideration of approximately $45.5 million (including approximately $8.2 million of cash acquired), a non-cash contribution of shares of common stock of River of $6.6 million and transaction expenses of approximately $1.5 million. The acquisition was funded with (i) a $22.0 million common stock sale to the Company's existing majority shareholder, (ii) a $22.0 million, 12.0% per annum unsecured note payable to an affiliate of the Company's existing majority shareholder due August 1, 2006 and (iii) a $5.9 million unsecured bank loan bearing interest at the bank's reference rate plus 1/4% per annum due July 30, 2006. The acquisition of Hudson RCI AB was accounted for as a purchase and the purchase price was allocated based upon management's estimate of the assets acquired and liabilities assumed as follows (amounts in thousands): Cash ....................................... $ 8,208 Accounts receivable ........................ 1,823 Inventories ................................ 5,161 Fixed assets ............................... 1,206 Other assets ............................... 2,939 Current liabilities ........................ (4,856) Non-current liabilities .................... (4,123) Goodwill ................................... 43,223 ---------- $ 53,581 ========== F-32 Had this acquisition and the acquisition of certain assets of Gibeck, Inc. occurred at the beginning of 1998 and 1999, the unaudited pro forma net sales, net loss before extraordinary item and net loss would be as follows (amounts in thousands): Year Ended -------------------------------- December 25, December 31, 1998 1999 ---- ---- Net sales .................................. $ 122,819 $ 139,494 Net loss before extraordinary .............. (66,344) (1,949) Net loss ................................... (66,448) (1,949) Goodwill related to the Hudson RCI AB acquisition is being amortized over a period of 20 years. Acquisition of Product Lines On November 8, 1999, the Company acquired certain assets of Tyco Healthcare Group LP ("Tyco"), including Tyco's incentive breathing exerciser and pulmonary function monitor product lines, for a cash purchase price of approximately $23.8 million. On October 28, 2000, the Company acquired certain assets of Tyco, including Tyco's Sheridan(R) endotracheal tube for a cash purchase price of approximately $18.0 million. 3. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Hudson and its wholly-owned subsidiaries. All significant intercompany account balances and transactions have been eliminated in consolidation. Hudson and its wholly-owned subsidiaries are collectively referred to herein as the Company. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Inventories Inventories are stated at the lower of cost (first-in, first-out (FIFO) method) or market. At December 31, 1999 and December 31, 2000, inventories consisted of the following (amounts in thousands): 1999 2000 ---- ---- $ 5,901 $ 8,134 5,682 6,591 Raw materials .......................... 12,460 29,885 Work-in-process ........................ -------- -------- Finished goods ......................... $ 24,043 $ 44,610 ======== ======== F-33 Raw materials principally consist of bulk resins. Work-in-process and finished goods include raw materials, labor and overhead costs. Certain finished goods are purchased for resale and are not manufactured. Foreign Currency Translation The Company uses the local currency as the functional currency of its operating subsidiaries. Accordingly, all assets and liabilities outside the United States are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Income and expense items are translated at the weighted-average exchange rate prevailing during the period. Beginning in the second quarter of 1998, the Company commenced using the U.S. dollar as the functional currency of its Mexican operations since Mexico was considered a highly inflationary economy. Management believes that the effect of not using the U.S. dollar as the functional currency from January 1, 1997 was not material to the financial statements. Beginning in January 1999, Mexico was no longer considered a highly inflationary economy and, accordingly, the Company resumed using the Mexican Peso as the functional currency. Revenue Recognition The Company recognizes revenue when product is shipped. The Company establishes reserves for sales returns and other allowances based on historical experience. The Company's policy is to provide a reserve for estimated uncollectable trade accounts receivable. During 2000, the Company provided approximately $3.5 million for such accounts. Income Taxes The Company applies the asset and liability method in recording income taxes, under which deferred income tax assets and liabilities are determined, based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using currently enacted tax rates and laws. Additionally, deferred tax assets are evaluated and a valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. Fiscal Year-End The Company reported its operations on a 52-53 week fiscal year ending on the Friday closest to December 31 for the fiscal years ended December 25, 1998 and December 31, 1999. Beginning in 2000, the Company adopted calendar year reporting, with the year ending on December 31, 2000. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, effective for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments. The statement requires that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value, and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The impact of adoption was not material to the financial statements. During the second quarter of fiscal year 2000, Emerging Issues Task Force (EITF) No. 00-10 "Accounting for Shipping and Handling Fees and Costs" was issued. EITF No. 00-10 clarifies the accounting treatment and classification of the Company's delivery revenues and expenses. The adoption of this EITF only affects the classification of certain revenues and costs related to delivery services and does not affect the Company's net loss. Delivery costs include direct and incremental costs incurred to warehouse and move product to the Company's customers. Since the Company records freight costs associated with delivery of product to customers as a component of cost of sales and warehousing costs as distribution expenses management believes the Company is in compliance with this pronouncement. F-34 During December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. Management believes the Company is in compliance with this pronouncement. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"). This Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations," and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. The Company will adopt SFAS 141 for all business combinations initiated after June 30, 2001. Also in June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." This pronouncement addresses, among other things, how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Goodwill would no longer be amortized but would be assessed at least annually for impairment using a fair value methodology. The Company will adopt this statement for all goodwill and other intangible assets acquired after June 30, 2001 and for all existing goodwill and other intangible assets beginning January 1, 2002. Upon adoption of this standard on January 1, 2002 The Company will cease recording amortization of goodwill which would increase net income in 2002 by approximately $2.8 million, net of income taxes. Other than ceasing the amortization of goodwill, The Company does not anticipate that the adoption of SFAS 142 will have a significant effect on our financial position or the results of our operations as The Company does not currently anticipate any impairment charges for existing goodwill. Reclassifications Certain reclassifications have been made in the 1998 and 1999 statements to conform to the 2000 presentation. 4. Preferred Stock In connection with the Recapitalization, the Company issued 300,000 shares of mandatorily-redeemable 11-1/2% senior exchangeable pay-in-kind ("PIK") preferred stock due 2010. Net proceeds from the original issuance were $29.0 million. Dividends are payable semi-annually in arrears on April 15 and October 15 each year. Dividends will be payable in cash, except on dividend payment dates occurring on or prior to April 15, 2003, for which the Company has the option to issue additional shares of preferred stock (including fractional shares) having an aggregate liquidation preference equal to the amount of such dividends. The preferred stock will rank junior in right of payment to all obligations of the Company and its subsidiaries. The Company issued PIK preferred stock with a liquidation preference of approximately $3,757,000 and $4,207,000 to satisfy the dividend requirements in 1999 and 2000, respectively. As of December 31, 1999 and December 31, 2000 the Company accrued for PIK preferred stock dividends in the amount of $863,000 and $1,018,000, respectively. 5. Long-Term Debt Obligations Summary of Amounts Outstanding F-35 The Company's long-term debt obligations as of December 31, 1999 and December 31, 2000 consist of the following (amounts in thousands):
1999 2000 ---- ---- Borrowings under revolving credit facility ......... $ 36,600 $ 53,000 Term loan payable to domestic banks ................ 35,000 29,500 Term and revolving loan payable to Swedish bank .... 17,586 14,148 Senior subordinated notes .......................... 115,000 115,000 Note payable to affiliate .......................... 7,508 10,266 --------- ---------- 211,694 221,914 Less--current portion .............................. (6,673) (12,686) --------- ---------- Long-term debt ..................................... $ 205,021 $ 209,228 ========= ==========
Credit Facility In connection with the Recapitalization, the Company entered into a new credit agreement (the Credit Facility) with a bank group, which provides for borrowings of up to $100.0 million. This agreement consists of two separate facilities as follows: 1.) Revolving credit--maximum borrowings of $60.0 million with a letter of credit sub-limit of $7.5 million. This facility must be prepaid upon payment in full of the Term Loan facility. 2.) Term loan--maximum borrowings of $40.0 million with quarterly installments to be made through maturity. Interest on the Credit Facility is based, at the option of the Company, upon either a eurodollar rate (as defined) plus 2.25%, or a base rate (as defined) plus 1.25% per annum. A commitment fee of 0.50% per annum is charged on the unused portion of the Credit Facility. The following summarizes interest rate data on the Credit Facility as of December 31, 1999 and 2000: 1999 2000 ---- ---- Revolving credit facility rate ....... 8.5625% to 9.563% 10.0% Term loan facility rate .............. 8.75% 9.250% Total borrowings as of December 31, 2000 were $53.0 million and $29.5 million under the Revolving Credit Facility and Term Loan Facility, respectively. The Credit Facility will mature on April 7, 2004. The agreement provides the bank a first security interest in substantially all of the properties and assets of the Company and a pledge of 65.0% of the stock of Industrias, a wholly-owned subsidiary of the Company. The agreement also requires the Company to maintain certain financial ratios and financial covenants, as defined in the agreement, the most restrictive of which and among other restrictions, prohibit additional indebtedness and limit dividend payments to the Company's stockholders. The Credit Facility is guaranteed by the Company's parent. As of December 31, 2000, the Company had available credit under the Revolving Loan Facility in the amount of $7.0 million ($5.0 million of which is restricted for use on future acquisitions). No additional borrowing is available under the Term Loan Facility. The Company is required under restrictive covenants of the Credit Facility Agreement to maintain certain financial ratios, and meet certain operating cash flow tests for which the Company was not in compliance as of December 31, 2000 (see Note 15). F-36 Senior Subordinated Notes Also related to the Recapitalization, the Company issued under an Indenture $115.0 million of senior subordinated notes (the "Notes"). The Notes are fully transferable and are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior debt, as defined, of the Company. The Notes bear interest at a rate equal to 9-1/8% per annum from the date of issuance of the Notes. Interest is payable semi-annually on April 15 and October 15 of each year, commencing October 15, 1998. The Notes will mature on April 15, 2008 and will be redeemable at the option of the Company, in whole or in part, on or after April 15, 2003. The Notes are guaranteed by Industrias. The fair value of the Company's senior subordinated notes at December 31, 2000 was approximately $69.0 million. The fair value is estimated based on the quoted market prices for issues listed on exchanges and is not intended to, and does not, represent the underlying fair value of the Company. Subsequent to December 31, 2000, the Company was in default of certain financial reporting requirements to the noteholders. Management believes that it has cured this default. Note Payable to Affiliate In connection with the acquisition of Hudson RCI AB during 1999, the Company borrowed $22.0 million under an unsecured 12% note payable to an affiliate of the Company's existing majority stockholder. The note is due August 1, 2006. During 1999, the Company paid approximately $14.5 million in principal on the note. During 2000, the Company Borrowed an additional $2 million from the existing majority shareholder under an unsecured 14% note payable due on demand. Bank Notes Payable The Company has bank borrowings of $14.1 million outstanding at December 31, 2000, which are denominated in Swedish Krona. The borrowings bear interest at the 3-month STIBOR plus 0.75% to 1.75% (4.884% to 5.884% at December 31, 2000), are due December 21, 2003 and are secured by the common stock of Hudson RCI AB. Future Debt Principal Payments As of December 31, 2000, future debt principal payments on the aforementioned debt are as follows (amounts in thousands): Fiscal Year Ending: ------------------- 2001 ....................... $ 10,686 2002 ....................... 11,444 2003 ....................... 13,444 2004 ....................... 55,944 2005 ....................... 5,130 Thereafter 125,266 -------- $221,914 ======== F-37 6. Detail of Selected Balance Sheet Accounts Property, Plant and Equipment The following is a summary as of December 31, 1999 and December 31, 2000 (amounts in thousands): 1999 2000 ---- ---- Land .............................................. $ 2,044 $ 2,044 Buildings.......................................... 15,078 15,875 Leasehold improvements............................. 1,322 1,322 Machinery, equipment and purchased software........ 65,667 90,789 Furniture and fixtures............................. 4,227 2,883 --------- -------- 88,338 112,913 Less-- Accumulated depreciation and amortization... (57,740) (64,556) ---------- -------- 30,598 48,357 Equipment installation in progress................. 8,481 268 ERP software installation in progress.............. 3,397 800 --------- -------- Property and equipment, net........................ $ 42,476 $ 49,425 ========= ======== Depreciation of property, plant and equipment is provided using the straight-line method over the following estimated useful lives: Buildings ................................... 31.5 years Leasehold improvements ...................... Lesser of the useful life or lease term Machinery, equipment and purchased software.. 5 to 7 years Furniture and fixtures ...................... 3 to 7 years Upon retirement or disposal of depreciable assets, the cost and related accumulated depreciation are removed and the resulting gain or loss is reflected in income from operations. Major renewals and betterments are capitalized while maintenance costs and repairs are expensed in the year incurred. ERP software installation costs are capitalized in accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Company implemented the new ERP system on April 1, 2000. Total depreciation expense related to property, plant and equipment and amortization expense related to intangible and other assets was $6,101,000, $8,315,000 and $11,719,000 for the years ended December 25, 1998, December 31, 1999 and December 31, 2000, respectively. Intangible Assets and Deferred Financing Costs, net Amortization of intangible assets is provided using the straight-line method over the applicable amortization period. During 1999, the Company wrote-off certain fully-amortized patents. The following is a summary of the components of intangible assets as of December 31, 1999 and December 31, 2000 (amounts in thousands):
Useful lives 1999 2000 ------------ ---- ---- Covenant not-to-compete ................. 5 to 7 years $ 3,500 $ 3,500 Patents ................................. 15 years 472 68 Goodwill ................................ 15 to 20 years 67,834 69,927 Other ................................... 5 to 20 years 133 133 ---------- ---------- 71,939 73,628 Less-- Accumulated amortization ......... (4,969) (6,055) ---------- ---------- $ 66,970 $ 67,573 ========== ==========
Deferred financing costs are amortized using the straight-line method over the period of the related debt. F-38 Management reviews Goodwill on a regular basis for possible impairment. Management knows of no factors at December 31, 2000 which may affect the impairment recorded of long-lived assets. Accrued Liabilities and Accounts Payable Accrued liabilities consisted of the following as of December 31, 1999 and December 31, 2000 (amounts in thousands): 1999 2000 ---- ---- Interest................................. $ 4,162 $ 3,605 Payroll and related...................... 4,095 4,224 Vacation................................. 1,509 1,824 Pension.................................. 1,353 1,767 Medical self-insurance................... 577 569 Other.................................... 4 718 --------- ---------- $ 11,700 $ 12,707 ========= ========== Accounts payable includes a book overdraft of approximately $0.9 million and $1.2 million at December 31, 1999 and 2000. 7. Commitments and Contingencies The Company leases certain facilities, automobiles and office equipment under noncancellable leases, with the majority of the automobile leases having a term of one year with annual renewal provisions. All of these leases have been classified as operating leases. As of December 31, 2000, the Company had future obligations under operating leases as follows (amounts in thousands): Fiscal Year Ending: ------------------- 2001....................... $ 2,534 2002....................... 2,290 2003....................... 2,099 2004....................... 1,914 2005....................... 1,378 Thereafter ................ 4,023 ---------- $ 14,238 ========== Rental expense was approximately $1,506,000, $2,052,000 and $3,115,000 in fiscal 1998, 1999 and 2000, respectively. The Company self-insures the majority of its medical benefit programs. Reserves for losses totaling approximately $577,000 and $569,000 at December 31, 1999 and December 31, 2000, respectively, were established based upon estimated obligations and are included in accrued liabilities in the accompanying balance sheets. The Company maintains excess coverage on an aggregate claim basis. The Company is party to lawsuits and other proceedings, including suits relating to product liability and patent infringement. While the results of such lawsuits and other proceedings cannot be predicted with certainty, management does not expect that the ultimate liabilities, if any, will have a material adverse effect on the financial position or results of operations of the Company. F-39 8. Income Taxes Effective November 1, 1987, the stockholder of Hudson elected S corporation status under the Internal Revenue Code, such that income of the Company is taxed directly to the stockholder for both federal and state income tax purposes. Hudson's provision for income taxes and income taxes payable was limited to the California S corporation tax of 1.5%. The Company became a C corporation upon consummation of the transaction discussed in Note 1. Accordingly, the Company has presented pro forma net income (loss) amounts to reflect a provision for income taxes at a combined effective rate of approximately 39% in 1998, after consideration of permanent differences between financial reporting and income tax amounts. The pro forma amounts presented do not include the one-time effect of the conversion to C corporation status reflected in the 1998 financial statements. During 1999, the Company revised its estimate of the combined effective income tax rate to approximately 40%. The actual provision for income taxes for 1998 reflects that the Company was a C corporation for a portion of the period presented. The conversion from S to C corporation status and the related Section 338(h)(10) election to increase the tax bases of assets in connection with the Recapitalization resulted in a one-time net benefit of $77,064,000 in the second quarter of 1998 which was recorded directly to retained earnings. From the date of the Recapitalization, the Company is included in the consolidated income tax returns of its parent. The Company provides for income taxes on a stand-alone basis in accordance with the asset and liability method pursuant to an informal tax-sharing agreement. During the fourth quarter of 1998, management evaluated the Company's subsequent actual performance relative to certain budget projections which were originally used to evaluate the realizability of the deferred tax asset established at the time of the Recapitalization. Based upon this assessment, management provided a valuation allowance of $8,477,000 in the fourth quarter to reduce the deferred tax asset to an amount that management believes are more likely than not to be realizable. This change in estimate was included in the deferred tax provision for the year ended December 25, 1998. The effective tax rate for 1998, 1999 and 2000 consists of the following (amounts in thousands):
1998 1999 2000 ---- ---- ---- Income taxes at combined statutory rate of approximately 40% ........ $ (24,094) $ 143 $ (2,398) Domestic losses not benefited. ...................................... 24,022 - 2,730 Foreign taxes ....................................................... - 1,443 2,871 Valuation allowance ................................................. 8,477 - - ------------- ------------- ------------- $ 8,405 $ 1,586 $ 3,203 ============= ============= =============
F-40 The provision (benefit) for income taxes consists of the following (amounts in thousands): United States Foreign Total ------------- ------- ----- 2000 Current ............................ $ - $ 3,203 $ 3,203 Deferred ........................... - - - ----------- ----------- ----------- $ - $ 3,203 $ 3,203 =========== =========== =========== 1999 Current ............................ $ - $ 340 $ 340 Deferred ........................... 1,724 (478) 1,246 ----------- ----------- ----------- $ 1,724 $ (138) $ 1,586 =========== =========== =========== 1998 Current ............................ $ - $ - $ - Deferred ........................... 8,405 - 8,405 ----------- ----------- ----------- $ 8,405 $ - $ 8,405 =========== =========== =========== The 1998 tax provision results primarily from the valuation allowance discussed previously. As of December 31, 2000, the Company has recorded a net deferred tax asset of approximately $69.0 million primarily related to basis differences between financial reporting and tax purposes arising from the Section 338(h)(10) election to increase the tax bases of assets in connection with the Recapitalization (see Note 1), which in management's opinion is more likely than not to be realized. As of December 31, 2000, the Company had a United States net operating loss carryforward of approximately $34.0 million. The components of the deferred tax asset as of December 31, 1999 and December 31, 2000 are (amounts in thousands): 1999 2000 ---- ---- Basis differences arising from Section 338(h)(10) election ........................................... $ 68,873 $ 66,933 Net operating loss carryforwards ................... 10,640 11,927 Other .............................................. (2,093) (1,278) ----------- ----------- 77,420 77,582 Valuation allowance ................................ (8,477) (8,477) ----------- ----------- $ 68,943 $ 69,105 =========== =========== 9. Related-Party Transactions Amounts included in the consolidated financial statements with respect to transactions with companies controlled by officers, the stockholders or members of their immediate families are as follows (amounts in thousands):
December 25, December 31, December 31, 1998 1999 2000 ---- ----- ---- Purchases .......................................... $ 128 $ - $ - =========== ============ ============== Notes and advances receivable ...................... $ 91 $ 7,608 $ 10,366 =========== ============ ==============
10. Deferred Compensation and Benefit Plans Pension Plan The Company has a defined-contribution pension plan covering substantially all its employees. Amounts charged to expense relating to this plan totaled approximately $810,000, $972,000 and $914,000 for the fiscal years ended 1998, 1999 and 2000, respectively. F-41 Deferred Compensation Effective December 1, 1994, the Company established a deferred compensation plan for certain key employees. As of December 31, 2000 no material amount of compensation has been deferred. Equity Participation Plan Effective January 1, 1994, the Company's Board of Directors adopted the Equity Participation Plan, as amended (the "Plan"). This Plan provided certain key employees and independent contractors deferred compensation based upon the Company's value, as defined in the agreement. Benefits earned by participants were based upon a formula with a specified minimum benefit accruing each year for each participant, and benefits were accrued and charged to compensation in the year earned. As of the fiscal year ended 1998, the Company recorded $68,693,000 related to amounts earned by the Plan participants. In fiscal 1998, the Company declared bonuses totaling $20.0 million that resulted in a corresponding decrease in amounts payable under the Plan. The effect of the bonuses was to accelerate the timing of payments to the participants. Effective with the Recapitalization, all amounts owed to participants were paid out and the plan was terminated. Total amounts paid in 1998 were $89,642,000. 11. Extraordinary Item In accordance with the Recapitalization, the Company recorded an extraordinary loss on the extinguishment of the existing debt related to the write-off of unamortized deferred finance fees of $104,000 in 1998. 12. Geographic, Segment and Major Customer Information The Company presents segment information externally the same way management uses financial data internally to make operating decisions and assess performance. The Company also reports information about the revenues derived from the enterprise's products or services (or groups of similar products and services), about the countries in which the enterprise earns revenues and holds assets and about major customers regardless of whether that information is used in making operating decisions. As discussed in Note 14, the non-guarantor subsidiaries consist principally of Hudson RCI AB and subsidiaries (whose operations are principally international). The Company operates in two segments: United States operations and international operations. The financial data of these two segments closely approximates the guarantor/non-guarantor information set forth in Note 14 and, accordingly, no additional segment data has been provided. The Company sells respiratory care products to distributors and medical facilities throughout the United States and internationally. During 1998, 1999 and 2000, the Company had foreign sales of approximately $20,148,000, $28,497,000 and $31,383,000 respectively, which constituted approximately 20.0%, 22.1% and 19.7% of total sales, respectively. The Company's percentage of sales by geographic region for the fiscal years ended 1998, 1999 and 2000 are as follows:
1998 1999 2000 ---- ---- ---- Domestic ...................................................... 79.9% 77.9% 80.3% Europe ........................................................ 7.8 10.1 9.0 Pacific Rim (Japan, Southeast Asia, Australia/New Zealand) .... 6.2 6.1 5.8 Canada ........................................................ 2.0 1.9 1.6 Other international ........................................... 4.1 4.0 3.3 ---------- ---------- ---------- 100.0% 100.0% 100.0% ========== ========== ==========
F-42 The following summarizes the net book value of fixed assets at the respective locations as of December 31, 1999 and December 31, 2000 (amounts in thousands): December 31, December 31, 1999 2000 ------------ ------------ Ensenada, Mexico ................. $ 1,134 $ 1,137 Stockholm, Sweden ................ 342 291 Kuala Lumpur, Malaysia ........... 741 672 United States .................... 40,259 47,325 ------------ ------------ $ 42,476 $ 49,425 ============ ============ For the fiscal years ended 1998, 1999 and 2000, the Company had sales to one domestic distributor in the amount of $24,940,000, $24,491,000 and $32,184,000 which represented approximately 24.8%, 19.0% and 20.2% of sales, respectively. Additionally, the Company had sales to another domestic distributor of $14,775,000 and $16,936,000, that accounted for approximately 11.5% and 10.6% of sales in 1999 and 2000, respectively. 13. Unaudited Consolidated Quarterly Data
1998 Quarters Ended ------------------------------------------------------------ March 27 June 26 September 25 December 25 ----------- ------- ------------ ----------- Net sales ................................... $ 24,265 $ 22,432 $ 22,130 $ 31,671 Gross profit ................................ 10,431 9,600 9,843 13,822 Income (loss) before extraordinary item ..... 1,498 (66,623) (243) (4,713) Net income (loss) ........................... 1,498 (66,727) (243) (4,713) 1999 Quarters Ended ------------------------------------------------------------ March 26 June 25 September 24 December 31 ----------- ------- ------------ ----------- Net sales ................................... $ 27,169 $ 27,274 $ 30,827 $ 43,533 Gross profit ................................ 11,389 11,414 12,185 18,397 Income (loss) before extraordinary item ..... 281 327 (1,554) (282) Net income (loss) ........................... 281 327 (1,554) (282) 2000 Quarters Ended ------------------------------------------------------------ March 31 June 30 September 30 December 31 ----------- ------- ------------ ----------- Net sales ................................... $ 40,807 $ 31,811 $ 41,111 $ 45,549 Gross profit ................................ 18,304 16,986 21,524 17,541 Income (loss) before extraordinary item ..... 1,599 (385) 1,662 (12,073) Net income (loss) ........................... 1,599 (385) 1,662 (12,073)
14. Subsidiaries Debt Guarantee and Segment Data The Company is the 100% owner of certain subsidiaries, which do not guarantee the Company's senior subordinated notes. The non-guarantor subsidiaries consist principally of the assets, liabilities and operations of Hudson RCI AB and subsidiaries. The following tables disclose the required consolidating financial information for the guarantor, including the Company, and non-guarantor subsidiaries (amounts in thousands): F-43 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES CONSOLIDATING BALANCE SHEET
As of December 31, 1999 -------------------------------------------------------- Non- Guarantor Guarantor Adjustments Total --------- --------- ----------- ----- ASSETS CURRENT ASSETS: Cash .......................................... $ 184 $ 2,733 $ - $ 2,917 Accounts receivable ........................... 28,329 2,096 - 30,425 Inventories ................................... 21,124 4,065 (1,146) 24,043 Other current assets .......................... 4,578 16,673 (16,639) 4,612 ----------- ----------- ------------ ----------- Total current assets ....................... 54,215 25,567 (17,785) 61,997 PROPERTY, PLANT AND EQUIPMENT, net ............... 41,335 1,141 - 42,476 OTHER ASSETS: Intangible assets, net ........................ 22,770 44,200 - 66,970 Deferred financing costs, net ................. 10,749 385 - 11,134 Deferred tax asset ............................ 68,600 223 120 68,943 Investment in non-guarantor subsidiaries ...... 29,245 - (29,245) - Other assets .................................. 833 162 (696) 299 ----------- ----------- ------------ ----------- Total other assets ......................... 132,197 44,970 (29,821) 147,346 ----------- ----------- ------------ ----------- $ 227,747 $ 71,678 $ (47,606) $ 251,819 =========== =========== ============ =========== LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Notes payable to banks ........................ $ 5,500 $ 1,173 $ - $ 6,673 Accounts payable .............................. 6,625 1,559 (2,016) 6,168 Accrued liabilities ........................... 8,344 3,356 - 11,700 Other current liabilities ..................... 458 10,876 (9,849) 1,485 ----------- ----------- ------------ ----------- Total current liabilities .................... 20,927 16,964 (11,865) 26,026 NOTE PAYABLE TO AFFILIATE ........................ - 13,906 (6,398) 7,508 NOTES PAYABLE TO BANKS, net of current portion ... 66,100 16,413 - 82,513 SENIOR SUBORDINATED NOTES PAYABLE ................ 115,000 - - 115,000 ----------- ----------- ------------ ----------- Total liabilities .......................... 202,027 47,283 (18,263) 231,047 ----------- ----------- ------------ ----------- Mandatorily-redeemable preferred stock ........... 35,421 - - 35,421 STOCKHOLDERS' EQUITY (DEFICIT) ................... (9,701) 24,395 (29,343) (14,649) ----------- ----------- ------------ ----------- $ 227,747 $ 71,678 $ (47,606) $ 251,819 =========== =========== ============ ===========
F-44 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES CONSOLIDATING BALANCE SHEET
As of December 31, 2000 -------------------------------------------------------- Non- Guarantor Guarantor Adjustments Total --------- --------- ----------- ----- ASSETS CURRENT ASSETS: Cash ........................................... $ 437 $ 3,093 $ - $ 3,530 Accounts receivable ............................ 32,665 4,395 (8,753) 28,307 Inventories .................................... 38,703 7,973 (2,066) 44,610 Other current assets ........................... 6,350 52,467 (56,985) 1,832 ----------- ----------- ----------- ----------- Total current assets ........................ 78,155 67,928 (67,804) 78,279 PROPERTY, PLANT AND EQUIPMENT, net ................ 48,260 1,165 - 49,425 OTHER ASSETS: Intangible assets, net ......................... 27,719 39,854 - 67,573 Deferred financing costs, net .................. 9,587 - - 9,587 Deferred tax asset ............................. 68,881 224 - 69,105 Investment in non-guarantor subsidiaries ....... 29,245 - (29,245) - Other assets ................................... 294 971 - 1,265 ----------- ----------- ----------- ----------- Total other assets .......................... 135,726 41,049 (29,245) 147,530 ----------- ----------- ----------- ----------- $ 262,141 $ 110,142 $ (97,049) $ 275,234 =========== =========== =========== =========== LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Notes payable to banks ......................... $ 7,500 $ 3,186 $ - $ 10,686 Accounts payable ............................... 24,758 4,711 (9,149) 20,320 Accrued liabilities ............................ 9,420 3,287 - 12,707 Other current liabilitiesv ..................... 1,242 22,764 (20,999) 3,007 ----------- ----------- ----------- ----------- Total current liabilities ................... 42,920 33,948 (30,148) 46,720 ----------- ----------- ----------- ----------- NOTES PAYABLE TO AFFILIATE ........................ 2,000 8,266 - 10,266 NOTES PAYABLE TO BANKS, net of current portion .... 75,000 10,962 - 85,962 SENIOR SUBORDINATED NOTES PAYABLE ................. 115,000 - - 115,000 OTHER NON-CURRENT LIABILTIES ...................... - 1,095 (1,095) - ----------- ----------- ----------- ---------- Total liabilities ........................... 234,920 54,271 (31,243) 257,948 ----------- ----------- ----------- ---------- MANDATORILY-REDEEMABLE PREFERRED STOCK ............ 40,061 - - 40,061 STOCKHOLDERS' EQUITY (DEFICIT) .................... (12,840) 55,871 (65,806) (22,775) ----------- ----------- ----------- ----------- $ 262,141 $ 110,142 $ (97,049) $ 275,234 =========== =========== =========== ===========
F-45 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999 ---------------------------------------------------- Non- Guarantor Guarantor Adjustments Total --------- --------- ----------- ----- NET SALES ........................................................ $ 121,796 $ 9,500 $ (2,493) $ 128,803 COST OF SALES .................................................... 71,146 6,465 (2,193) 75,418 ----------- ----------- ----------- ----------- Gross profit ..................................................... 50,650 3,035 (300) 53,385 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Selling ....................................................... 10,649 2,473 - 13,122 Distribution .................................................. 4,647 - - 4,647 General and administrative .................................... 11,815 1,454 - 13,269 Amortization of goodwill ...................................... 416 1,047 - 1,463 Research and development ...................................... 1,362 669 - 2,031 ----------- ----------- ----------- ----------- Total operating expenses ................................... 28,889 5,643 - 34,532 ----------- ----------- ----------- ----------- Income (loss) from operations .................................... 21,761 (2,608) (300) 18,853 OTHER EXPENSES: Interest expense .............................................. (16,023) (1,240) - (17,263) Other, net .................................................... (633) (599) - (1,232) ----------- ----------- ----------- ----------- Total other expense ........................................ (16,656) (1,839) - (18,495) ----------- ----------- ----------- ----------- Income (loss) before provision (benefit) for income taxes ........ 5,105 (4,447) (300) 358 PROVISION (BENEFIT) FOR INCOME TAXES .......................... 2,183 (477) (120) 1,586 ----------- ------------ ----------- ----------- Net income (loss) ................................................ $ 2,922 $ (3,970) $ (180) $ (1,228) =========== =========== =========== =========== Depreciation and amortization (a) ................................ $ 6,531 $ 4,609 $ - $ 11,140 =========== =========== =========== =========== Adjusted EBITDA (b) .............................................. $ 28,292 $ 2,001 $ (300) $ 29,993 =========== =========== =========== ===========
___________________________________ (a) Includes approximately $2,825,000 of non-cash expense related to the recognition of the portion of purchase price allocation related to acquired inventories. (b) Adjusted EBITDA represents income before depreciation and amortization, interest expense, income tax expense and recognition of the portion of purchase price allocation related to acquired inventories. Adjusted EBITDA is not a measure of performance under accounting principles generally accepted in the United States, and should not be considered as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with accounting principles generally accepted in the United States, or as a measure of profitability or liquidity. F-46 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2000 --------------------------------------------------- Non- Guarantor Guarantor Adjustments Total --------- --------- ----------- ----- NET SALES ..................................................... $ 145,786 $ 33,536 $ (20,044) $ 159,278 COST OF SALES ................................................. 87,092 16,875 (19,044) 84,923 ----------- ------------ ----------- ---------- Gross profit .................................................. 58,694 16,661 (1,000) 74,355 OPERATING EXPENSES: Selling .................................................... 12,434 5,828 - 18,262 Distribution ............................................... 9,566 543 - 10,109 General & Administrative ................................... 20,659 3,364 - 24,023 Amortization of goodwill ................................... 1,281 2,039 - 3,320 Research and development ................................... 1,072 1,315 - 2,387 ----------- ------------ ----------- ---------- Total operating expenses ................................ 45,012 13,089 - 58,101 ----------- ------------ ----------- ---------- Income (loss) from operations ................................. 13,682 3,572 (1,000) 16,254 OTHER INCOME AND (EXPENSES): Interest expense ........................................... (18,506) (2,583) - (21,089) Other, net ................................................. (205) (556) (398) (1,159) ----------- ------------ ----------- ---------- Total other income (expense) ............................ (18,711) (3,139) (398) (22,248) ----------- ------------ ----------- ---------- Income (loss) before provision (benefit) for income taxes ..... (5,029) 433 (1,398) (5,994) PROVISION (BENEFIT) FOR INCOME TAXES ....................... - 3,203 - 3,203 ----------- ------------ ----------- ---------- Net income (loss) ............................................. $ (5,029) $ (2,770) $ (1,398) $ (9,197) =========== ============ =========== ========== Depreciation and amortization (c) ............................ $ 10,450 $ 2,468 $ - $ 12,918 =========== ============ =========== ========== Adjusted EBITDA (d) ........................................... $ 24,132 $ 6,040 $ (1,000) $ 29,172 =========== ============ =========== ==========
_____________________ (c) Includes approximately $1,199,000 of non-cash expense related to the recognition of the portion of purchase price allocation related to acquired inventories. (d) Adjusted EBITDA represents income before depreciation and amortization, interest expense, income tax expense and recognition of the portion of purchase price allocation related to acquired inventories. Adjusted EBITDA is not a measure of performance under accounting principles generally accepted in the United States, and should not be considered as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with accounting principles generally accepted in the United States, or as a measure of profitability or liquidity. F-47 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1999 -------------------------------------- Non- Guarantor Guarantor Total --------- --------- ----- Net cash provided by operating activities ................. $ 6,108 $ 989 $ 7,097 Net cash used in investing activities ..................... (34,928) (40,890) (75,818) Net cash provided by financing activities ................. 28,197 43,332 71,529 Effect of exchange rate changes on cash ................... -- (398) (398) --------- --------- --------- NET INCREASE IN CASH ...................................... (623) 3,033 2,410 CASH, beginning of year ................................... 507 -- 507 --------- --------- --------- CASH, end of year ......................................... $ (116) $ 3,033 $ 2,917 ========= ========= ========= For the Year Ended December 31, 2000 -------------------------------------- Non- Guarantor Guarantor Total --------- --------- ----- Net cash provided by operating activities ................. $ 11,804 $ (180) $ 11,624 Net cash used in investing activities ..................... (29,329) 2,388 (26,941) Net cash provided by financing activities ................. 17,778 (1,559) 16,219 Effect of exchange rate changes on cash ................... -- (289) (289) --------- --------- --------- NET INCREASE IN CASH ...................................... 253 360 613 CASH, beginning of year ................................... 184 2,733 2,917 --------- --------- --------- CASH, end of year ......................................... $ 437 $ 3,093 $ 3,530 ========= ========= =========
15. Subsequent Events On March 21, 2001, the Company replaced its existing lending agreement denominated in Swedish Krona with a new loan that allows for borrowings up to approximately $19,100,000. The principal is amortized over 18 equal quarterly payments commencing June 30, 2001. Interest is based on the STIBOR rate + 0% to 1.65%, based on the outstanding balance of the loan. The loan is secured by a pledge of Hudson Euro SarL stock, a wholly-owned subsidiary of the Company and 100% owner of Hudson RCI AB, Hudson RCI UK Ltd. and Hudson RCI France S.A.S. In April and May of 2001, the company issued for cash unsecured senior subordinated convertible notes to certain managers and shareholders in the amount of $9,451,250 and will issues an additional $3,500,000 in August of 2001. The notes bear interest at 10% and are due in 2005. The interest may be paid or deferred to the due date at the option of the Company and are convertible to common stock at the demand of the note holder. Additionally, in August of 2001 the Company will issue for $3,000,000 cash an additional 30,000 shares of mandatorily-redeemable preferred stock. As discussed in Note 5, the Company was not in compliance with certain restrictive covenants of the Credit Facility at December 31, 2000. On July 30, 2001, the Company amended its Credit Facility covenants so that under the amended terms, the Company was in compliance as of December 31, 2000 and expects to remain in compliance until December 31, 2001. As part of this amendment (1) the Company's shareholders agreed to invest an additional $3 million in senior subordinated convertible notes of the Company (2) certain maturities were extended and (3) interest rate margins increased. F-48 HUDSON RESPIRATORY CARE INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (Amounts in thousands)
Balance at Balance at Beginning of Charges to End of Period Expenses Write-offs Period -------------- -------------- --------------- -------------- Description - ----------- For the Year Ended December 31, 2001: Allowance for doubtful accounts receivable ............................. $ (3,500) $ (2,826) $ 4,525 $ (1,801) ============== ============== =============== ==============
II-1 Arthur Andersen LLP ("Andersen") is the former auditor of the Company. As a result of recent events at Andersen, Andersen declined the Company's request to reissue their audit report dated July 30, 2001 for the fiscal years ended December 31, 2000 and 1999 for inclusion in the Company's 10-K filing for the fiscal year ended December 31, 2001. As such, pursuant to the guidance given in the Temporary Final Rule and Final Rule: Requirements for Arthur Andersen LLP Auditing Clients, Release Nos. 33-8070; 34-45590; 35-27503; 39-2395; IA-2018; IC-25464; FR-62; File No. S7-03-02, the Company is filing this copy of the latest signed and dated accountant's report issued by Andersen for such periods. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Hudson Respiratory Care Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the financial statements of HUDSON RESPIRATORY CARE INC. (a California corporation) and subsidiaries included in this Form 10-K and have issued our report thereon dated July 30, 2001. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying Schedule II -- Valuation and Qualifying Accounts listed in the index above is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of those financial statements and in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Orange County, California July 30, 2001 HUDSON RESPIRATORY CARE INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (Amounts in thousands)
Balance at Balance at Beginning of Charges to End of Period Expenses Write-offs Period ------ -------- ---------- ------ For the Year Ended December 31, 2000: Allowance for doubtful accounts receivable.............................. $ (973) $ (3,106) $ 579 $ (3,500) ========== ========== ========= ========== For the Year Ended December 31, 1999: Allowance for doubtful accounts receivable............................... $ (794) $ (440) $ 261 $ (973) ========== ========== ========= ==========
II-2 EXHIBIT 12.1 Ratio Support Ratio Of Earnings To Fixed Charges
Hudson RCI ---------------------------------------------------- 1997 1998 1999 2000 2001 -------- -------- -------- -------- -------- Earnings: Pre-tax income (loss) ................ $ 11,443 $(61,676) $ 358 $ (5,994) $(73,817) Fixed charges ........................ Interest expense ..................... 1,834 11,327 17,263 21,089 20,542 Amortization of debt expense ......... 62 -- -- -- -- Interest factor of rent expense ...... 374 497 677 1,038 1,537 -------- -------- -------- -------- -------- Total fixed charges .................. 2,270 11,824 17,940 22,127 22,079 -------- -------- -------- -------- -------- Total earnings (loss) before fixed charges .................... 13,713 (49,852) 18,298 16,133 (51,738) -------- -------- -------- -------- -------- Ratio of earnings (loss) to fixed charges .................... 6.0 -- 1.0 -- -- Deficiency of earnings to cover fixed charges ...................... -- (61,676) -- (5,994) (73,817)
II-3 Ratio of Earnings to Fixed Charges and Preferred Dividends
Hudson RCI ------------------------------------------------------- 1997 1998 1999 2000 2001 --------- --------- ---------- ------- --------- Earnings: Pre-tax income (loss) ................... $ 11,443 $ (61,676) $ 358 $(5,994) $ (73,817) Fixed charges Interest expense ........................ 1,834 11,327 17,263 21,089 20,542 Amortization of debt expense ............ 62 -- -- -- -- Interest factor of rent expense ......... 374 497 677 1,028 1,537 Preferred stock dividend expense .............................. -- 4,187 6,518 7,733 8,213 --------- --------- ---------- ------- --------- Total fixed charges ..................... 2,270 16,011 24,458 29,850 30,292 --------- --------- ---------- ------- --------- Total earnings (loss) before fixed charges ....................... 13,713 (45,665) 24,816 23,856 (43,525) --------- ---------- ---------- ------- --------- Ratio of earnings (loss) to fixed charges ....................... 6.0 -- 1.0 -- -- Deficiency of earnings to cover fixed charges ................. -- (61,676) -- (5,994) (73,817)
Computation of Interest Factor of Rental
Hudson RCI ------------------------------------------------------- 1997 1998 1999 2000 2001 --------- --------- ---------- ------- --------- Operating rental expense $ 1,132 $ 1,506 $ 2,052 $ 3,115 $ 4,657 Interest factor 33% 33% 33% 33% 33% --------- --------- ---------- ------- --------- Total $ 374 $ 497 $ 677 $ 1,028 $ 1,537 ========= ========= ========== ======= =========
II-4
Computation of Preferred Stock Expense Hudson RCI ------------------------------------------------------- 1997 1998 1999 2000 2001 --------- --------- ---------- -------- --------- Preferred stock dividend expense $ -- $ 2,512 $ 3,911 $ 4,640 $ 4,928 Tax effect (1.0-.40) 60% 60% 60% 60% 60% --------- -------- ---------- -------- --------- Total $ -- $ 4,187 $ 6,518 $ 7,733 $ 8,213 ========= ======== ========== ======== =========
II-5 EX-10.1 3 dex101.txt AMENDED AND RESTATED CREDIT AGREEMENT Exhibit 10.1 AMENDED AND RESTATED CREDIT AGREEMENT dated as of May 14, 2002 among HUDSON RESPIRATORY CARE INC., RIVER HOLDING CORP., The Lenders Party Hereto, and DEUTSCHE BANK TRUST COMPANY AMERICAS, as Administrative Agent and Collateral Agent TABLE OF CONTENTS Exhibit 10.1
Page ARTICLE I Definitions. SECTION 1.01. Defined Terms ................................................ 1 SECTION 1.02. Terms Generally .............................................. 33 ARTICLE II The Credits. SECTION 2.01. Commitments .................................................. 34 SECTION 2.02. Loans ........................................................ 34 SECTION 2.03. Borrowing Procedure .......................................... 36 SECTION 2.04. Notes and Records ............................................ 36 SECTION 2.05. Fees ......................................................... 37 SECTION 2.06. Interest on Loans ............................................ 38 SECTION 2.07. Default Interest ............................................. 39 SECTION 2.08. Alternate Rate of Interest ................................... 39 SECTION 2.09. Termination and Reduction of Commitments ..................... 40 SECTION 2.10. Conversion and Continuation of Borrowings .................... 40 SECTION 2.11. Repayment of Term Borrowings ................................. 42 SECTION 2.12. Prepayment ................................................... 43 SECTION 2.13. Mandatory Prepayments ........................................ 43 SECTION 2.14. Reserve Requirements; Change in Circumstances ................ 46 SECTION 2.15. Change in Legality ........................................... 47 SECTION 2.16. Indemnity .................................................... 48 SECTION 2.17. Pro Rata Treatment ........................................... 49 SECTION 2.18. Sharing of Setoffs ........................................... 49 SECTION 2.19. Payments ..................................................... 50 SECTION 2.20. Taxes ........................................................ 50 SECTION 2.21. Assignment of Commitments Under Certain Circumstances; Duty to Mitigate ............................................. 52 SECTION 2.22. Swingline Loans .............................................. 53 SECTION 2.23. Letters of Credit ............................................ 55 ARTICLE III Representations and Warranties. SECTION 3.01. Organization; Powers ......................................... 59 SECTION 3.02. Authorization ................................................ 59 SECTION 3.03. Enforceability ............................................... 60 SECTION 3.04. Governmental Approvals and Licenses .......................... 60 SECTION 3.05. Financial Statements ......................................... 60 SECTION 3.06. No Material Adverse Change ................................... 61 SECTION 3.07. Title to Properties; Possession Under Leases ................. 61 SECTION 3.08. Subsidiaries ................................................. 62 SECTION 3.09. Litigation; Compliance with Laws ............................. 62 SECTION 3.10. Default in Material Agreements ............................... 62
-i- TABLE OF CONTENTS Exhibit 10.1 (continued)
Page SECTION 3.11. Federal Reserve Regulations .................................. 62 SECTION 3.12. Investment Company Act; Public Utility Holding Company Act ... 62 SECTION 3.13. Use of Proceeds .............................................. 63 SECTION 3.14. Tax Returns .................................................. 63 SECTION 3.15. No Material Misstatements .................................... 63 SECTION 3.16. Employee Benefit Plans ....................................... 63 SECTION 3.17. Environmental Matters ........................................ 64 SECTION 3.18. Insurance .................................................... 64 SECTION 3.19. Security Documents ........................................... 65 SECTION 3.20. Location of Real Property and Leased Premises ................ 66 SECTION 3.21. Labor Matters ................................................ 66 SECTION 3.22. Solvency ..................................................... 66 ARTICLE IV Conditions of Lending. SECTION 4.01. All Credit Events ............................................ 67 SECTION 4.02. Conditions Precedent to Effective Date ....................... 67 SECTION 4.03. Effective Date Matters ....................................... 69 ARTICLE V Affirmative Covenants. SECTION 5.01. Existence; Businesses and Properties ......................... 72 SECTION 5.02. Insurance .................................................... 72 SECTION 5.03. Payment of Taxes ............................................. 74 SECTION 5.04. Financial Statements, Reports, etc. .......................... 74 SECTION 5.05. Litigation and Other Notices ................................. 76 SECTION 5.06. Employee Benefits ............................................ 77 SECTION 5.07. Maintaining Records; Access to Properties and Inspections .... 77 SECTION 5.08. Use of Proceeds .............................................. 77 SECTION 5.09. Compliance with Environmental Laws ........................... 78 SECTION 5.10. Preparation of Environmental Reports ......................... 78 SECTION 5.11. Further Assurances ........................................... 78 SECTION 5.12. Mortgaged Property Casualty and Condemnation ................. 79 SECTION 5.13. Sale of Excess Real Estate ................................... 82 SECTION 5.14. Certain Collateral Matters ................................... 83 ARTICLE VI Negative Covenants. SECTION 6.01. Indebtedness ................................................. 83 SECTION 6.02. Liens ........................................................ 85 SECTION 6.03. Investments, Loans and Advances .............................. 86 SECTION 6.04. Mergers, Consolidations, Sales of Assets and Acquisitions .... 87 SECTION 6.05. Dividends and Distributions; Restrictions on Ability of Subsidiaries to Pay Dividends ................................ 88
-ii- TABLE OF CONTENTS Exhibit 10.1 (continued)
Page SECTION 6.06. Transactions with Affiliates ................................. 90 SECTION 6.07. Business of Holding, Borrower and Subsidiaries ............... 91 SECTION 6.08. Capital Expenditures ......................................... 91 SECTION 6.09. Debt/Adjusted EBITDA Ratio ................................... 91 SECTION 6.10. Minimum EBITDA ............................................... 91 SECTION 6.11. Interest Coverage Ratio ...................................... 92 SECTION 6.12. Fixed Charge Coverage Ratio .................................. 92 SECTION 6.13. Modification of Certain Agreements ........................... 92 SECTION 6.14. Additional Provisions Concerning Unrestricted Subsidiaries ... 92 SECTION 6.15. Bank Accounts ................................................ 93 ARTICLE VII Defaults and Remedies. SECTION 7.01. Events of Default ............................................ 93 ARTICLE VIII The Agents. SECTION 8.01. Appointment of Administrative and Collateral Agent ........... 96 SECTION 8.02. Limitations on Liabilities ................................... 96 SECTION 8.03. Acting at the Direction of the Required Lenders .............. 97 SECTION 8.04. Resignation of the Administrative Agent or the Collateral Agent ........................................................ 97 SECTION 8.05. Other Transactions ........................................... 97 SECTION 8.06. Reimbursement and Indemnity .................................. 97 SECTION 8.07. No Reliance .................................................. 98 ARTICLE IX Miscellaneous. SECTION 9.01. Notices ...................................................... 98 SECTION 9.02. Survival of Agreement ........................................ 99 SECTION 9.03. Effectiveness; Termination ................................... 99 SECTION 9.04. Successors and Assigns ....................................... 99 SECTION 9.05. Expenses; Indemnity .......................................... 103 SECTION 9.06. Right of Setoff .............................................. 104 SECTION 9.07. Applicable Law ............................................... 104 SECTION 9.08. Waivers; Amendment ........................................... 104 SECTION 9.09. Interest Rate Limitation ..................................... 106 SECTION 9.10. Entire Agreement ............................................. 106 SECTION 9.11. WAIVER OF JURY TRIAL ......................................... 106 SECTION 9.12. Severability ................................................. 107 SECTION 9.13. Counterparts ................................................. 107 SECTION 9.14. Headings ..................................................... 107 SECTION 9.15. Jurisdiction; Consent to Service of Process .................. 107 SECTION 9.16. Confidentiality .............................................. 108
-iii- Exhibit 10.1 Annexes ------- Annex 1 - Loan Commitments and Term Loan Commitments Annex 2 - Administrative Information Annex 3 - Description of the Recapitalization Annex 4 - Description of the Gibeck AB Transaction Schedules --------- Schedule 1.01(a) - Existing Letters of Credit Schedule 1.01(b) - Mortgaged Properties Schedule 1.01(c) - Subsidiary Guarantors Schedule 3.07(b) - Exceptions to Compliance with Leases Schedule 3.07(c) - Condemnation Proceedings Schedule 3.08 - Subsidiaries Schedule 3.09 - Litigation Schedule 3.10 - Certain Defaults Schedule 3.17 - Environmental Matters Schedule 3.18 - Insurance Schedule 3.19(d) - Mortgage Filing Offices Schedule 3.20(a) - Owned Real Properties Schedule 3.20(b) - Leased Real Properties Schedule 6.01(a) - Indebtedness to be Paid Schedule 6.02(a) - Existing Liens Schedule 6.03(c) - European Investments Exhibits -------- Exhibit A - Administrative Questionnaire Exhibit B - Form of Term Note Exhibit C - Form of Revolving Credit Note Exhibit D - Form of Swingline Note Exhibit E - Form of Borrowing Request Exhibit F - Form of Continuation/Conversion Request Exhibit G - Form of Letter of Credit Request Exhibit H - Form of Assignment and Acceptance Exhibit I - Form of Amended and Restated Security Agreement Exhibit J - Form of Pledge Agreement Exhibit K - Form of Mortgage Exhibit L - Form of Holding Guarantee Agreement Exhibit M - Form of Subsidiary Guarantee Agreement Exhibit N - Form of Indemnity, Subrogation and Contribution Agreement Exhibit O - Form of Pricing Adjustment Certificate Exhibit P - Form of Riordan & McKinzie, special California counsel to Holding and the Borrower Exhibit Q - Form of Opinion of Richards & O'Neil, special New York counsel for Holding and Borrower Exhibit R - Form of Opinion of Borrower's Local Counsel i Exhibit 10.1 Exhibit S - Form of Master Assignment and Exchange Agreement Exhibit T - Form of Nonrecourse Pledge Agreement ii Exhibit 10.1 AMENDED AND RESTATED CREDIT AGREEMENT dated as of May 14, 2002, among HUDSON RESPIRATORY CARE INC., a California corporation (the "Borrower"), RIVER HOLDING CORP., a Delaware corporation ("Holding"), the Lenders (as defined in Article I), and DEUTSCHE BANK TRUST COMPANY AMERICAS, a New York banking corporation, as swingline lender (in such capacity, the "Swingline Lender"), and as issuing bank (in such capacity, the "Issuing Bank"), and as administrative agent (in such capacity, the "Administrative Agent") and as collateral agent (in such capacity, the "Collateral Agent") for the Lenders. The Borrower has requested the Lenders to amend and restate this Agreement to reflect the assignment, exchange and cancellation of a portion of the Term Loans as of the Effective Date, to modify certain of the covenants as set forth herein, to extend the final maturity date of the loans and commitments as set forth herein and to make other modifications to this Agreement, all as more specifically set forth herein and on the terms and subject to the conditions set forth herein the Lenders, Swingline Lender, Issuing Bank, Administrative Agent and Collateral Agent have agreed to amend this Agreement in the manner set forth herein. Accordingly, the parties hereto agree as follows: ARTICLE I Definitions SECTION 1.01. Defined Terms. As used in this Agreement, the following terms shall have the meanings specified below: "ABR Borrowing" means a Borrowing comprised of ABR Loans. "ABR Loan" means any ABR Term Loan or ABR Revolving Loan. "ABR Revolving Loan" means any Revolving Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "ABR Term Borrowing" means a Borrowing comprised of ABR Term Loans. "ABR Term Loan" means any Term Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "Acquisition Agreement" means the Amended and Restated Merger Agreement, dated as of March 15, 1998, among Holding, River Acquisition Corp., the Borrower and the Sellers, as amended and otherwise modified from time to time with the consent of the Agents. "Acquisition Loans" has the meaning set forth in Section 3.13(e)(1). "Additional Equity" means (a) Capital Stock of Holding or the Borrower issued in exchange for up to $18,000,000 in cash proceeds paid by Freeman Spogli, an Affiliate of Freeman 1 Exhibit 10.1 Spogli, management of Holding and/or the Borrower and other existing shareholders of Holding and/or the Borrower so long as such cash proceeds are either contributed to the Borrower or used to purchase Capital Stock of the Borrower on or prior to the Fifth Amendment Effective Date plus (b) any Capital Stock of Holding or the Borrower issued upon conversion of the FS Convertible Senior Subordinated Debt which Capital Stock, to the extent constituting Capital Stock of the Borrower, shall be pledged to the Administrative Agent pursuant to a non-recourse Pledge Agreement, satisfactory in form and substance to Administrative Agent, by the holders thereof. "Adjusted EBITDA" means, with respect to the Borrower and its Subsidiaries for the four most recently completed fiscal quarters for which financial statements are available, EBITDA on a consolidated basis after giving effect to all Asset Acquisitions or Stock Acquisitions consummated during such period on a pro forma basis (as if such acquisitions were made on the first day of such period), plus the pro forma cost savings for such period calculated, without duplication (a) in accordance with Regulation S-X under the Securities Exchange Act of 1934, as amended, and (b) good faith estimates by management and approved by the Administrative Agent of the results of determined events which have been notified to the Administrative Agent in writing in reasonable detail and do not exceed 20% of the reported EBITDA of the acquired business for previous four quarters. "Adjusted Eurodollar Rate" means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the product of (a) the Eurodollar Rate in effect for such Interest Period and (b) Statutory Reserves. "Adjusted Working Capital" means, for any date, current assets (other than cash and cash equivalent investments) less current liabilities (other than current maturities of long-term debt). "Administrative Agent" has the meaning assigned thereto in the Preamble hereto. "Administrative Agent Fees" has the meaning assigned thereto in Section 2.05(b). "Administrative Questionnaire" means an Administrative Questionnaire in the form of Exhibit A. "Affiliate" means, when used with respect to a specified person, another person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the person specified. "Affiliate Transactions" has the meaning assigned thereto in Section 6.06. "Aggregate Revolving Credit Exposure" means the aggregate amount of the Lenders' Revolving Credit Exposures. "Alternate Base Rate" means, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to 2 Exhibit 10.1 ascertain the Base CD Rate or the Federal Funds Effective Rate or both for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms of the definition thereof, the Alternate Base Rate shall be determined without regard to clause (b) or (c), or both, of the preceding sentence, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate, respectively. The term "Prime Rate" means the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced as being effective. The term "Base CD Rate" means the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) Statutory Reserves and (b) the Assessment Rate. The term "Federal Funds Effective Rate" means, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for the day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Applicable Percentage" of any Revolving Credit Lender at any time means the percentage of the Total Revolving Credit Commitment represented by such Lender's Revolving Credit Commitment. In the event the Revolving Credit Commitments shall have expired or been terminated, the Applicable Percentages shall be determined on the basis of the Revolving Credit Commitments most recently in effect. "Assessment Rate" means for any date the annual rate (rounded upwards, if necessary, to the next 1/100 of 1%) most recently estimated by the Administrative Agent as the then current net annual assessment rate that will be employed in determining amounts payable by the Administrative Agent to the Federal Deposit Insurance Corporation (or any successor thereto) for insurance by such Corporation (or such successor) of time deposits made in dollars at the Administrative Agent's domestic offices. "Asset Acquisition" means a purchase, lease or other acquisition of all or substantially all of the Assets of any person or of a division or business of any person. "Asset Disposition" means any sale, lease, transfer, issuance or other disposition (or series of related sales, leases, transfers, issuances or dispositions) by Holding, the Borrower 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 Borrower or any Restricted Subsidiary outside of the ordinary course of business of the Borrower or such Restricted Subsidiary (other than, in the case of clauses (a) and (b) above, (i) any disposition by a Restricted Subsidiary to the Borrower or by the Borrower or a Restricted Subsidiary to a wholly owned Restricted Subsidiary, (ii) any disposition effected in compliance with Section 6.04). "Asset Disposition" shall not include (i) any Sale/Leaseback Transaction, (ii) the Investments by the Borrower in Swedish Acquisitionco, US Holdco and Euro Holdco as described in Annex 4, or (iii) so long as no Default or Event of Default has occurred 3 Exhibit 10.1 and is continuing, the making of an Investment by the Borrower in Swedish Acquisitionco, US Holdco and Euro Holdco with the proceeds of any Designated Capital Investment. "Assets" means property of any person other than capital stock, or warrants, instruments or rights convertible into capital stock, of any person. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an assignee, and accepted by the Administrative Agent, in the form of Exhibit H or such other form as shall be approved by the Administrative Agent. "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" means the Board of Governors of the Federal Reserve System of the United States of America. "Borrower" has the meaning assigned thereto in the Preamble hereto. "Borrowing" means a group of Loans of a single Type made by the Lenders on a single date and as to which a single Interest Period is in effect. "Borrowing Request" means a request by the Borrower in accordance with the terms of Section 2.03 or Section 2.22(b), as the case may be, and substantially in the form of Exhibit E. "Business Day" means any day other than a Saturday, Sunday or day on which banks in New York City and Los Angeles are authorized or required by law to close. "Capital Expenditures" means capital expenditures of the Borrower and its Subsidiaries determined in accordance with GAAP, excluding a cumulative amount of up to $4,000,000 of SAP Computer Capital Expenditures and excluding up to $1,000,000 per fiscal year of expenditures related to the production and repair of heaters used in Borrower's heated humidification system products, including CONCHATHERM heated humidifiers. "Capital Lease Obligations" of any person means the obligations of such person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "Capital Stock" mean, with respect to any person, any shares or other equivalents (however designated) of corporate stock, partnership interests or any other participants, rights, warrants, options or other interests in the nature of any equity interest in such person, including Preferred Stock, but excluding any debt security convertible or exchangeable into such equity interest. 4 Exhibit 10.1 "Casualty" has the meaning assigned thereto in Section 5.12(a). "Casualty Proceeds" has the meaning assigned thereto in Section 5.12(a). "Change of Control" means the occurrence of any of the following events: (a) prior to the first Public Equity Offering that results in a Public Market, 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 Borrower, whether as a result of the issuance of securities of the Borrower, any merger, consolidation, liquidation or dissolution of the Borrower, any direct or indirect transfer of securities by the Permitted Holders or otherwise (for purposes of this clause, 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 that results in a Public Market, 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 25% or more of the voting power of the Voting Stock of the Borrower; 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 Borrower than such other person or group (for purposes of this clause, 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 Borrower 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 Borrower 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 Borrower, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Borrower is reclassified into or exchanged for cash, securities or other Property, other than any such transaction where (i) the outstanding Voting Stock of the Borrower is reclassified into or exchanged for Voting Stock of 5 Exhibit 10.1 the surviving corporation and (ii) the holders of the Voting Stock of the Borrower 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 Borrower was approved by a vote of 66-2/3% 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 Board of Directors then in office; or (e) the shareholders of the Borrower shall have approved any plan of liquidation or dissolution of the Borrower; or (d) any transaction or series of related transactions constituting a "change of control" or other similar occurrence under documentation evidencing or governing any Indebtedness of the Borrower or its Restricted Subsidiaries of $2,500,000 or more which results in an obligation of the Borrower or any Restricted Subsidiary to prepay, purchase, offer to purchase, redeem or defease such Indebtedness. "Closing Date" means the date (which shall be on or prior to April 16, 1998) of the first Credit Event. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral" means all the "Collateral" as defined in any Security Document and shall also include the Mortgaged Properties. "Collateral Agent" has the meaning assigned thereto in the Preamble hereto. "Commitment" means, with respect to any Lender, such Lender's Revolving Credit Commitment, Term Loan Commitment and Swingline Commitment. "Commitment Fee" has the meaning assigned thereto in Section 2.05(a). "Condemnation" has the meaning assigned thereto in Section 5.12(b). "Condemnation Proceeds" has the meaning assigned thereto in Section 5.12(b). "Confidential Information Memorandum" means the Confidential Information Memorandum of the Borrower dated February 16, 1998. "Consolidated Interest Expense" means, for any period, the total interest expense of the Borrower and its consolidated Restricted Subsidiaries, other than any non-cash interest expense with respect to the FS Convertible Senior Subordinated Debt, plus, to the extent not included in such total interest expense, and to the extent Incurred by the Borrower or its Restricted Subsidiaries, (a) interest expense attributable to capital leases, (b) amortization of Indebtedness 6 Exhibit 10.1 discount and debt issuance cost, including commitment fees, (c) capitalized interest, (d) non-cash interest expenses other than any non-cash interest expense with respect to the FS Convertible Senior Subordinated Debt, (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) dividends and other distributions on Disqualified Stock, (h) Preferred Stock dividends in respect of all Preferred Stock of Restricted Subsidiaries held by persons other than the Borrower or a wholly owned Subsidiary (to the extent paid in cash), and (i) interest Incurred in connection with Investments in discontinued operations. "Consolidated Net Income" means, for any period, the net income (loss) of the Borrower 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 Borrower) if such person is not a Restricted Subsidiary, except that (i) subject to the exclusion contained in clause (d), the Borrower'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 Borrower 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)) and (ii) the Borrower'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 Section 6.06 only, any net income (loss) of any person acquired by the Borrower 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 Borrower, except that subject to the exclusion contained in clause (d), the Borrower'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 Borrower 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 (but not loss) realized upon the sale or other disposition of any Property of the Borrower 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 calculating such Consolidated Net Income, (e) any extraordinary gain or loss; provided, that any tax benefit or tax liability resulting therefrom shall be excluded in calculating such Consolidated Net Income, (f) the cumulative effect of a change in accounting principles, (g) any non-cash compensation expense realized for grants of performance shares, stock options or other stock awards to officers, directors and employees of the Borrower or any Restricted Subsidiary, (h) compensation expense realized with respect to periods prior to the Closing Date in respect of payments under the Borrower's 1994 Amended and Restated Equity Participation Plan, (i) Contingent Acquisition-Related Payments; (j) fees and expenses incurred in connection with the Recapitalization and referred to in Section 4.02(s) to the extent the same would otherwise constitute an expense which would be deducted in calculating Consolidated Net Income; (k) compensation expense realized with respect to retention bonuses paid in connection with the Recapitalization to employees of the Borrower or any Subsidiary in an amount not to exceed $4,400,000, to the extent such expense was paid from the Redemption Amount, and (l) any expense attributable to taxes incurred by the Borrower as a result of its making the election under 7 Exhibit 10.1 Section 338(h)(10) of the Code in connection with the Recapitalization in an amount not to exceed $2,800,000. "Contingent Acquisition-Related Payments" means (a) payments to the Sellers pursuant to the Acquisition Agreement in an aggregate amount not to exceed $1,100,000 in any fiscal year or $3,300,000 in the aggregate after the Closing Date while any Loans are outstanding (plus, in each case, interest due on the unpaid portion of such required payment in accordance with the Acquisition Agreement); and (b) compensation expense, to the extent accrued in 1998, related to contingent payments to existing managers of the Borrower pursuant to the Acquisition Agreement in an aggregate amount not in excess of $2,400,000. "Continuation/Conversion Request" means a continuation/conversion request delivered by the Borrower to the Administrative Agent, in the form of Exhibit F or such other form as shall be approved by the Administrative Agent. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, and the terms "Controlling" and "Controlled" shall have meanings correlative thereto. "Credit Documents" means this Agreement, the Letters of Credit, the Notes, the Subsidiary Guarantee Agreement, Holding Guarantee Agreement, the Security Documents, the Indemnity, Subrogation and Contribution Agreement, the Nonrecourse Pledge Agreement and the Master Assignment and Exchange Agreement. "Credit Event" has the meaning assigned thereto in Section 4.01. "Credit Parties" means the Borrower and the Guarantors. "Debt" means, with respect to any person, all Indebtedness of such person of the types referred to in clauses (a), (b), (c), (d), (e), (f) and (h) of the definition of "Indebtedness". "Debt/Adjusted EBITDA Ratio" means, as of any date with respect to the Borrower and its consolidated Restricted Subsidiaries, (a) the total amount of Debt of the Borrower and its consolidated Restricted Subsidiaries, excluding any FS Convertible Senior Subordinated Debt, as of such date to (b) Adjusted EBITDA of the Borrower and its consolidated Subsidiaries for the period of four fiscal quarters most recently ended for which financial statements are available. "Default" means any event or condition which upon notice, lapse of time or both would constitute an Event of Default. "Designated Capital Investment" means any equity Investment in Holding (other than the Investments described in Annex 4), the proceeds of which are invested by Holding in the Borrower in the form of equity, with respect to which the Borrower has notified the Administrative Agent in advance in writing that the proceeds of such investment are to be invested or loaned by the Borrower to Swedish Acquisitionco, US Holdco or Euro Holdco. 8 Exhibit 10.1 "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 Loan Maturity Date; 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 Loan Maturity Date, if (x) such repurchase obligation may not be triggered in respect of such Redeemable Stock unless a mandatory prepayment obligation also arises with respect to the Loans and (y) no such repurchase or redemption is permitted to be consummated unless and until such person shall have satisfied all mandatory prepayment obligations with respect to the Loans. "dollars" or "$" means lawful money of the United States of America. "Domestic Subsidiaries" means all Restricted Subsidiaries incorporated or organized under the laws of the United States of America, any State thereof or the District of Columbia. "EBITDA" means, for any period, an amount equal to, for the Borrower and its consolidated Restricted Subsidiaries, the sum of Consolidated Net Income for such period, plus the following to the extent reducing Consolidated Net Income for such period and without duplication: (i) the provision for taxes based on income or profits or utilized in computing net loss, (ii) Consolidated Interest Expense plus any noncash interest expense with respect to the FS Convertible Senior Subordinated Debt, (iii) depreciation, (iv) amortization, (v) nonrecurring restructuring charges not to exceed a maximum aggregate amount of $1,500,000 and (vi) other noncash charges to the extent approved by Administrative Agent, plus or minus the Intercompany Receivable Adjustment to EBITDA. 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 Borrower 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. "Effective Date" means the date on or prior to May 15, 2002 on which the conditions set forth in Section 4.02 have been satisfied. Administrative Agent shall notify Borrower and Lenders upon the occurrence of the Effective Date. "Employee Notes" means promissory notes of employees of the Borrower, Holding or their Subsidiaries payable to the Borrower or Holding and received in connection with the substantially concurrent purchase of Capital Stock of the Borrower or Holding by such employees. 9 Exhibit 10.1 "environment" means ambient air, surface water and groundwater (including potable water, navigable water and wetlands), the land surface or subsurface strata, the workplace or as otherwise defined in any Environmental Law. "Environmental Claim" means any written accusation, allegation, notice of violation, claim, demand, order, directive, cost recovery action or other cause of action by, or on behalf of, any Governmental Authority or any person for damages, injunctive or equitable relief, personal injury (including sickness, disease or death), Remedial Action costs, tangible or intangible property damage, natural resource damages, nuisance, pollution, any adverse effect on the environment caused by any Hazardous Material, or for fines, penalties or restrictions, resulting from or based upon (a) the existence, or the continuation of the existence, of a Release (including sudden or non-sudden, accidental or non-accidental Releases), (b) exposure to any Hazardous Material, (c) the presence, use, handling, transportation, storage, treatment or disposal of any Hazardous Material or (d) the violation or alleged violation of any Environmental Law or Environmental Permit. "Environmental Law" means any and all applicable present and future treaties, laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, Release or threatened Release of any Hazardous Material or to health and safety matters, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. (S)(S) 9601 et seq. (collectively "CERCLA"), the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. (S)(S) 6901 et seq., the Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 U.S.C. (S)(S) 1251 et seq., the Clean Air Act of 1970, as amended 42 U.S.C. (S)(S) 7401 et seq., the Toxic Substances Control Act of 1976, 15 U.S.C. (S)(S) 2601 et seq., the Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. (S)(S) 651 et seq., the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. (S)(S) 11001 et seq., the Safe Drinking Water Act of 1974, as amended, 42 U.S.C. (S)(S) 300(f) et seq., the Hazardous Materials Transportation Act, 49 U.S.C. (S)(S) 5101 et seq., and any similar or implementing state or local law, and all amendments or regulations promulgated under any of the foregoing. "Environmental Permit" means any permit, approval, authorization, certificate, license, variance, filing or permission required by or from any Governmental Authority pursuant to any Environmental Law. "Environmental Property" has the meaning assigned thereto in Section 3.17(a). "Equity Issuance" means, for any period, an amount equal to, for the Borrower 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 plus any noncash interest expense with respect to the FS Convertible Senior Subordinated Debt, (iii) depreciation, (iv) amortization, (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 10 Exhibit 10.1 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). "ERISA" means the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code, or solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA Event" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to a Plan; (b) the adoption of any amendment to a Plan that would require the provision of security pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA; (c) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (d) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (e) the incurrence of any liability under Title IV of ERISA with respect to the termination of any Plan or the withdrawal or partial withdrawal of the Borrower or any of its ERISA Affiliates from any Plan or Multiemployer Plan; (f) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to the intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (g) the receipt by the Borrower or any ERISA Affiliate of any notice concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; (h) the occurrence of a "prohibited transaction" with respect to which the Borrower or any of its Subsidiaries is a "disqualified person" (within the meaning of Section 4975 of the Code) or with respect to which the Borrower or any such Subsidiary could otherwise be liable; and (i) any other event or condition with respect to a Plan or Multiemployer Plan that could reasonably be expected to result in liability of the Borrower. "Eurodollar Borrowing" means a Borrowing comprised of Eurodollar Loans. "Eurodollar Loan" means any Eurodollar Revolving Loan or Eurodollar Term Loan. "Eurodollar Rate" means, with respect to any Eurodollar Borrowing, the rate (rounded upwards, if necessary, to the next 1/16 of 1%) at which dollar deposits approximately equal in principal amount to the Administrative Agent's portion of such Eurodollar Borrowing and for a maturity comparable to such Interest Period are offered to the principal New York office of the Administrative Agent in immediately available funds in the London interbank market at approximately 10:00 a.m., New York time, two Business Days prior to the commencement of such Interest Period. "Eurodollar Revolving Loan" means any Revolving Loan bearing interest at a rate determined by reference to the Adjusted Eurodollar Rate in accordance with the provisions of Article II. 11 Exhibit 10.1 "Eurodollar Term Borrowing" means a Borrowing comprised of Eurodollar Term Loans. "Eurodollar Term Loan" means any Term Loan bearing interest at a rate determined by reference to the Adjusted Eurodollar Rate in accordance with the provisions of Article II. "Euro Holdco" is defined in Annex 4. "Event of Default" has the meaning assigned thereto in Section 7.01. "Excess Cash Flow" for any period, means EBITDA for such period, less the sum of (a) (i) permitted Capital Expenditures, (ii) taxes of the Borrower and the Subsidiaries paid or payable in cash for such period, (iii) cash consideration paid for Permitted Acquisitions (but excluding cash consideration funded by a Borrowing under the Revolving Credit Commitments), (iv) Consolidated Interest Expense, (v) increases in Adjusted Working Capital for such period, (vi) scheduled and mandatory payments of Debt, (vii) payments pursuant to Section 6.05(a)(i)(A) in connection with purchases of Excluded Shares, (viii) Contingent Acquisition-Related Payments, (ix) compensation payments made in such period in respect of amounts excluded from the definition of "Consolidated Net Income" by virtue of clause (h) thereof, and (x) dividends paid with respect to the Borrower's Exchangeable Preferred Stock to the extent permitted by Section 6.05(a)(ii), in each case to the extent made in cash during such period; plus the sum of (b) (i) decreases in Adjusted Working Capital for such period, (ii) refunds of taxes paid in prior periods, and (iii) proceeds to the Borrower or any Restricted Subsidiary of any Indebtedness referred to in Section 6.01(f), in each case to the extent received in cash or cash equivalents during such period. "Exchangeable Preferred Stock" means (a) with respect to the Borrower, 300,000 shares of the 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) with respect to Holding, 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 Holdings 11 1/2% Senior Exchangeable PIK Preferred Stock Due 2010 as may be issued in lieu of cash dividends thereon. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Excluded Shares" means Capital Stock of Holding, issued to an employee of Holding, the Borrower or any Subsidiary of the Borrower pursuant to any stock option, stock purchase, stock incentive or other similar plan of Holding, the Borrower or any Subsidiary of the Borrower established for the benefit of their employees (collectively, an "Employee Stock Issuance"), or any Capital Stock of the Borrower issued to Holding in consideration of the contribution by Holding to Borrower of the cash proceeds of any such Employee Stock Issuance. 12 Exhibit 10.1 "Existing Letters of Credit" means each Letter of Credit previously issued for the account of the Borrower that (a) is outstanding on the Closing Date and (b) is listed on Schedule 1.01(a). "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. "Fee Letter" means the Fee Letter dated February 3, 1998, among the Borrower, the Administrative Agent and the Syndication Agent. "Fees" means the Commitment Fees, the fees described in Section 2.05(c), the Administrative Agent's Fees, the L/C Participation Fees and the Issuing Bank Fees. "Fifth Amendment" means that certain Amendment No. 5 and Limited Waiver to this Agreement dated as of July 30, 2001. "Fifth Amendment Effective Date" means the date on which the Fifth Amendment becomes effective pursuant to paragraph 22 thereof. "Financial Officer" means the Chief Executive Officer or the Chief Financial Officer of the Borrower. "Fixed Charge Coverage Ratio" means, with respect to the Borrower and its Restricted Subsidiaries for any period of four consecutive fiscal quarters, the ratio of (a) EBITDA for such period, to (b) the sum of Capital Expenditures paid in cash, Consolidated Interest Expense, scheduled amortizations of Debt, taxes paid or due and payable (excluding taxes paid resulting from the Borrower making the election under Section 338(h)(10) of the Code in 1998 in connection with the Recapitalization in an amount not to exceed $2,800,000), and dividends or other distributions on the Capital Stock of such person paid in cash (other than to the Borrower or another Restricted Subsidiary), in each case for such period. "Foreign Subsidiary" means any Subsidiary that is not a Domestic Subsidiary. "Freeman Spogli" means Freeman Spogli & Co. Incorporated, a Delaware corporation, and Freeman Spogli & Co. LLC, a Delaware limited liability company. "FS Convertible Senior Subordinated Debt" means up to $15,000,000 in aggregate principal amount of unsecured convertible senior subordinated notes of the Borrower owing to an Affiliate of Freeman Spogli, Freeman Spogli, management of Holding and/or the Borrower and/or other existing shareholders of Holding or the Borrower (which may include up to $6,500,000 in FS Convertible Senior Subordinated Debt issued in April and May 2001 and Indebtedness outstanding pursuant to Section 6.01(j) hereof), and any unsecured convertible senior subordinated notes issued in lieu of cash interest thereon, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms hereof and thereof; provided that (1) interest shall not be payable in cash on such notes but shall be either accrued and compounded or shall be payable by the issuance of additional unsecured convertible senior subordinated notes to the extent such issuance is in compliance with the requirements of any indenture governing Subordinated Obligations of the Borrower or any Subsidiary; (2) such notes 13 Exhibit 10.1 shall not mature earlier than March 31, 2005 and shall have no scheduled amortization or sinking fund payments payable thereon; and (3) payments on or with respect to such notes shall be subordinated on terms and conditions substantially in the form attached as Annex A to the Fifth Amendment. "GAAP" means generally accepted accounting principles applied on a consistent basis. "Gibeck AB" is defined in Annex 4. "Gibeck AB Acquisition" is defined in Annex 4. "Gibeck Family" is defined in Annex 4. "Governmental Authority" means any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Guarantee" of or by any person means any obligation, contingent or otherwise, of such person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness; provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. "Guarantee Agreements" means Holding Guarantee Agreement and the Subsidiary Guarantee Agreement. "Guarantors" means Holding and the Subsidiary Guarantors. "Hazardous Materials" means all explosive or radioactive substances or wastes, hazardous or toxic substances or wastes, pollutants, solid, liquid or gaseous wastes, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls ("PCBs") or PCB-containing materials or equipment, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "Hedging Obligations" means, with respect to any person, all obligations of such person in respect of Interest Rate Agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements. "Holding" has the meaning assigned thereto in the Preamble hereto. "Holdco" means collectively HRC Holding, Inc., a Delaware corporation, and Hudson Euro Co S.a.r.l., a Luxembourg corporation. 14 Exhibit 10.1 "Holding Guarantee Agreement" means Holding Guarantee Agreement, substantially in the form of Exhibit L, made by Holding in favor of the Collateral Agent for the benefit of the Secured Parties. "HRC Holding" means HRC Holding, Inc., a Delaware corporation. "HRC Holding Senior Notes" means the unsecured senior notes of HRC Holding due December 31, 2004, substantially in the form of the Senior Notes or as otherwise approved by the Administrative Agent, interest on which shall not be payable in cash but which interest shall accrue until maturity and the principal on which shall have no scheduled amortization prior to December 31, 2004, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms hereof. The HRC Holding Senior Notes shall include the HRC Holding Senior Notes issued on the Effective Date and any HRC Holding Senior Notes issued thereafter pursuant to Section 6.01(k). "Immaterial Subsidiary" means any Subsidiary of the Borrower identified as an Immaterial Subsidiary on Schedule 3.08 and any Subsidiary of the Borrower formed or acquired after the Effective Date and designated as an Immaterial Subsidiary on Schedule 3.08, which Subsidiary, (a) does not own assets with an aggregate value of greater than $25,000, (b) does not generate revenues of greater than $25,000 in any single fiscal year, and (c) is not actively engaged in any ongoing business or operations, the assets and revenues of which are not encumbered or otherwise subject to any claim in favor of any third party and which has no indebtedness or other liabilities, contingent or otherwise; provided that all Immaterial Subsidiaries in the aggregate do not own assets with an aggregate value of greater than $50,000 or generate revenues of greater than $50,000 in any single fiscal year or such amount in excess of $50,000 as may be approved in writing by Administrative Agent. "Incur" means issue, assume, Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a person existing at the time such person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary. Any Indebtedness issued at a discount (including Indebtedness on which interest is payable through the issuance of additional Indebtedness) shall be deemed incurred at the time of original issuance of the Indebtedness at the initial accreted amount thereof. "Indebtedness" of any person means, without duplication, (a) all obligations of such person for borrowed money or with respect to deposits or advances of any kind held by it, (b) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) financings of accounts receivable, (d) all obligations of such person under other title retention agreements relating to property or assets purchased by such person, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable and accrued obligations incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such person, whether or not the obligations secured thereby have been assumed (measured as the fair market value of such property, (g) all Guarantees by such person of Indebtedness of others (measured by the amount for which such person would be liable), (h) all Capital Lease Obligations of such person , (i) all net Hedging Obligations of such person and (j) all obligations of such 15 Exhibit 10.1 person as an account party in respect of letters of credit and bankers' acceptances (other than trade letters of credit and trade bankers' acceptances). The Indebtedness of any person shall include the Indebtedness of any partnership in which such person is a general partner. "Indebtedness to be Paid" has the meaning assigned thereto in Section 6.01(b). "Indemnitee" has the meaning assigned thereto in Section 9.05(b). "Indemnity, Subrogation and Contribution Agreement" means the Indemnity, Subrogation and Contribution Agreement, substantially in the form of Exhibit N, among the Borrower, the Subsidiary Guarantors and the Collateral Agent. "Independent Consultant" means a consultant not affiliated with any Credit Party or any Lender. "Intercompany Receivable" means the aggregate amount owed to Borrower and its Restricted Subsidiaries by Borrower's Unrestricted Subsidiaries for goods sold or leased or services rendered to or for the benefit of Borrower's Unrestricted Subsidiaries by Borrower and its Restricted Subsidiaries, net of the aggregate amount owed by Borrower and its Restricted Subsidiaries to Borrower's Unrestricted Subsidiaries for goods sold or leased to or services rendered to or for the benefit of Borrower and its Restricted Subsidiaries by Borrower's Unrestricted Subsidiaries. "Intercompany Receivable Adjustment to EBITDA" means, for any quarter, an adjustment for the amount that the Intercompany Receivable exceeds $3,500,000 on the last day of the quarter, adjusted for the amount that the Intercompany Receivable balance exceeded $3,500,000 on the last day of the last quarter, as follows: if the Intercompany Receivable exceeds $3,500,000 in the current quarter, but did not exceed $3,500,000 in the last quarter, EBITDA will be reduced by the amount that the Intercompany Receivable exceeds $3,500,000; if the Intercompany Receivable balance exceeded $3,500,000 in the last quarter, EBITDA will be: (i) reduced by the amount of increase in the Intercompany Receivable if the Intercompany Receivable continues to exceed $3,500,000 and exceeds the amount of the last quarter, (ii) increased by the amount that the Intercompany Receivable has decreased, so long as it still exceeds $3,500,000, or (iii) increased by the amount that the Intercompany Receivable exceeded $3,500,000 in the last quarter, if the Intercompany Receivable no longer exceeds $3,500,000. "Interest Payment Date" means, with respect to any Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day that would have been an Interest Payment Date had successive Interest Periods of three months' duration been applicable to such Borrowing, and, in addition, the date of any prepayment of such Borrowing or conversion of such Borrowing to a Borrowing of a different Type. "Interest Period" means (a) as to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2 or 3 months thereafter, as the Borrower may elect and 16 Exhibit 10.1 (b) as to any ABR Borrowing, the period commencing on the date of such Borrowing and ending on the earlier of (i) the next succeeding March 31, June 30, September 30 or December 31, and (ii) the Revolving Credit Maturity Date or the Loan Maturity Date, as applicable, provided, however, that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. "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 Indebtedness issued by, any other person. 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. "Issuing Bank" has the meaning assigned thereto in the Preamble hereto and Section 2.23(i). "Issuing Bank Fees" has the meaning assigned thereto in Section 2.05(d). "L/C Commitment" means the commitment of the Issuing Bank to issue Letters of Credit pursuant to Section 2.23. "L/C Disbursement" means a payment or disbursement made by the Issuing Bank pursuant to a Letter of Credit. "L/C Exposure" means at any time the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (b) the aggregate principal amount of all L/C Disbursements that have not yet been reimbursed at such time. The L/C Exposure of any Revolving Credit Lender at any time means its Applicable Percentage of the aggregate L/C Exposure at such time. "L/C Participation Fee" has the meaning assigned thereto in Section 2.05(c). "Lenders" means (a) the financial institutions listed on Annex 2 (other than any such financial institution that has ceased to be a party hereto pursuant to an Assignment and Acceptance) and (b) any financial institution (or other person approved by Administrative Agent in its sole discretion) that has become a party hereto pursuant to an Assignment and Acceptance. Unless the context clearly indicates otherwise, the term "Lenders" shall include the Swingline Lender. 17 Exhibit 10.1 "Letter of Credit" means any letter of credit issued pursuant to Section 2.23 and any Existing Letter of Credit. "Letter of Credit Request" means a letter of credit issuance, extension or amendment request delivered by the Borrower to the Administrative Agent, in the form of Exhibit G or such other form as shall be approved by the Administrative Agent and the applicable Issuing Bank. "Lien" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Loan Maturity Date" means June 30, 2004. "Loans" means the Revolving Loans, the Term Loans and the Swingline Loans. "Margin Stock" has the meaning assigned thereto in Regulation U. "Master Assignment and Exchange Agreement" means the Master Assignment and Exchange Agreement, substantially in the form of Exhibit S, among the Lenders, the Administrative Agent, Freeman Spogli or its Affiliates and Borrower. "Material Adverse Effect" means (a) a materially adverse effect on the business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and the Subsidiaries, taken as a whole, (b) impairment of the ability of the Borrower or any other Credit Party to perform any of its obligations under any Credit Document to which it is or will be a party, which impairment is material with respect to the Borrower and the other Credit Parties taken as a whole, or (c) impairment of the rights of or benefits available to the Lenders under any Credit Document, which impairment is material with respect to the Borrower and the other Credit Parties taken as a whole, to the Borrower, or to a Material Subsidiary. "Material Subsidiary" means a Restricted Subsidiary that, as of the end of the most recent fiscal quarter for which financial statements are available accounted for 10% or more of the Borrower's consolidated (i) total assets, (ii) shareholders' equity, (iii) operating income (calculated for the four most recently completed fiscal quarters for which financial statements are available), or (iv) revenues (calculated for the four most recently completed fiscal quarters for which financial statements are available), determined in each case in accordance with GAAP. "Moody's" means Moody's Investors Service, Inc. "Mortgaged Properties" means the owned real properties and leasehold and subleasehold interests of the Credit Parties specified on Schedule 1.01(b). "Mortgages" means the mortgages, deeds of trust, leasehold mortgages, assignments of leases and rents, modifications and other security documents delivered on the 18 Exhibit 10.1 Closing Date, the Effective Date or pursuant to Sections 5.11 or 5.14, each substantially in the form of Exhibit K or in such other form as is approved by Administrative Agent. "Multiemployer Plan" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Cash Proceeds" means, with respect to any Prepayment Event, (a) all cash or readily marketable cash equivalents received (including by way of sale, discounting or payment of a note, installment receivable or other instrument or obligation, but excluding any other consideration received in the form of assumption by the acquiree of Indebtedness or other obligations relating to such properties or assets or received in any other noncash form) therefrom by such person, as part of the consideration for such Prepayment Event, if applicable) received by or on behalf of Holding, the Borrower or any Restricted Subsidiary in respect of such Prepayment Event, less (b) the sum of (i) the amount, if any, of all taxes (other than taxes based on income) payable by Holding, the Borrower or any Restricted Subsidiary in connection with such Prepayment Event and the Borrower's good-faith best estimate of the amount of all taxes based on income payable in connection with such Prepayment Event, (ii) in the case of a Prepayment Event that is a Restricted Asset Disposition, the amount applied to repay any Indebtedness (other than the Loans) to the extent such Indebtedness is required by its terms to be repaid as a result of such Prepayment Event, (iii) fees, commissions and expenses (including, in the case of Casualty Proceeds and Condemnation Proceeds, the costs of adjustment and condemnation proceedings) and other costs paid by Holding, the Borrower or any Restricted Subsidiary in connection with such Prepayment Event (other than those payable to the Borrower or any Affiliate of the Borrower), in each case only to the extent not already deducted in arriving at the amount referred to in clause (a); and (iv) all distributions and other payments made to minority interest holders in Subsidiaries of such person or joint ventures as a result of such Prepayment Event. Notwithstanding the foregoing, (a) no proceeds of any Restricted Asset Disposition (excluding Excess Real Estate) of fixed or capital assets, no Casualty Proceeds and no Condemnation Proceeds shall constitute Net Cash Proceeds, to the extent that (x) such proceeds held by the Borrower or any Restricted Subsidiary to be reinvested, or are reinvested, in other fixed or capital assets within one year of such Restricted Asset Disposition and (y) such reinvestment has either (i) been designated by the Borrower as Capital Expenditures, such Capital Expenditures are permitted under Section 6.08 and the other fixed or capital assets in which such reinvestment is made constitute Collateral or (ii) been approved in writing by the Administrative Agent prior to receipt of such proceeds by Borrower or any Restricted Subsidiary; provided, that (i) at any time when the aggregate amount of such proceeds from Restricted Asset Disposition held for reinvestment exceeds $10,000,000 at 19 Exhibit 10.1 any one time (whether or not such reinvestment has been approved by Administrative Agent), such excess shall immediately constitute Net Cash Proceeds, and (ii) at any time when an Event of Default of type described in Section 7.01(b) or (c) shall have occurred and be continuing, such proceeds shall immediately constitute Net Cash Proceeds to the extent that the Borrower has not entered into binding agreements to acquire assets with such proceeds, and (b) there shall be excluded from Net Cash Proceeds up to $200,000 of net proceeds of a single Equity Issuance to be made no more than 90 days after the Closing Date. Administrative Agent agrees to respond within 5 Business Days of any request by Borrower to reinvest such proceeds in accordance with the foregoing clause (a)(y)(ii) provided that any failure to so respond shall be deemed a denial of such request to reinvest. "New Lending Office" has the meaning assigned thereto in Section 2.20(e). "Nonrecourse Pledge Agreement" means the Nonrecourse Pledge Agreement, substantially in the form of Exhibit T, between Administrative Agent and Freeman Spogli or its Affiliates and any other permitted holders of the Senior Notes, HRC Holding Senior Notes or any other investments required by this Agreement to be pledged under such Nonrecourse Pledge Agreement. "Non-U.S. Lender" has the meaning assigned thereto in Section 2.20(e). "Notes" means the Term Notes, the Revolving Credit Notes and the Swingline Notes. "Obligations" means all obligations defined as "Obligations" in the Guarantee Agreements and the Security Documents. "Other Taxes" has the meaning assigned thereto in Section 2.20(b). "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA. "Perfection Certificate" means the Perfection Certificate substantially in the form of Annex 2 to the Security Agreement. "Permitted Acquisition" means an Asset Acquisition or a Stock Acquisition not in the ordinary course of the Borrower's business which in either case satisfies each of the following conditions: (a) the Administrative Agent shall receive at least 15 days prior written notice of such proposed Permitted Acquisition, which notice shall include a detailed description of such proposed Permitted Acquisition and the business rationale for such acquisition, and including, in the case of a Stock Acquisition, financial statements of the Target; (b) in the case of an Asset Acquisition, such assets shall comprise a business, or assets of a business, of a type which is the same line of business as the Borrower, or which is a related or complementary business to that of the Borrower; and in the case of a Stock Acquisition, 20 Exhibit 10.1 the business of the Target shall be of a type which is the same line of business as a the Borrower, or which is a related or complementary business to that of the Borrower; provided, however, that (i) no such acquisition would require the Administrative Agent or any Lender to obtain regulatory or third party approvals in connection with the exercise of its rights and remedies under this Agreement or any other Credit Documents other than approvals required for the exercise of such rights and remedies with respect to the Borrower prior to such Permitted Acquisition; and (ii) no such acquisition would result in a material increase in the regulatory burdens and obligations of the Borrower and its Subsidiaries taken as a whole; (c) in the case of a Stock Acquisition, after giving effect thereto, the Target will either be merged with and into the Borrower, or shall be a wholly owned Subsidiary of the Borrower; (d) in the case of a Stock Acquisition, such Permitted Acquisition shall be consensual and shall have been approved by the Target's board of directors; (e) no additional Indebtedness or Guarantees, and no other material liabilities outside the ordinary course of business, shall be incurred, assumed or otherwise be reflected on a consolidated balance sheet of the Borrower after giving effect to such Permitted Acquisition, except (i) Indebtedness permitted under Section 6.01 and operating leases, and (ii) Debt Incurred in contemplation of such acquisition for the purposed of financing such acquisitions consisting of: (A) Revolving Loans, the aggregate principal amount of which, when added to the aggregate outstanding principal amount of all other Revolving Loans made to finance Permitted Acquisitions, shall not exceed $40,000,000 at any one time outstanding; provided that notwithstanding anything in this Agreement to the contrary, without the prior written consent of Required Lenders, no Asset Acquisitions or Stock Acquisitions shall be permitted on and after the Fifth Amendment Effective Date; and (B) unsecured subordinated Debt, in form and substance satisfactory to the Administrative Agent in all respects which is permitted pursuant to Section 6.01(h); (f) the sum of all amounts paid or payable in connection with any single Permitted Acquisition (including all transaction costs and all Indebtedness, liabilities and Guarantees and other contingent obligations incurred or assumed in connection therewith (whether or not reflected on a consolidated balance sheet of the Borrower) after giving effect to the Permitted Acquisition) shall not exceed $30,000,000; (g) in the case of (i) a Stock Acquisition, the Target shall not have, and (ii) in the case of an Asset Acquisition for which the consideration paid is $5,000,000 or more, the acquired assets if considered as a stand-alone entity on a pro forma basis would not have, reported negative EBITDA for the four most recently completed fiscal quarters for which financial statements are available preceding the date of the Permitted Acquisition, as determined based upon the Target's audited financial statements for its most recently completed fiscal year and its most 21 Exhibit 10.1 recent interim financial period completed within 60 days prior to the date of consummation of such Permitted Acquisition; (h) the business and assets acquired in such Permitted Acquisition shall be free and clear of all Liens (other than Permitted Encumbrances); (i) promptly following the closing of any Permitted Acquisition, the Collateral Agent will be granted a first priority perfected Lien (subject to Liens permitted pursuant to Section 6.02) in all assets acquired pursuant thereto, and the Borrower (and, in the case of a Stock Acquisition, the Target) shall have executed such documents and taken such actions as may be required by the Collateral Agent in connection therewith; (j) concurrently with delivery of the notice referred to in clause (a), the Borrower shall have delivered to the Administrative Agent, a pro forma consolidated balance sheet of the Borrower and its Subsidiaries (the "Acquisition Pro Forma"), based on recent financial data, which shall be complete and shall accurately and fairly represent the assets, liabilities, financial condition and results of operations of the Borrower and its Subsidiaries in accordance with GAAP consistently applied, but taking into account such Permitted Acquisition and the funding of all Loans in connection therewith, and such Acquisition Pro Forma shall reflect that; (i) the Pro Forma Debt/Pro Forma EBITDA Ratio shall not exceed the following amounts as of the date of such acquisition:
---------------------------------------------------------------------------------------------------------- Acquisition Pro Forma Debt/Pro Forma EBITDA Ratio Occurring in Fiscal Quarter Ending Nearest to ---------------------------------------------------------------------------------------- 1998 1999 2000 2001 2002 2003 2004 ----------------------------------------------------------------------------------------------------------- March 31 5.75:1.00 5.00:1.00 4.25:1.00 3.50:1.00 3.25:1.00 3.25:1.00 ----------------------------------------------------------------------------------------------------------- June 30 6.00:1:00 5.75:1.00 4.75:1.00 4.00:1.00 3.50:1.00 3.25:1.00 ----------------------------------------------------------------------------------------------------------- September 30 6.00:1:00 5.75:1.00 4.75:1.00 4.00:1.00 3.50:1.00 3.25:1.00 ----------------------------------------------------------------------------------------------------------- December 31 5.75:1.00 5.00:1.00 4.25:1.00 3.50:1.00 3.25:1.00 3.25:1.00 -----------------------------------------------------------------------------------------------------------
and thereafter, 3.25:1.00. (ii) on a pro forma basis, no Event of Default shall have occurred and be continuing or would result after giving effect to such Permitted Acquisition and the Borrower would have been in compliance with the financial covenants set forth in Section 6.09 through Section 6.12 with a look-back for pro-forma compliance (the "Acquisition Projections"); (k) the Borrower shall have delivered financial projections covering the 5-year period commencing on the date of such Permitted Acquisition based upon historical financial data of a recent date, taking into account such Permitted Acquisition prepared in a manner consistent 22 Exhibit 10.1 with the financial projections delivered to the Agents in connection with the closing of this Agreement (the "Closing Projections"); (l) the Borrower shall have delivered a certificate of a Financial Officer of the Borrower to the effect that: (i) the Borrower will be solvent upon the consummation of the Permitted Acquisition; (ii) the Acquisition Pro Forma fairly presents the financial condition of the Borrower and its Subsidiaries (on a consolidated basis) as of the date thereof after giving effect to the Permitted Acquisition; and (iii) the Acquisition Projections are reasonable estimates of the future financial performance of the Borrower subsequent to the date thereof prepared in a manner consistent with the Closing Projections of the Borrower (and, in the case of a Stock Acquisition, the Target) and show that the Borrower shall continue to be in compliance with the financial covenants set forth in Section 6.09 through Section 6.12 for the 5-year period thereafter; (m) except where substantially all of the consideration for such acquisition consists of Capital Stock of the Borrower, on or prior to the date of such Permitted Acquisition, the Administrative Agent shall have received, in form and substance satisfactory to the Administrative Agent, all opinions, certificates, lien search results and other documents reasonably requested by the Administrative Agent; (n) the Administrative Agent and the Lenders shall have received Phase I reports (reasonably satisfactory in scope and substance to the Agents) with respect to any owned property to be acquired; and (o) at the time of such Permitted Acquisition and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing. "Permitted Holder" means Helen Hudson Lovaas, any member of senior management of the Borrower or Holding on the Closing Date, Freeman Spogli or any successor entity thereof controlled by the principals of Freeman Spogli and any entity controlled by, or under common control with, Freeman Spogli. "Permitted Investments" means: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof; (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, a rating of A1/P1 from S&P and from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within one year from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $250,000,000; 23 Exhibit 10.1 (d) other investment instruments approved in writing by the Required Lenders and offered by financial institutions which have a combined capital and surplus and undivided profits of not less than $250,000,000; and (e) interests in mutual funds which invest primarily in instruments described in clauses (a), (b) and (c). "Permitted Purchase Money Lien" means (a) purchase money and similar Liens existing on the Closing Date or (b) Liens applicable to real property, improvements thereto or equipment or other Property acquired or constructed after the Closing Date by the Borrower or any Restricted Subsidiary; provided that (i) such security interests are incurred, and the Indebtedness secured thereby is created, no later than 12 months after such acquisition (or completion of construction), and (ii) such security interests do not apply to any other property or assets of the Borrower or any Subsidiary. "person" means any natural person, corporation, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof. "Plan" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 307 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Pledge Agreement" means the Pledge Agreement, substantially in the form of Exhibit J, between the Borrower, Holding, the Subsidiaries party thereto and the Collateral Agent for the benefit of the Secured Parties. "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. "Prepayment Event" means any Incurrence of Debt of the Borrower or any Restricted Subsidiary, any Equity Issuance (other than the issuance of shares of the Borrower to Holding or of Holding in connection with the Gibeck AB Acquisition), any Restricted Asset Disposition, any Restricted Sale/Leaseback Transaction, any Casualty or any Condemnation. "Pricing Adjustment" shall mean, for any day, with respect to any Loan or with respect to the Commitment Fees, as the case may be, the Pricing Adjustment set forth below, based upon the Debt/Adjusted EBITDA Ratio as of the date of determination: 24 Exhibit 10.1
Category 1 Category 2 Category 3 Category 4 Category 5 Debt/Adjusted Debt/Adjusted Debt/Adjusted Debt/Adjusted EBITDA EBITDA Ratio EBITDA Ratio EBITDA Ratio Ratio less than less than less than Debt/Adjusted greater than or 5.5:1.0 and 4.75:1.0 and 4.0:1.0 and EBITDA Ratio equal to greater than or greater than or greater than or less than 5.5:1.0 equal to 4.75:1.0 equal to 4.0:1.0 equal to 3.5:1.0 3.5:1.0 ----------------------- ------------------ ----------------- ------------------ --------------- Commitment Fees 0% 0% 0% .0625% .125% ABR Loans 0% .250% .500% .750% 1.000% Eurodollar Loans 0% .250% .500% .750% 1.000%
Each change in the Pricing Adjustment resulting from a change in the Debt/Adjusted EBITDA Ratio shall become effective with respect to all outstanding Loans and Commitments on the Business Day after the date of receipt by the Administrative Agent of the financial statements and certificates required by Section 5.04(a) or (b) indicating such change until the date immediately preceding the next date of delivery of such financial statements and certificates indicating another such change. Notwithstanding the foregoing, (i) the Pricing Adjustment shall be 0% for 12 months after the Closing Date; (ii) at any time during which the Borrower has failed to deliver the financial statements and certificates required by Section 5.04(a) or (b), the Debt/Adjusted EBITDA Ratio shall be deemed to be in Category 1 for purposes of determining the Pricing Adjustment; (iii) at any time after the occurrence and during the continuance of an Event of Default relating to Section 7.01(b), (c), or (d) (but only with respect to breaches of the covenants contained in Section 6.09 through Section 6.12), the Debt/Adjusted EBITDA Ratio shall be deemed to be in Category 1 for purposes of determining the Pricing Adjustment; and (iv) the Pricing Adjustment shall be 0% during the period from the Fifth Amendment Effective Date through June 30, 2002. "Pricing Adjustment Certificate" means an pricing adjustment certificate delivered by the Borrower to the Administrative Agent, in the form of Exhibit O or such other form as shall be approved by the Administrative Agent. "Pro Forma Debt/Pro Forma EBITDA Ratio" means, as of any date with respect to the Borrower and its consolidated Restricted Subsidiaries, (a) the total amount of Debt of the Borrower and its consolidated Restricted Subsidiaries as of such date (after giving effect to any Debt assumed or Incurred in connection with a proposed acquisition), to (b) Pro Forma EBITDA of the Borrower and its consolidated Restricted Subsidiaries for the four most recently completed fiscal quarters for which financial statements are available. "Pro Forma EBITDA" means, with respect to the Borrower and its consolidated Restricted Subsidiaries for the most recently completed period of four fiscal quarters for which financial statements are available, EBITDA on a consolidated basis after giving effect to: 25 Exhibit 10.1 (a) a proposed Asset Acquisition or Stock Acquisition on a pro forma basis (as if such acquisition has been made on the first day of such period), and (b) all Asset Acquisitions or Stock Acquisitions consummated during such period on a pro forma basis (as if such acquisitions were made on the first day of such period), plus the pro forma cost savings for such period calculated, without duplication (a) in accordance with Regulation S-X under the Securities Exchange Act of 1934, as amended, and (b) good faith estimates by management and approved by the Agents of the results of determined events which have been notified to the Agents in writing in reasonable detail and do not exceed 20% of the reported EBITDA of the acquired business for previous four quarters. "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 Borrower pursuant to an effective registration statement under the Securities Act. "Recapitalization" has the meaning specified in Annex 3, and includes any other transactions incidental thereto. "Recapitalization Agreements" means the Acquisition Agreement, and any other agreement, instrument or other document to be entered into or delivered by, between or among the Borrower, the Sellers and any of their respective Affiliates in connection with the Recapitalization, as each such agreement, instrument or document may be amended, modified or supplemented from time to time in accordance with the terms thereof and hereof. "Redeemable Dividend" means, for any dividend with respect to Redeemable 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 Redeemable Stock. "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. "Redemption Amount" has the meaning given such term in Section 4.02(t). "Refinancing Indebtedness" means Indebtedness that is Incurred to refund, refinance, replace, renew, repay or extend (including pursuant to any defeasance or discharge mechanism) (collectively, "refinances," and "refinanced" shall have a correlative meaning) any Indebtedness existing on the Closing Date or Incurred in compliance with this Agreement ((including (a) Indebtedness of the Borrower that refinances Indebtedness of any Restricted Subsidiary (to the extent permitted in this Agreement), (b) Indebtedness of any Restricted 26 Exhibit 10.1 Subsidiary that refinances Indebtedness of another Restricted Subsidiary, and (c) Indebtedness that refinances Refinancing Indebtedness); provided, however, that (i) the Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being refinanced, (ii) the Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being refinanced and (iii) such Refinancing Indebtedness is Incurred in an aggregate principal amount (or if issued with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if issued with original issue discount, the aggregate accreted value) then outstanding of the Indebtedness being refinanced, plus fees, underwriting discounts and other costs and expenses incurred in connection with such Refinancing Indebtedness; provided further, however, that Refinancing Indebtedness shall not include (x) Indebtedness of a Restricted Subsidiary that is not a Subsidiary Guarantor that refinances Indebtedness of the Borrower or (y) Indebtedness of the Borrower or a Restricted Subsidiary that refinances Indebtedness of an Unrestricted Subsidiary. "Register" has the meaning given such term in Section 9.04(d). "Regulation G" means Regulation G of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation U" means Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation X" means Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulatory Shares" means, with respect to any person, shares of such person required to be issued as qualifying shares to directors or persons similarly situated or shares issued to persons other than the Borrower or a wholly owned subsidiary of the Borrower in response to regulatory requirements of foreign jurisdictions pursuant to a resolution of the Board of Directors of such person, so long as such shares do not exceed 1% of the total outstanding shares of Capital Stock of such person and any owners of such shares irrevocably waive or agree to remit to the Borrower any dividends or distributions payable in respect of such shares. "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing, depositing, dispersing, emanating or migrating of any Hazardous Material in, into, onto or through the environment. "Remedial Action" means (a) "remedial action" as such term is defined in CERCLA, 42 U.S.C. Section 9601(24), and (b) all other actions required by any Governmental Authority or voluntarily undertaken to: (i) cleanup, remove, treat, abate or in any other way address any Hazardous Material in the environment; (ii) prevent the Release or threat of Release, or minimize the further Release of any Hazardous Material so it does not migrate or endanger or threaten to endanger public health, welfare or the environment; or (iii) perform studies and investigations in connection with, or as a precondition to, clause (i) or (ii). "Repayment Date" means each date on which a principal installment on a Borrowing is required to be paid in accordance with Section 2.11. 27 Exhibit 10.1 "Required Lenders" means, (i) prior to June 30, 2003, Lenders having Loans (excluding Swingline Loans), L/C Exposure, Swingline Exposure and unused Revolving Credit Commitments and Term Loan Commitments representing at least a majority of the sum of all Loans outstanding (excluding Swingline Loans), L/C Exposure, Swingline Exposure and unused Revolving Credit Commitments and Term Loan Commitments at such time, (ii) on and after June 30, 2003, for all matters other than those relating to any financial covenants, including without limitation, Sections 6.08 and 6.10 and the related financial definitions, Lenders having Loans (excluding Swingline Loans), L/C Exposure, Swingline Exposure and unused Revolving Credit Commitments and Term Loan Commitments representing at least 66-2/3% of the sum of all Loans outstanding (excluding Swingline Loans), L/C Exposure, Swingline Exposure and unused Revolving Credit Commitments and Term Loan Commitments at such time, and (iii) on and after June 30, 2003, for matters relating to any financial covenants, including without limitation, Sections 6.08 and 6.10 and the related financial definitions, including any amendment, modification or supplement thereof which occurs prior to June 30, 2003 but which is effective for periods on and after June 30, 2003, Lenders having Loans (excluding Swingline Loans), L/C Exposure, Swingline Exposure and unused Revolving Credit Commitments and Term Loan Commitments representing at least 71% of the sum of all Loans outstanding (excluding Swingline Loans), L/C Exposure, Swingline Exposure and unused Revolving Credit Commitments and Term Loan Commitments at such time; provided further that in no event shall Freeman Spogli or any of its officers, directors, employees or Affiliates or anyone holding all or any portion of any Loan or Revolving Credit Commitment on behalf of Freeman Spogli or its Affiliates constitute a "Lender" as used in this definition of Required Lenders. "Responsible Officer" of any corporation means any executive officer or Financial Officer of such corporation and any other officer or similar official thereof responsible for the administration of the obligations of such corporation in respect of this Agreement. "Restricted Asset Disposition" means any sale, transfer, lease or other disposition of any asset of the Borrower or any Subsidiary other than an Unrestricted Asset Disposition. "Restricted Payment" has the meaning assigned thereto in Section 6.05(a). "Restricted Sale/Leaseback Transaction" means any Sale/Leaseback Transaction other than an Unrestricted Sale/Leaseback Transaction. "Restricted Subsidiary" means any Subsidiary of the Borrower other than an Unrestricted Subsidiary. "Revolving Credit Borrowing" means a Borrowing comprised of Revolving Loans. "Revolving Credit Commitment" means, with respect to each Lender, the commitment of such Lender to make Revolving Loans hereunder as set forth on Annex I, or in the Assignment and Acceptance pursuant to which such Lender assumed its Revolving Credit Commitment, as applicable, as the same may be (a) reduced from time to time pursuant to Section 2.09 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. "Revolving Credit Exposure" means, with respect to any Lender at any time, the aggregate principal amount at such time of all outstanding Revolving Loans of such Lender, plus 28 Exhibit 10.1 the aggregate amount at such time of such Lender's L/C Exposure, plus the aggregate amount at such time of such Lender's Swingline Exposure. "Revolving Credit Lender" means a Lender with a Revolving Credit Commitment. "Revolving Credit Maturity Date" means June 30, 2004. "Revolving Credit Note" means a promissory note of the Borrower, substantially in the form of Exhibit C, evidencing Revolving Loans. "Revolving Loans" means the revolving loans made by the Lenders to the Borrower pursuant to clause (b) of Section 2.01. Each Revolving Loan shall be a Eurodollar Revolving Loan or an ABR Revolving Loan. "SAP Computer Capital Expenditures" means Capital Expenditures for the installation of the Borrower's SAP computer system, including hardware costs, SAP licensing fees, implementation consulting, and internally capitalized labor, in each case incurred on or before June 30, 2000. "S&P" means Standard & Poor's Ratings Service. "Sale/Leaseback Transactions" means any arrangement, directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal, used or useful in its business, and thereafter rent or lease such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred. "Secured Parties" has the meaning assigned thereto in the Security Agreement. "Securities Act" means the Securities Act of 1933, as amended. "Security Agreement" means the Security Agreement, substantially in the form of Exhibit I, between the Borrower, the Subsidiaries party thereto and the Collateral Agent for the benefit of the Secured Parties. "Security Documents" means the Mortgages, the Security Agreement, the Pledge Agreement, the Nonrecourse Pledge Agreement, all deposit account control agreements and each of the security agreements, mortgages and other instruments and documents executed and delivered pursuant to any of the foregoing or pursuant to Sections 5.11 or 5.14. "Sellers" means Helen Hudson Lovaas and the other shareholders of the Borrower immediately before the Recapitalization. "Senior Notes" means the unsecured senior notes of Borrower due December 31, 2004, in the form attached as Exhibit A to the Master Assignment and Exchange Agreement, interest on which shall not be payable in cash but which interest shall accrue until maturity and the principal on which shall have no scheduled amortization prior to December 31, 2004, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms hereof. The Senior Notes shall include the Senior Notes issued on the Effective Date and any Senior Notes issued thereafter permitted pursuant to Section 6.01(k). 29 Exhibit 10.1 "Senior Subordinated Notes" means the Borrower's 9"% Senior Subordinated Notes due 2008. "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). "Statutory Reserves" means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board and any other banking authority, domestic or foreign, to which the Administrative Agent or any Lender (including any branch, Affiliate, or other fronting office making or holding a Loan) is subject (a) with respect to the Base CD Rate, for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months, and (b) with respect to the Adjusted Eurodollar Rate, for Eurocurrency Liabilities (as defined in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Stock Acquisition" means an acquisition of Capital Stock of any person other than in the ordinary course of the Borrower's business. "Subordinated Obligation" means any Indebtedness of the Borrower or any Subsidiary (whether outstanding on the Closing Date or thereafter Incurred) which is subordinate or junior in right of payment to the Notes or the applicable Guarantee pursuant to a written agreement to that effect, including, but not limited to the FS Convertible Senior Subordinated Debt. "subsidiary" means, with respect to any person (herein referred to as the "parent"), any corporation, partnership, association or other business entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, controlled or held, or (b) that is, at the time any determination is made, otherwise Controlled, by Holding or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" means any subsidiary of the Borrower. "Subsidiary Guarantee Agreement" means the Subsidiary Guarantee Agreement, substantially in the form of Exhibit M, made by the Subsidiary Guarantors in favor of the Collateral Agent for the benefit of the Secured Parties. 30 Exhibit 10.1 "Subsidiary Guarantor" means each Subsidiary listed on Schedule 1.01(c), and each other Subsidiary that is or becomes a party to a Subsidiary Guarantee Agreement. "Swedish Acquisitionco" is defined in Annex 4. "Swingline Commitment" means the commitment of the Swingline Lender to make loans pursuant to Section 2.22, as the same may be reduced from time to time pursuant to Section 2.09 . "Swingline Exposure" means at any time the aggregate principal amount at such time of all outstanding Swingline Loans. The Swingline Exposure of any Revolving Credit Lender at any time shall equal its Applicable Percentage of the aggregate Swingline Exposure at such time. "Swingline Lender" has the meaning assigned thereto in the Preamble hereto. "Swingline Loan" means any loan made by the Swingline Lender pursuant to Section 2.22. "Swingline Note" means a promissory note evidencing Swingline Loans, executed and delivered as provided in Section 2.22 in substantially the form of Exhibit D. "Syndication Agent" has the meaning assigned thereto in the Preamble. "Target" means a person whose Capital Stock is the subject of a proposed Permitted Acquisition. "Taxes" has the meaning assigned thereto in Section 2.20(a). "Term Borrowing" means a Borrowing comprised of Term Loans. "Term Loan Commitment" means, with respect to each Lender, the commitment of such Lender to make Term Loans hereunder as set forth on Annex 1, or in the Assignment and Acceptance pursuant to which such Lender assumed its Term Loan Commitment, as applicable, as the same may be (a) reduced from time to time pursuant to Section 2.09 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. "Term Loans" means the term loans made by the Lenders to the Borrower pursuant to Section 2.01. Each Term Loan shall be a Eurodollar Term Loan or an ABR Term Loan. "Term Note" means a promissory note of the Borrower, substantially in the form of Exhibit B, evidencing Term Loans. "Three-Month Secondary CD Rate" means, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) 31 Exhibit 10.1 during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Administrative Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it. "Total Revolving Credit Commitment" means, at any time, the aggregate amount of the Revolving Credit Commitments, as in effect at such time. "Transaction Costs" means commitment fees, financing fees, advisory fees, underwriting fees and discounts, and other out-of-pocket fees and expenses relating to the Recapitalization, excluding any expenses of the Sellers which are deducted from the Redemption Amount. "Transactions" has the meaning assigned thereto in Section 3.02. "Transferee" has the meaning assigned thereto in Section 2.20(a). "Type", when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, the term "Rate" shall include the Adjusted Eurodollar Rate and the Alternate Base Rate. "Unrestricted Asset Disposition" means, on a consolidated basis with respect to the Borrower or any wholly owned Restricted Subsidiary, any sale, transfer, lease or other disposition of any inventory, cash, Permitted Investment, or obsolete or unusable Property of the Borrower or any Subsidiary in the ordinary course of business and not otherwise in violation of this Agreement. "Unrestricted Sale/Leaseback Transaction" mean any Sale/Leaseback Transaction which does not involve a sale or transfer of property which is owned by the Borrower or its Restricted Subsidiaries on the Closing Date (or any replacements thereof). "Unrestricted Subsidiary" means (i) any Subsidiary of the Borrower that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors of the Borrower in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Borrower may designate any Subsidiary of the Borrower (including any newly acquired or newly formed Subsidiary of the Borrower) to be an Unrestricted Subsidiary; provided, however, that at the time of such designation and in the case of clauses (A) and (B), at all times thereafter (A) neither such Subsidiary nor any of its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any Lien on any property of, the Borrower or any Restricted Subsidiary of the Borrower; and (B) except to the extent permitted under Section 6.03(c)(iii)(B), neither Holding, the Borrower nor any Restricted Subsidiary has Guaranteed any Indebtedness or other obligation of such Subsidiary to be so designated, and no 32 Exhibit 10.1 Indebtedness of such Subsidiary to be designated shall constitute Indebtedness of Holding, the Borrower or any Restricted Subsidiary; and (C) except in the case of Swedish Acquisitionco, US Holdco or Euro Holdco and any of their Subsidiaries, the Subsidiary to be so designated has total consolidated assets of $1,000 or less. "US Holdco" is defined in Annex 4. "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" of any person means a Restricted Subsidiary of which securities (except for Regulatory Shares) or other ownership interests representing 100% of the equity or 100% of the ordinary voting power or 100% of the general partnership interests are, at the time any determination is being made, owned, controlled or held by the Borrower or one or more wholly owned Subsidiaries of the Borrower or by the Borrower and one or more wholly owned Subsidiaries of the Borrower. "Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. "Work" has the meaning assigned thereto in Section 5.12(e). "Working Capital Loans" has the meaning set forth in Section 3.13(e)(2). SECTION 1.02. Terms Generally . The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Annexes, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Annexes, Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, (a) any reference in this Agreement to any Credit Document means such document as amended, restated, supplemented or otherwise modified from time to time and (b) all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that for purposes of determining compliance with the covenants contained in Article VI, all accounting terms herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP as in effect on the date of this Agreement and applied on a basis consistent with the application used in the financial statements referred to in Section 3.05(a). 33 Exhibit 10.1 ARTICLE II The Credits SECTION 2.01. Commitments. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, (a) to make a single Term Loan to the Borrower on the Closing Date in a principal amount not to exceed its Term Loan Commitment, and (b) to make Revolving Loans to the Borrower, at any time and from time to time on or after the date hereof, and until the earlier of the Revolving Credit Maturity Date and the termination of the Revolving Credit Commitment of such Lender in accordance with the terms hereof, in an aggregate principal amount at any time outstanding that will not result in (i) such Lender's Revolving Credit Exposure exceeding (ii) such Lender's Revolving Credit Commitment. Within the limits set forth in clause (b) of the preceding sentence and subject to the terms, conditions and limitations set forth herein, the Borrower may borrow, pay or prepay and reborrow Revolving Loans; provided however that on and after the Fifth Amendment Effective Date, Borrower may not borrow or reborrow Acquisition Loans (as defined in Section 3.13(e)(1)). SECTION 2.02. Loans. (a) Each Loan (other than Swingline Loans) shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their applicable Revolving Credit Commitments; provided, however, that the failure of any Lender to make any Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). Except for Loans deemed made pursuant to Section 2.02(e) or pursuant to Section 2.22(e)), the Loans comprising any Borrowing shall be in an aggregate principal amount that is (i) in the case of Eurodollar Loans, an integral multiple of $1,000,000 and not less than $3,500,000, (ii) in the case of ABR Loans, an integral multiple of $100,000 and not less than $1,000,000 or (ii) equal to the remaining available balance of the applicable Commitments. (b) Subject to Sections 2.08 and 2.15, each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request pursuant to Section 2.03. Each Lender may at its option make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement and the applicable Note. Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Borrower shall not be entitled to request any Borrowing that, if made, would result in more than five Eurodollar Borrowings outstanding hereunder at any time. For purposes of the foregoing, Borrowings having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Borrowings. (c) Except with respect to Loans made pursuant to Section 2.02(e), each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds to such account in New York City as the Administrative Agent may designate not later than 11:00 a.m., New York City time, and the Administrative Agent shall by 34 Exhibit 10.1 12:00 (noon), New York City time, credit the amounts so received to an account in the name of the Borrower and designated by the Borrower in the applicable Borrowing Request or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders. (d) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with clause (c) and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If the Administrative Agent shall have so made funds available then, to the extent that such Lender shall not have made such portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent at (i) in the case of the Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, for the first such day, the Federal Funds Effective Rate, and for each day thereafter, the Alternate Base Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. (e) If the Issuing Bank shall not have received from the Borrower the payment required to be made by Section 2.23(e) within the time specified in such Section, the Issuing Bank will promptly notify the Administrative Agent of the L/C Disbursement and the Administrative Agent will promptly notify each Revolving Credit Lender of such L/C Disbursement and its Applicable Percentage thereof. Each Revolving Credit Lender shall pay by wire transfer of immediately available funds to the Administrative Agent not later than 2:00 p.m., New York City time, on such date (or, if such Revolving Credit Lender shall have received such notice later than 12:00 (noon), New York City time, on any day, not later than 10:00 a.m., New York City time, on the immediately following Business Day), an amount equal to such Lender's Applicable Percentage of such L/C Disbursement (it being understood that such amount shall be deemed to constitute an ABR Revolving Loan of such Lender and such payment shall be deemed to have reduced the L/C Exposure), and the Administrative Agent will promptly pay to the Issuing Bank amounts so received by it from the Revolving Credit Lenders. The Administrative Agent will promptly pay to the Issuing Bank any amounts received by it from the Borrower pursuant to Section 2.23(e) prior to the time that any Revolving Credit Lender makes any payment pursuant to this clause; any such amounts received by the Administrative Agent thereafter will be promptly remitted by the Administrative Agent to the Revolving Credit Lenders that shall have made such payments and to the Issuing Bank, as their interests may appear. If any Revolving Credit Lender shall not have made its Applicable Percentage of such L/C Disbursement available to the Administrative Agent as provided above, such Lender and the Borrower severally agree to pay interest on such amount, for each day from and including the date such amount is required to be paid in accordance with this clause to but excluding the date such amount is paid, to the Administrative Agent for the account of the Issuing Bank at (i) in the case of the Borrower, a rate per annum equal to the interest rate applicable to Revolving Loans pursuant to Section 2.06(a), and (ii) in the case of such Lender, for the first such day, the Federal Funds Effective Rate, and for each day thereafter, the Alternate Base Rate. 35 Exhibit 10.1 SECTION 2.03. Borrowing Procedure. In order to request a Borrowing (other than a Swingline Loan or a deemed Borrowing pursuant to Section 2.02(e), as to which this Section shall not apply), the Borrower shall hand deliver or telecopy to the Administrative Agent a duly completed Borrowing Request (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before a proposed Borrowing, and (b) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before a proposed Borrowing. Each Borrowing Request shall be irrevocable, shall be signed by or on behalf of the Borrower and shall specify the following information: (i) whether the Borrowing then being requested is to be a Term Borrowing or a Revolving Credit Borrowing, and whether such Borrowing is to be a Eurodollar Borrowing or an ABR Borrowing; (ii) the date of such Borrowing (which shall be a Business Day), (iii) the number and location of the account to which funds are to be disbursed (which shall be an account that complies with the requirements of Section 2.02(c)); (iv) the amount of such Borrowing; and (v) if such Borrowing is to be a Eurodollar Borrowing, the Interest Period with respect thereto; provided, however, that, notwithstanding any contrary specification in any Borrowing Request, each requested Borrowing shall comply with the requirements set forth in Section 2.02. The initial Borrowing shall be an ABR Borrowing. If no election as to the Type of Borrowing is specified in any such notice, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any Eurodollar Borrowing is specified in any such notice, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. The Administrative Agent shall promptly advise the applicable Lenders of any notice given pursuant to this Section, and of each Lender's portion of the requested Borrowing. SECTION 2.04. Notes and Records. (a) The Revolving Loans, Term Loans and Swingline Loans made by each Lender shall be evidenced by a Revolving Credit Note, Term Note and Swingline Note, respectively, duly executed on behalf of the Borrower, dated the Closing Date, payable to the order of such Lender in a principal amount equal to such Lender's Revolving Credit Commitment, in the case of its Revolving Credit Note, such Lender's Term Commitment, in the case of its Term Note or such Lender's Swingline Commitment, in the case of its Swingline Note. The outstanding principal balance of each Loan, as evidenced by such a Note, shall be payable (i) in the case of a Swingline Loan, on the last day of the Interest Period applicable to such Loan and on the Revolving Credit Maturity Date, (ii) in the case of a Revolving Loan, on the Revolving Credit Maturity Date and (iii) in the case of a Term Loan, as provided in Section 2.11. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid such Lender from time to time under this Agreement. Each Lender shall, and is hereby authorized by the Borrower to, endorse on the schedule attached to each Note delivered to such Lender (or on a continuation of such schedule attached to such Note and made a part thereof), or otherwise to record in such Lender's internal records, an appropriate notation evidencing the date and amount of each Loan from such Lender, each payment and prepayment of principal of any such Loan, each payment of interest on any such Loan and the other information provided for on such schedule; provided, however, that the failure of any Lender to make such a notation or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans made by such Lender in accordance with the terms of this Agreement and the applicable Note. 36 Exhibit 10.1 (c) The Administrative Agent shall maintain accounts in which it will record (i) the amount of each Loan made hereunder, the Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder from the Borrower or any Guarantor and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to clauses (b) and (c) shall be prima facie evidence of the existence and amounts of the obligations therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligations of the Borrower to repay the Loans in accordance with their terms. SECTION 2.05. Fees. (a) The Borrower agrees to pay to each Lender, through the Administrative Agent, on March 31, June 30, September 30 and December 31 (beginning on June 30, 1998) and on each date on which any Commitment of such Lender shall expire or be terminated as provided herein, a commitment fee (a "Commitment Fee") of 0.50% per annum less the applicable Pricing Adjustment on the average daily excess of the aggregate amount of the Revolving Credit Commitments over the aggregate amount of the Revolving Credit Exposures during the preceding quarter (or other period commencing with the date of acceptance by the Borrower of the Commitment of such Lender or ending with the Revolving Credit Maturity Date or the date on which the Commitments of such Lender shall expire or be terminated). All Commitment Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days. The Commitment Fee due to each Lender shall begin to accrue on the date of execution of this Agreement and shall cease to accrue on the date on which the Commitment of such Lender shall expire or be terminated as provided herein. For purposes of calculating Commitment Fees only, no portion of the Revolving Credit Commitments shall be deemed utilized under Section 2.17 as a result of outstanding Swingline Loans. (b) The Borrower agrees to pay to the Administrative Agent, for its own account, the administrative fees set forth in the Fee Letter at the times and in the amounts specified therein (the "Administrative Agent Fees"). (c) The Borrower agrees to pay to the Administrative Agent, for payment to the other Lenders (to the extent applicable), on the Closing Date, the other fees specified in the Fee Letter, and the Administrative Agent shall pay to each Lender on the Closing Date that portion of such fees that shall be owing to such Lender. (d) The Borrower agrees to pay (i) to each Revolving Credit Lender, through the Administrative Agent, on March 31, June 30, September 30 and December 31 of each year and on the date on which the Revolving Credit Commitment of such Lender shall be terminated as provided herein, a fee (an "L/C Participation Fee") calculated on such Lender's Applicable Percentage of the average daily aggregate L/C Exposure (excluding the portion thereof attributable to unreimbursed L/C Disbursements) during the preceding quarter (or shorter period commencing with the Closing Date or ending with the Revolving Credit Maturity Date or the date on which all Letters of Credit have been cancelled or have expired and the Revolving Credit Commitments of 37 Exhibit 10.1 all Lenders shall have been terminated) at a rate equal to the applicable margin from time to time used to determine the interest rate on Revolving Credit Borrowings comprised of Eurodollar Loans pursuant to Section 2.06, and (ii) to the Issuing Bank with respect to each Letter of Credit an administrative fee payable to the Issuing Bank equal to the greater of (a) for the period from and after the date of issuance thereof (or, with respect to Existing Letters of Credit, for the period from and after the Closing Date), 1/4 of 1% per annum of the maximum amount available from time to time to be drawn under such Letter of Credit, in each case calculated in arrears on and through the last day of each Fiscal Quarter and on the basis of a 360-day year and the actual number of days elapsed and (b) $500, and payable on the Business Day immediately succeeding such date of calculation in immediately available funds, and (iii) the standard issuance, drawing and amendment fees specified from time to time by the Issuing Bank (the "Issuing Bank Fees"). All L/C Participation Fees and Issuing Bank Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days. (e) The Borrower agrees to pay each Lender, through the Administrative Agent, on July 1, 2002, a fee equal to 0.075% of the sum of such Lender's Revolving Credit Commitment and outstanding Term Loans as of such date. (f) If the compliance certificate filed by the Borrower with respect to the fiscal period ended June 30, 2002 sets forth a Debt/Adjusted EBITDA Ratio in excess of 4.90:1.00, or if such compliance certificate is not filed by the deadline set forth in Section 5.04(b), the Borrower agrees to immediately pay each Lender, through the Administrative Agent, a fee equal to 0.025% of the sum of such Lender's Revolving Credit Commitment and outstanding Term Loans as of such deadline. All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as appropriate, among the Lenders, except that the Issuing Bank Fees shall be paid directly to the Issuing Bank. Once paid, none of the Fees shall be refundable under any circumstances. SECTION 2.06. Interest on Loans. (a) Subject to the provisions of Section 2.07, the Loans comprising each ABR Borrowing, including each Swingline Loan, shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when the Alternate Base Rate is determined by reference to the Prime Rate and over a year of 360 days at all other times) at a rate per annum equal to the Alternate Base Rate plus (i) from the Fifth Amendment Effective Date through June 30, 2002, 3.00% less the applicable Pricing Adjustment in the case of Term Loans and Working Capital Loans and 3.25% less the applicable Pricing Adjustment in the case of Acquisition Loans; (ii) from July 1, 2002 through March 31, 2003, 3.50% less the applicable Pricing Adjustment in the case of Term Loans and Working Capital Loans and 3.75% less the applicable Pricing Adjustment in the case of Acquisition Loans; and (iii) from April 1, 2003, 4.00% less the applicable Pricing Adjustment in the case of Term Loans and Working Capital Loans and 4.25% less the Applicable Pricing Adjustment in the case of Acquisition Loans. 38 Exhibit 10.1 (b) Subject to the provisions of Section 2.07, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the Adjusted Eurodollar Rate for the Interest Period in effect for such Borrowing plus (i) from the Fifth Amendment Effective Date through June 30, 2002, 4.00% less the applicable Pricing Adjustment in the case of Term Loans and Working Capital Loans and 4.25% less the applicable Pricing Adjustment in the case of Acquisition Loans; (ii) from July 1, 2002 through March 31, 2003, 4.50% less the applicable Pricing Adjustment in the case of Term Loans and Working Capital Loans and 4.75% less the applicable Pricing Adjustment in the case of Acquisition Loans; and (iii) from April 1, 2003, 5.00% less the applicable Pricing Adjustment in the case of Term Loans and Working Capital Loans and 5.25% less the Applicable Pricing Adjustment in the case of Acquisition Loans. (c) Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. Interest on each Loan shall be payable on the Interest Payment Dates applicable to such Loan except as otherwise provided in this Agreement. The applicable Alternate Base Rate or Adjusted Eurodollar Rate for each Interest Period or day within an Interest Period, as the case may be, shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. SECTION 2.07. Default Interest. Upon the occurrence and during the continuation of any Event of Default, the Borrower shall on demand from time to time pay interest, to the extent permitted by law, on the outstanding principal amount of all Loans, any interest payments thereon not paid when due and any fees and other amounts then due and payable hereunder on such Loans at the rate otherwise applicable to such Loan pursuant to Section 2.06 without making the applicable Pricing Adjustment plus 2.00% per annum. SECTION 2.08. Alternate Rate of Interest. In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing any Lender shall have determined that dollar deposits in the principal amounts of the Loans comprising such Borrowing are not generally available to it in the Eurodollar interbank market, or that the rates at which such dollar deposits are being offered will not adequately and fairly reflect the cost to such Lender of making or maintaining its Eurodollar Loan during such Interest Period, or that the Administrative Agent shall have determined that reasonable means do not exist for ascertaining the Adjusted Eurodollar Rate as soon as practicable thereafter, the affected Lender shall give written or telecopy notice thereof to the Administrative Agent, and/or the Administrative Agent shall, give written or telecopy notice thereof to the Borrower and the Lenders. In the event of any such determination, until the affected Lender or the Administrative Agent, as the case may be, shall have given notice that the circumstances giving rise to such notice no longer exist, any request by the Borrower for a Eurodollar Borrowing pursuant to Section 2.03 or 2.10, from the affected Lender or the Lenders, as the case may be, shall be deemed to be a request for an ABR Borrowing. Each determination by such Lender or the Administrative Agent hereunder shall be conclusive absent manifest error. 39 Exhibit 10.1 SECTION 2.09. Termination and Reduction of Commitments. (a) The Term Loan Commitments hereunder shall terminate on the earliest of (i) the date on which the Borrower informs the Lenders that it has decided not to proceed with the Recapitalization, (ii) the date on which the Acquisition Agreement is terminated in accordance with its terms or (iii) 5:00 p.m., New York City Time, April 30, 1998, if the initial Credit Event is not made on or before such date. The Revolving Credit Commitments, the Swingline Commitment and the L/C Commitment shall automatically terminate on the earliest of (i) the Revolving Credit Maturity Date, (ii) the date on which the Borrower informs the Lenders that it has decided not to proceed with the Recapitalization, (iii) the date on which the Acquisition Agreement is terminated in accordance with its terms or (iv) 5:00 p.m., New York City Time, April 16, 1998, if the initial Credit Event shall not have occurred by such time. (b) Upon at least three Business Days' prior irrevocable written or telecopy notice to the Administrative Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Term Loan Commitments or the Revolving Credit Commitments; provided, however, that (i) each partial reduction of the Term Loan Commitments or the Revolving Credit Commitments shall be in (1) an integral multiple of $1,000,000 and in a minimum amount of $1,000,000 or (2) in the full remaining amount of the Term Loan Commitments or the Revolving Credit Commitments, as the case may be, and (ii) the Total Revolving Credit Commitment shall not be reduced to an amount that is less than the sum of the Aggregate Revolving Credit Exposure at the time. In addition, if no Term Loans or Acquisition Loans are outstanding, the Revolving Credit Commitments shall automatically be reduced by the amount of any mandatory prepayment that would otherwise have been applied to the prepayment of Term Loans or Acquisition Loans pursuant to Section 2.13(g). The Borrower in making any voluntary reduction of the Revolving Credit Commitments may designate whether such reduction applies to the Revolving Credit Commitments available with respect to Acquisition Loans pursuant to Section 3.13(e)(1) hereof, or to the Revolving Credit Commitments available with respect to Working Capital Loans pursuant to Section 3.13(e)(2) hereof. (c) Each reduction in the Term Loan Commitments or the Revolving Credit Commitments hereunder shall be made ratably among the Lenders in accordance with their respective applicable Commitments. The Borrower shall pay to the Administrative Agent for the account of the applicable Lenders, on the date of each termination or reduction, the Commitment Fees on the amount of the Commitments so terminated or reduced accrued to but excluding the date of such termination or reduction. SECTION 2.10. Conversion and Continuation of Borrowings. The Borrower shall have the right at any time by delivery of a Continuation/Conversion Request (or by telephonic notice promptly confirmed by delivery of a Continuation/Conversion Request) to the Administrative Agent (a) not later than 11:00 a.m., New York City time, one Business Day prior to conversion, to convert any Eurodollar Borrowing into an ABR Borrowing, (b) upon the occurrence of the Effective Date, not later than 11:00 a.m., New York City time, three Business Days prior to conversion or continuation, to convert any ABR Borrowing into a Eurodollar Borrowing or to continue any Eurodollar Borrowing as a Eurodollar Borrowing for an additional Interest Period, and (c) upon the occurrence of the Effective Date, not later than 11:00 a.m., New York City time, three Business Days prior to conversion, to convert the Interest Period with 40 Exhibit 10.1 respect to any Eurodollar Borrowing to another permissible Interest Period, subject in each case to the following: (i) each conversion or continuation shall be made pro rata among the Lenders in accordance with the respective principal amounts of the Loans comprising the converted or continued Borrowing; (ii) if less than all the outstanding principal amount of any Borrowing shall be converted or continued, then each resulting Borrowing shall satisfy the limitations specified in Sections 2.02(a) and 2.02(b) regarding the principal amount and maximum number of Borrowings of the relevant Type; (iii) each conversion shall be effected by each Lender and the Administrative Agent by recording for the account of such Lender the new Loan of such Lender resulting from such conversion and reducing the Loan (or portion thereof) of such Lender being converted by an equivalent principal amount; accrued interest on any Eurodollar Loan (or portion thereof) being converted shall be paid by the Borrower at the time of conversion; (iv) if any Eurodollar Borrowing is converted at a time other than the end of the Interest Period applicable thereto, the Borrower shall pay, upon demand, any amounts due to the Lenders pursuant to Section 2.16; (v) any portion of a Borrowing maturing or required to be repaid in less than one month may not be converted into or continued as a Eurodollar Borrowing; (vi) any portion of a Eurodollar Borrowing that cannot be converted into or continued as a Eurodollar Borrowing by reason of the immediately preceding clause shall be automatically converted at the end of the Interest Period in effect for such Borrowing into an ABR Borrowing; (vii) no Interest Period may be selected for any Eurodollar Borrowing that would end later than a Repayment Date applicable thereto occurring on or after the first day of such Interest Period if, after giving effect to such selection, the aggregate outstanding amount of (A) applicable Eurodollar Borrowings with Interest Periods ending on or prior to such Repayment Date and (B) the applicable ABR Borrowings would not be at least equal to the principal amount of Borrowings to be paid on such Repayment Date; (viii) no Interest Period applicable to a Revolving Loan may end later than the Revolving Credit Maturity Date, and no Interest Period applicable to a Term Loan may end later than the Loan Maturity Date; and (ix) after the occurrence and during the continuance of a Default or Event of Default, no outstanding Loan may be converted into, or continued as, a Eurodollar Loan. Each notice pursuant to this Section shall be irrevocable and shall refer to this Agreement and specify (A) the identity and amount of the Borrowing that the Borrower requests be converted or continued, (B) whether such Borrowing is to be converted to or continued as a Eurodollar Borrowing or an ABR Borrowing, (C) if such notice requests a conversion, the date of such conversion (which shall be a Business Day) and (D) if such Borrowing is to be converted to 41 Exhibit 10.1 or continued as a Eurodollar Borrowing, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as a Eurodollar Borrowing, the Borrower shall be deemed to have selected an Interest Period of one month's duration. The Administrative Agent shall advise the Lenders of any notice given pursuant to this Section and of each Lender's portion of any converted or continued Borrowing. If the Borrower shall not have given notice in accordance with this Section to continue any Borrowing into a subsequent Interest Period (and shall not otherwise have given notice in accordance with this Section to convert such Borrowing), such Borrowing shall, at the end of the Interest Period applicable thereto (unless repaid pursuant to the terms hereof), automatically be continued into a new Interest Period as an ABR Borrowing. SECTION 2.11. Repayment of Term Borrowings. (a) The principal of the Term Borrowings shall be payable in quarterly installments on the following Repayment Dates in the following amounts: ---------------------------------------------------------------------- Date Amount of Repayment ------------------------------------------- 2002 2003 2004 ---------------------------------------------------------------------- March 31 $1,250,000 ---------------------------------------------------------------------- June 30 $1,250,000 $3,000,000 ---------------------------------------------------------------------- September 30 $1,250,000 $2,000,000 ---------------------------------------------------------------------- December 31 $1,250,000 ---------------------------------------------------------------------- (b) Repayment of Acquisition Borrowings. The principal of the Acquisition Loans shall be payable in quarterly installments on the following Repayment Dates in the following amounts: ---------------------------------------------------------------------- Date Amount of Repayment ---------------------------------------------------------------------- 2003 2004 ---------------------------------------------------------------------- March 31 $ 2,000,000 ---------------------------------------------------------------------- June 30 $35,000,000 ---------------------------------------------------------------------- September 30 $1,000,000 ---------------------------------------------------------------------- December 31 $2,000,000 ---------------------------------------------------------------------- (c) Accrued Interest. Each payment of Borrowings pursuant to this Section shall be accompanied by accrued interest on the principal amount paid to but excluding the date of payment. (d) Certain Loan Purchases. In the event that Freeman Spogli or any affiliate of Freeman Spogli or any shareholder of Holdings or Borrower desires to purchase additional Loans in order to effect all or any portion of the next scheduled quarterly amortization payment on the Loans, each Lender hereby agrees to sell such Loans to Freeman Spogli, any such Affiliate or shareholder on terms and conditions which are substantially the same as those set forth in the Master Assignment and Exchange Agreement including without limitation that such loans are 42 Exhibit 10.1 purchased at par on a pro rata basis from all Lenders, all accrued interest on the purchased Loans is paid through the date of purchase, such purchased Loans are immediately exchanged for additional Senior Notes and pledged to Collateral Agent pursuant to the Nonrecourse Pledge Agreement and upon such exchange shall no longer constitute Obligations or Indebtedness outstanding under this Agreement or the other Credit Documents. SECTION 2.12. Prepayment. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing, in whole or in part, upon at least three Business Days' prior written or telecopy notice (or telephone notice promptly confirmed by written or telecopy notice) to the Administrative Agent before 11:00 a.m., New York City time; provided, however, that each partial prepayment shall be in an amount that is an integral multiple of $1,000,000 and not less than $1,000,000. (b) Optional prepayments of Term Loans or Acquisition Loans shall be applied (i) first, to scheduled amortization payments due within 12 calendar months thereafter, and (ii) second, pro rata against the remaining scheduled installments of principal due in respect of the Term Loans or Acquisition Loans. (c) Each notice of prepayment shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the Borrower to prepay such Borrowing by the amount stated therein on the date stated therein. All prepayments under this Section shall be subject to Section 2.16 but otherwise without premium or penalty. All prepayments under this Section shall be accompanied by accrued interest on the principal amount being prepaid to the date of payment. SECTION 2.13. Mandatory Prepayments. (a) In the event of any termination of all the Revolving Credit Commitments, the Borrower shall repay or prepay all its outstanding Revolving Credit Borrowings and all outstanding Swingline Loans on the date of such termination. In the event of any partial reduction of the Revolving Credit Commitments, then (i) at or prior to the effective date of such reduction, the Administrative Agent shall notify the Borrower and the Revolving Credit Lenders of the Aggregate Revolving Credit Exposure after giving effect thereto and (ii) if the Aggregate Revolving Credit Exposure would exceed the Total Revolving Credit Commitment after giving effect to such reduction or termination, then the Borrower shall, on the date of such reduction or termination, repay or prepay Revolving Credit Borrowings or Swingline Loans (or a combination thereof) in an amount sufficient to eliminate such excess. In the event that, as of any date of determination, the sum of (x) cash on hand plus (y) Permitted Investments exceeds $5,000,000 for a period of greater than 30 consecutive days, in each case as determined for Borrower and its Restricted Subsidiaries on a consolidated basis (the amount of such excess being hereinafter referred to as the "Excess Liquidity"), Borrower shall repay or prepay its Swingline Loans and its Revolving Credit Borrowings by an amount equal to such Excess Liquidity, such Excess Liquidity being applied to repay or prepay first Swingline Loans to the full extent thereof, second Working Capital Loans and third Acquisition Loans, in the case of Swingline Loans and Working Capital Loans without any related reduction in the Revolving Credit Commitment. 43 Exhibit 10.1 (b) With respect to (I) any Restricted Asset Disposition other than the sale of the Excess Real Estate, not later than the earliest of (i) the third Business Day following the completion of any Restricted Asset Disposition if the Borrower does not intend to reinvest the Net Cash Proceeds thereof or Administrative Agent has not approved the reinvestment of such Net Cash Proceeds prior to receipt by Borrower or any Restricted Subsidiary of such proceeds, as and under the circumstances set forth in the definition of Net Cash Proceeds, (ii) promptly after the date on which the Borrower determines not to reinvest such Net Cash Proceeds or Administrative Agent disapproves such reinvestment as set forth in the definition of Net Cash Proceeds, and (iii) the first anniversary of the date thereof, the Borrower shall apply 100% of the Net Cash Proceeds, if any, received with respect thereto to prepay outstanding Term Loans and/or Acquisition Loans and/or reduce the Revolving Credit Commitment in accordance with Section 2.13(g); and (II) any sale of the Excess Real Estate, not later than the first Business Day thereafter Borrower shall apply (i) the first $3,500,000 in Net Cash Proceeds from the sale of such Excess Real Estate to reduce outstandings under the Revolving Credit Facility but without any Revolving Credit Commitment reduction and (ii) Net Cash Proceeds in excess of $3,500,000 to prepay Term Loans and/or Acquisition Loans and/or reduce the Revolving Credit Commitment in accordance with Section 2.13(g). (c) In the event and on each occasion that (i) an Equity Issuance occurs as part of an initial public offering of the Capital Stock of the Borrower or Holding, the Borrower shall, substantially simultaneously with (and in any event not later than the third Business Day next following) the occurrence of such Equity Issuance, apply Net Cash Proceeds therefrom in an amount equal to 50% of the net cash proceeds of the Capital Stock sold in such initial public offering (whether or not all such Capital Stock is offered by the Borrower or Holding) to prepay outstanding Term Loans and/or Acquisition Loans and/or reduce the Revolving Credit Commitment in accordance with Section 2.13(g); provided, however, that the remaining portion of such Net Cash Proceeds shall be applied either (A) pursuant to Section 6.05(a)(iii) for the redemption of Exchangeable Preferred Stock (including accreted PIK liquidation preference) or (B) to prepay outstanding Term Loans and/or Acquisition Loans and/or reduce the Revolving Credit Commitment in accordance with Section 2.13(g); and (ii) an Equity Issuance occurs other than as part of an initial public offering of the Capital Stock of the Borrower or Holding, the Borrower shall, substantially simultaneously with (and in any event not later than the third Business Day next following) the occurrence of such Equity Issuance, apply 100% of the Net Cash Proceeds therefrom to prepay outstanding Term Loans and/or Acquisition Loans and/or reduce the Revolving Credit Commitment in accordance with Section 2.13(g); provided that upon notice to Administrative Agent of such equity investment, Freeman Spogli, any Affiliate of Freeman Spogli or any shareholder of Holding or Borrower may directly or indirectly invest in Borrower after the Effective Date up to an additional $5,000,000 in Capital Stock other than Disqualified Stock, the proceeds of which may be retained by Borrower and utilized by Borrower in the ordinary course of its business. (d) Beginning with the fiscal year ending nearest to December 31, 1999, no later than the earlier of (i) 90 days after the end of each fiscal year of the Borrower, and (ii) the date on which the financial statements with respect to such period are delivered pursuant to 44 Exhibit 10.1 Section 5.04(a), the Borrower shall prepay outstanding Term Loans and/or Acquisition Loans in accordance with Section 2.13(g) in an aggregate principal amount equal to 75% (or 50%, for fiscal years for which the Debt/Adjusted EBITDA Ratio for such fiscal year is less than 5:1) of Excess Cash Flow for the fiscal year then ended. (e) In the event that any Credit Party or any subsidiary of a Credit Party shall receive Net Cash Proceeds from the Incurrence of Debt of the Borrower or any of its Subsidiaries (other than any proceeds of Debt permitted pursuant to Section 6.01), the Borrower shall, substantially simultaneously with (and in any event not later than the third Business Day next following) the receipt of such Net Cash Proceeds by the Borrower or such Subsidiary, apply an amount equal to 100% of such Net Cash Proceeds to prepay outstanding Term Loans and/or Acquisition Loans and/or reduce the Revolving Credit Commitment in accordance with Section 2.13(g). (f) In the event that there shall occur any Casualty or Condemnation and, pursuant to Section 5.12, the Casualty Proceeds or Condemnation Proceeds, as the case may be, are required to be used to prepay the Loans, then the Borrower shall apply an amount equal to 100% of such Casualty Proceeds or Condemnation Proceeds, as the case may be, to prepay outstanding Term Loans and/or Acquisition Loans and/or reduce the Revolving Credit Commitment in accordance with Section 2.13(g). (g) Other than as may be provided in Section 2.13(b)(II)(i), mandatory prepayments shall be applied first to the Term Loans to the full extent thereof and if no Term Loans are outstanding shall be applied second to the Acquisition Loans to the full extent thereof and if no Acquisition Loans are outstanding, the Revolving Credit Commitments shall be permanently reduced by an amount equal to the amount of such mandatory prepayment and, if required by Section 2.13(a), to prepay Revolving Loans. Mandatory prepayments under this Agreement shall be applied pro rata against the remaining scheduled installments of principal due in respect of the Term Loans or Acquisition Loans under Section 2.11; provided that any mandatory prepayments of the Term Loans and/or Acquisition Loans made pursuant to Section 2.13(b)(II)(ii) shall be applied to the remaining scheduled installments in inverse order of maturity. (h) The Borrower shall deliver to the Administrative Agent, at the time of each prepayment required under this Section, (i) a certificate signed by a Responsible Officer of the Borrower setting forth in reasonable detail the calculation of the amount of such prepayment and (ii) to the extent practicable, at least three days prior written notice of such prepayment. Each notice of prepayment shall specify the prepayment date, the Type of each Loan being prepaid and the principal amount of each Loan (or portion thereof) to be prepaid. All prepayments of Borrowings under this Section shall be subject to Section 2.16, but shall otherwise be without premium or penalty. (i) Amounts to be applied pursuant to this Section to the prepayment of Term Loans and Revolving Loans shall be applied, as applicable, first to reduce outstanding ABR Term Loans and ABR Revolving Loans. Any amounts remaining after each such application shall, at the option of the Borrower, be applied to prepay Eurodollar Term Loans or Eurodollar Revolving Loans, as the case may be, immediately and/or shall be deposited in the Prepayment Account (as defined below). The Administrative Agent shall apply any cash deposited in the Prepayment 45 Exhibit 10.1 Account (i) allocable to Term Loans to prepay Eurodollar Term Loans and (ii) allocable to Revolving Loans to prepay Eurodollar Revolving Loans, in each case on the last day of their respective Interest Periods (or, at the direction of the Borrower, on any earlier date) until all outstanding Term Loans or Revolving Loans, as the case may be, have been prepaid or until all the allocable cash on deposit with respect to such Loans has been exhausted. For purposes of this Agreement, the term "Prepayment Account" means an account established by the Borrower with the Administrative Agent and over which the Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal for application in accordance with this clause. The Administrative Agent will, at the request of the Borrower, invest amounts on deposit in the Prepayment Account in Permitted Investments that mature prior to the last day of the applicable Interest Periods of the Eurodollar Term Borrowings or Eurodollar Revolving Borrowings to be prepaid, as the case may be; provided, however, that (i) the Administrative Agent shall not be required to make any investment that, in its sole judgment, would require or cause the Administrative Agent to be in, or would result in any, violation of any law, statute, rule or regulation and (ii) the Administrative Agent shall have no obligation to invest amounts on deposit in the Prepayment Account if a Default or Event of Default shall have occurred and be continuing. The Borrower shall indemnify the Administrative Agent for any losses relating to the investments so that the amount available to prepay Eurodollar Borrowings on the last day of the applicable Interest Period is not less than the amount that would have been available had no investments been made pursuant thereto. Other than any interest earned on such investments, the Prepayment Account shall not bear interest. Interest or profits, if any, on such investments shall be deposited in the Prepayment Account and reinvested and disbursed as specified above. If the maturity of the Loans has been accelerated pursuant to Article VII, the Administrative Agent may, in its sole discretion, apply all amounts on deposit in the Prepayment Account to satisfy any of the Obligations. The Borrower hereby grants to the Administrative Agent, for its benefit and the benefit of the Issuing Bank, the Swingline Lender and the Lenders, a security interest in the Prepayment Account to secure the Obligations. SECTION 2.14. Reserve Requirements; Change in Circumstances. (a) Notwithstanding any other provision of this Agreement, if after the date of this Agreement any change in applicable law or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to any Lender or the Issuing Bank of the principal of or interest on any Eurodollar Loan made by such Lender or any Fees or other amounts payable hereunder (other than changes in respect of taxes based on the overall net income of such Lender or the Issuing Bank by the jurisdiction in which such Lender or the Issuing Bank has its principal office or by any political subdivision or taxing authority therein), or shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by any Lender or the Issuing Bank (except any such reserve requirement which is reflected in the Adjusted Eurodollar Rate) or shall impose on such Lender or the Issuing Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein, and the result of any of the foregoing shall be to increase the cost to such Lender or the Issuing Bank of making or maintaining any Eurodollar Loan or increase the cost to any Lender of issuing or maintaining any Letter of Credit or purchasing or maintaining a participation therein or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder or under the Notes 46 Exhibit 10.1 (whether of principal, interest or otherwise) by an amount deemed by such Lender or the Issuing Bank to be material, then the Borrower will pay to such Lender or the Issuing Bank, as the case may be, upon demand such additional amount or amounts as will compensate such Lender or the Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered. (b) If any Lender or the Issuing Bank shall have determined that the adoption after the Closing Date of any law, rule, regulation, agreement or guideline regarding capital adequacy, or any change after the Closing Date in any such law, rule, regulation, agreement or guideline (whether such law, rule, regulation, agreement or guideline has been adopted) or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or the Issuing Bank or any Lender's or the Issuing Bank's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any Governmental Authority has or would have the effect of reducing the rate of return on such Lender's or the Issuing Bank's capital or on the capital of such Lender's or the Issuing Bank's holding company, if any, as a consequence of this Agreement or the Loans made or participations in Letters of Credit purchased by such Lender pursuant hereto or the Letters of Credit issued by the Issuing Bank pursuant hereto to a level below that which such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration such Lender's or the Issuing Bank's policies and the policies of such Lender's or the Issuing Bank's holding company with respect to capital adequacy) by an amount deemed by such Lender or the Issuing Bank to be material, then from time to time the Borrower shall pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company for any such reduction suffered. (c) A certificate of a Lender or the Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or the Issuing Bank or its holding company, as applicable, as specified in clause (a) or (b), and showing the method of calculation in reasonable detail, shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender or the Issuing Bank the amount shown as due on any such certificate delivered by it within 10 days after its receipt of the same. (d) Failure or delay on the part of any Lender or the Issuing Bank to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital shall not constitute a waiver of such Lender's or the Issuing Bank's right to demand such compensation. The protection of this Section shall be available to each Lender and the Issuing Bank regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, agreement, guideline or other change or condition that shall have occurred or been imposed. If such Lender receives a refund of any such amount, such Lender will promptly pay such amount over to the Borrower. SECTION 2.15. Change in Legality. (a) Notwithstanding any other provision of this Agreement, if, after the Closing Date, any change in any law or regulation or in the interpretation thereof by any Governmental Authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as 47 Exhibit 10.1 contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Borrower and to the Administrative Agent: (i) such Lender may declare that Eurodollar Loans will not thereafter (for the duration of such unlawfulness) be made by such Lender hereunder (or be continued for additional Interest Periods and ABR Loans will not thereafter (for such duration) be converted into Eurodollar Loans), whereupon any request for a Eurodollar Borrowing (or to convert an ABR Borrowing to a Eurodollar Borrowing or to continue a Eurodollar Borrowing for an additional Interest Period) shall, as to such Lender only, be deemed a request for an ABR Loan (or a request to continue an ABR Loan as such for an additional Interest Period or to convert a Eurodollar Loan into an ABR Loan, as the case may be), unless such declaration shall be subsequently withdrawn; and (ii) such Lender may require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in clause (b). In the event any Lender shall exercise its rights under clause (i) or (ii), all payments and prepayments of principal that would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans. (b) For purposes of this Section, a notice to the Borrower by any Lender shall be effective as to each Eurodollar Loan made by such Lender, if lawful, on the last day of the Interest Period currently applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by the Borrower. SECTION 2.16. Indemnity. The Borrower shall indemnify each Lender against any loss or expense that such Lender may sustain or incur as a consequence of (a) any event, other than a default by such Lender in the performance of its obligations hereunder, which results in (i) such Lender receiving or being deemed to receive any amount on account of the principal of any Eurodollar Loan prior to the end of the Interest Period in effect therefor, (ii) the conversion of any Eurodollar Loan to an ABR Loan, or the conversion of the Interest Period with respect to any Eurodollar Loan, in each case other than on the last day of the Interest Period in effect therefor, or (iii) any Eurodollar Loan to be made by such Lender (including any Eurodollar Loan to be made pursuant to a conversion or continuation under Section 2.10) not being made after notice of such Loan shall have been given by the Borrower hereunder (any of the events referred to in this clause being called a "Breakage Event") or (b) any default in the making of any payment or prepayment required to be made hereunder. In the case of any Breakage Event, such loss shall include an amount equal to the excess, as reasonably determined by such Lender, of (i) its cost of obtaining funds for the Eurodollar Loan that is the subject of such Breakage Event for the period from the date of such Breakage Event to the last day of the Interest Period in effect (or that would have been in effect) for such Loan over (ii) the amount of interest likely to be realized by such Lender in redeploying the funds released or not utilized by reason of such Breakage Event for such period. A certificate of any Lender setting forth any amount or amounts which such Lender is entitled to 48 Exhibit 10.1 receive pursuant to this Section with calculations in reasonable detail shall be delivered to the Borrower and shall be conclusive absent manifest error. SECTION 2.17. Pro Rata Treatment. Except as provided below in this Section with respect to Swingline Loans and as required under Section 2.15, each Borrowing, each payment or prepayment of principal of any Borrowing, each payment of interest on the Loans, each payment of the Commitment Fees, each reduction of the Term Loan Commitments or the Revolving Credit Commitments and each conversion of any Borrowing to or continuation of any Borrowing as a Borrowing of any Type shall be allocated pro rata among the Lenders in accordance with their respective applicable Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Loans and participations in unreimbursed drawings under Letters of Credit). For purposes of determining the available Revolving Credit Commitments of the Lenders at any time, each outstanding Swingline Loan shall be deemed to have utilized the Revolving Credit Commitments of the Lenders (including those Lenders which shall not have made Swingline Loans) pro rata in accordance with such respective Revolving Credit Commitments. Each Lender agrees that in computing such Lender's portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender's percentage of such Borrowing to the next higher or lower whole dollar amount. SECTION 2.18. Sharing of Setoffs. Each Lender agrees that if it or any Affiliate of such Lender shall, through the exercise of a right of banker's lien, setoff or counterclaim against the Borrower or any other Credit Party or any Affiliate of any Credit Party, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender or any Affiliate of such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Loan or Loans or L/C Disbursement as a result of which the unpaid principal portion of its Term Loans and Revolving Loans and participations in L/C Disbursements shall be proportionately less than the unpaid principal portion of the Term Loans and Revolving Loans and participations in L/C Disbursements of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Term Loans and Revolving Loans and L/C Exposure, as the case may be of such other Lender, so that the aggregate unpaid principal amount of the Term Loans and Revolving Loans and L/C Exposure and participations in Term Loans and Revolving Loans and L/C Exposure held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Term Loans and Revolving Loans and L/C Exposure then outstanding as the principal amount of its Term Loans and Revolving Loans and L/C Exposure prior to such exercise of banker's lien, setoff or counterclaim or other event was to the principal amount of all Term Loans and Revolving Loans and L/C Exposure outstanding prior to such exercise of banker's lien, setoff or counterclaim or other event; provided, however, that if any such purchase or purchases or adjustments shall be made pursuant to this Section and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrower and Holding consent to the foregoing arrangements and agree that any Lender or any Affiliate of such Lender holding a participation in a Term Loan or Revolving Loan or L/C Disbursement deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by the Borrower and Holding or any other Credit Party or 49 Exhibit 10.1 any Affiliate of any Credit Party, to such Lender by reason thereof as fully as if such Lender had made a Loan directly to the Borrower in the amount of such participation. SECTION 2.19. Payments. (a) The Borrower shall make each payment (including principal of or interest on any Borrowing or any L/C Disbursement or any Fees or other amounts) hereunder and under any other Credit Document not later than 12:00 (noon), New York City time, on the date when due in immediately available dollars, without setoff, defense or counterclaim. Each such payment (other than (i) Issuing Bank Fees, which shall be paid directly to the Issuing Bank, and (ii) principal of and interest on Swingline Loans, which shall be paid directly to the Swingline Lender except as otherwise provided in Section 2.21(e)) shall be made to the Administrative Agent at its offices at identified in Annex 2. (b) Whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder or under any other Credit Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable. SECTION 2.20. Taxes. (a) Any and all payments by or on behalf of the Borrower or any Credit Party hereunder and under any other Credit Document shall be made, in accordance with Section 2.19, free and clear of and without deduction for any and all current or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding (i) taxes imposed on the net income of the Administrative Agent, any Lender or the Issuing Bank (or any transferee or assignee thereof, including a participation holder (any such entity a "Transferee")) and (ii) franchise taxes imposed on the net income of the Administrative Agent, any Lender or the Issuing Bank (or Transferee), in each case by the jurisdiction under the laws of which the Administrative Agent, such Lender or the Issuing Bank (or Transferee) is organized (or where its lending office is located) or any political subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities, collectively or individually, being called "Taxes"). If the Borrower or any Credit Party shall be required to deduct any Taxes from or in respect of any sum payable hereunder or under any other Credit Document to the Administrative Agent, any Lender or the Issuing Bank (or any Transferee), (i) the sum payable shall be increased by the amount (an "additional amount") necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent, such Lender or the Issuing Bank (or Transferee), as the case may be, shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower or such Credit Party shall make such deductions and (iii) the Borrower or such Credit Party shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower agrees to pay to the relevant Governmental Authority in accordance with applicable law any current or future stamp, documentary, excise, transfer, sales, property taxes, charges or similar levies (including mortgage recording taxes and similar fees) that arise from any payment made hereunder or under any other Credit Document or 50 Exhibit 10.1 from the execution, delivery, enforcement or registration of, or otherwise with respect to, this Agreement or any other Credit Document ("Other Taxes"). (c) The Borrower will indemnify the Administrative Agent, each Lender and the Issuing Bank (or Transferee) for the full amount of Taxes and Other Taxes paid by the Administrative Agent, such Lender or the Issuing Bank (or Transferee), as the case may be, and any liability (including penalties, interest and expenses (including reasonable attorney's fees and expenses (including the allocated costs of in-house legal counsel))) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability prepared by the Administrative Agent, a Lender or the Issuing Bank (or Transferee), or the Administrative Agent on its behalf showing calculations in reasonable detail, absent manifest error, shall be final, conclusive and binding for all purposes. Such indemnification shall be made within 30 days after the date the Administrative Agent, any Lender or the Issuing Bank (or Transferee), as the case may be, makes written demand therefor. (d) As soon as practicable after the date of any payment of Taxes or Other Taxes by the Borrower or any other Credit Party to the relevant Governmental Authority, the Borrower or such other Credit Party will deliver to the Administrative Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt issued by such Governmental Authority evidencing payment thereof. (e) Each Lender (or Transferee) that is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (a "Non-U.S. Lender") shall deliver to the Borrower and the Administrative Agent two copies of either United States Internal Revenue Service Form 1001 or Form 4224, or, in the case of a Non-U.S. Lender claiming exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest", a Form W-8, or any subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8, a certificate representing that such Non-U.S. Lender is not a bank for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and is not a controlled foreign corporation related to the Borrower (within the meaning of Section 864(d)(4) of the Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or reduced rate of, U.S. Federal withholding tax on payments by the Borrower under this Agreement and the other Credit Documents. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of a Transferee that is a participation holder, on or before the date such participation holder becomes a Transferee hereunder) and on or before the date, if any, such Non-U.S. Lender changes its applicable lending office by designating a different lending office (a "New Lending Office"). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Notwithstanding any other provision of this Section 2.20(e), a Non-U.S. Lender shall not be required to deliver any form pursuant to this Section 2.20(e) that such Non-U.S. Lender is not legally able to deliver. (f) The Borrower shall not be required to indemnify any Non-U.S. Lender or to pay any additional amounts to any Non-U.S. Lender, in respect of United States Federal withholding tax pursuant to clause (a) or (c) to the extent that (i) the obligation to withhold 51 Exhibit 10.1 amounts with respect to United States Federal withholding tax existed and would apply to payments made to such Non-U.S. Lender on the date such Non-U.S. Lender became a party to this Agreement (or, in the case of a Transferee that is a participation holder, on the date such participation holder became a Transferee hereunder) or, with respect to payments to a New Lending Office, the date such Non-U.S. Lender designated such New Lending Office with respect to a Loan; provided, however, that this clause shall not apply (x) to any Transferee or New Lending Office that becomes a Transferee or New Lending Office as a result of an assignment, participation, transfer or designation made at the request of the Borrower and (y) to the extent the indemnity payment or additional amounts any Transferee, or any Lender (or Transferee), acting through a New Lending Office, would be entitled to receive (without regard to this clause) do not exceed the indemnity payment or additional amounts that the person making the assignment, participation or transfer to such Transferee, or Lender (or Transferee) making the designation of such New Lending Office, would have been entitled to receive in the absence of such assignment, participation, transfer or designation or (ii) the obligation to pay such additional amounts would not have arisen but for a failure by such Non-U.S. Lender to comply with the provisions of clause (e). (g) Nothing contained in this Section shall require any Lender or the Issuing Bank (or any Transferee) or the Administrative Agent to make available any of its tax returns (or any other information that it deems to be confidential or proprietary). If any Lender receives a refund of any additional amount or any taxes paid by or on behalf of such Lender, such Lender will promptly pay such amount over to the Borrower. SECTION 2.21. Assignment of Commitments Under Certain Circumstances; Duty to Mitigate. (a) In the event (i) any Lender or the Issuing Bank delivers a certificate requesting compensation pursuant to Section 2.14, (ii) any Lender or the Issuing Bank delivers a notice described in Section 2.15 or (iii) the Borrower is required to pay any additional amount to any Lender or the Issuing Bank or any Governmental Authority on account of any Lender or the Issuing Bank pursuant to Section 2.20, the Borrower may, at its sole expense and effort (including with respect to the processing and recordation fee referred to in Section 9.04(b)), upon notice to such Lender or the Issuing Bank and the Administrative Agent, require such Lender or the Issuing Bank to transfer and assign, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all of its interests, rights and obligations under this Agreement to an assignee that shall assume such assigned obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (x) such assignment shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority having jurisdiction, (y) the Borrower shall have received the prior written consent of the Administrative Agent (and, if a Revolving Credit Commitment is being assigned, of the Issuing Bank and the Swingline Lender), which consent shall not unreasonably be withheld, and (z) the Borrower or such assignee shall have paid to the affected Lender or the Issuing Bank in immediately available funds an amount equal to the sum of the principal of and interest accrued to the date of such payment on the outstanding Loans or L/C Disbursements of such Lender or the Issuing Bank, respectively, plus all Fees and other amounts accrued for the account of such Lender or the Issuing Bank hereunder (including any amounts under Section 2.14 and Section 2.16); provided further that, if prior to any such transfer and assignment the circumstances or event that resulted in such Lender's or the Issuing Bank's claim for compensation under Section 2.14 or notice under Section 2.15 or the 52 Exhibit 10.1 amounts paid pursuant to Section 2.20, as the case may be, cease to cause such Lender or the Issuing Bank to suffer increased costs or reductions in amounts received or receivable or reduction in return on capital, or cease to have the consequences specified in Section 2.15, or cease to result in amounts being payable under Section 2.20, as the case may be (including as a result of any action taken by such Lender or the Issuing Bank pursuant to clause (b)), or if such Lender or the Issuing Bank shall waive its right to claim further compensation under Section 2.14 in respect of such circumstances or event or shall withdraw its notice under Section 2.15 or shall waive its right to further payments under Section 2.20 in respect of such circumstances or event, as the case may be, then such Lender or the Issuing Bank shall not thereafter be required to make any such transfer and assignment hereunder. (b) If (i) any Lender or the Issuing Bank shall request compensation under Section 2.14, (ii) any Lender or the Issuing Bank delivers a notice described in Section 2.15 or (iii) the Borrower is required to pay any additional amount to any Lender or the Issuing Bank or any Governmental Authority on account of any Lender or the Issuing Bank, pursuant to Section 2.20, then such Lender or the Issuing Bank shall use reasonable efforts (which shall not require such Lender or the Issuing Bank to incur an unreimbursed loss or unreimbursed cost or expense or otherwise take any action inconsistent with its internal policies or legal or regulatory restrictions or suffer any disadvantage or burden deemed by it to be significant) (x) to file any certificate or document reasonably requested in writing by the Borrower or (y) to assign its rights and delegate and transfer its obligations hereunder to another of its offices, branches or affiliates, if such filing or assignment would materially reduce its claims for compensation under Section 2.14 or enable it to withdraw its notice pursuant to Section 2.15 or would materially reduce amounts payable pursuant to Section 2.20, as the case may be, in the future. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender or the Issuing Bank in connection with any such filing or assignment, delegation and transfer. SECTION 2.22. Swingline Loans. (a) Swingline Commitment. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, the Swingline Lender agrees to make loans to the Borrower at any time and from time to time on and after the Closing Date and until the earlier of the Revolving Credit Maturity Date and the termination of the Revolving Credit Commitments in accordance with the terms hereof, in an aggregate principal amount at any time outstanding that will not result in (i) the aggregate principal amount of all Swingline Loans exceeding $5,000,000 in the aggregate or (ii) the Aggregate Revolving Credit Exposure, after giving effect to any Swingline Loan, exceeding the Total Revolving Credit Commitment. Each Swingline Loan shall be in a principal amount that is an integral multiple of $100,000. The Swingline Commitment may be terminated or reduced from time to time as provided herein. Within the foregoing limits, the Borrower may borrow, pay or prepay and reborrow Swingline Loans hereunder, subject to the terms, conditions and limitations set forth herein. (b) Swingline Loans. The Borrower shall notify the Administrative Agent by telecopy or by telephone, not later than 1:00 p.m., New York City time, on the day of a proposed Swingline Loan. Such notice shall be delivered on a Business Day, shall be irrevocable and shall refer to this Agreement. Promptly after such notification, the Borrower shall hand deliver or telecopy to the Administrative Agent a duly completed Borrowing Request confirming such notification. Each such Borrowing Request shall be signed by or on behalf of the Borrower and 53 Exhibit 10.1 shall specify: (i) that the Borrower is requesting a Swingline Loan, (ii) the requested date of such Swingline Loan (which shall be a Business Day), (iii) the number and location of the account to which funds are to be disbursed (which shall be an account that complies with the requirements of Section 2.02(c)), and (iv) the amount of such Swingline Loan. The Administrative Agent will promptly advise the Swingline Lender of any notice received from the Borrower pursuant to this clause. The Swingline Lender shall make each Swingline Loan available to the Borrower by means of a credit to the account specified in the Borrowing Request by 4:00 p.m., New York City time, on the date such Swingline Loan is so requested. (c) Prepayment. The Borrower shall have the right at any time and from time to time to prepay any Swingline Loan, in whole or in part, upon giving written or telecopy notice (or telephone notice promptly confirmed by written, or telecopy notice) to the Swingline Lender and to the Administrative Agent before 12:00 (noon), New York City time on the date of prepayment at the Swingline Lender's address for notices specified on Annex 2. (d) Interest. Each Swingline Loan shall be an ABR Loan and, subject to the provisions of Section 2.07, shall bear interest as provided in Section 2.06(a). (e) Conversion to Revolving Loans. With respect to any Swingline Loans, the Swingline Lender may, at any time in its sole and absolute discretion, deliver to Administrative Agent (with a copy to the Borrower ) no later than 11:00 a.m. (New York City time) on the first Business Day in advance of the proposed Funding Date, a notice (which shall be deemed to be a Borrowing Request given by the Borrower) requesting the Lenders to make Revolving Loans that are ABR Loans on such Funding Date in an amount equal to the amount of such Swing Line Loans outstanding on the date such notice is given which Swing Line Lender requests the Lenders to prepay; provided, however, that the obligations of the Lenders to fund such Borrowing shall not be subject to Section 4.01. (f) Participations. Upon the Borrowing of a Swingline Loan, each Revolving Credit Lender shall be deemed to have automatically acquired a unfunded participation in such Swingline Loan proportional to its Applicable Percentage. Upon demand by the Swingline Lender, or automatically upon the occurrence of an Event of Default under Section 7.01(g) or (h), each Revolving Credit Lender shall fund such participation by paying to the Administrative Agent, for the account of the Swingline Lender, such Revolving Credit Lender's Applicable Percentage of such Swingline Loan, together with interest accruing on such participation amount from the date of such Event of Default or such demand, as the case may be, at the Federal Funds Effective Rate for the first day, and for each day thereafter, the rate of interest then applicable to ABR Revolving Loans. Each Lender acknowledges and agrees that its obligation to acquire participations in Swingline Loans pursuant to this clause is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or an Event of Default, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Lender shall comply with its obligation under this clause by wire transfer of immediately available funds, in the same manner as provided in Section 2.02(c) with respect to Loans made by such Lender and the Administrative Agent shall promptly pay to the Swingline Lender the amounts so received by it from the Lenders. The Administrative Agent shall notify the Borrower of any participations in any Swingline Loan acquired pursuant to this clause and thereafter payments in respect of such Swingline Loan shall be made to the Administrative Agent and not to the Swingline Lender. Any amounts received by 54 Exhibit 10.1 the Swingline Lender from the Borrower (or other party on behalf of the Borrower) in respect of a Swingline Loan after receipt by the Swingline Lender of the proceeds of a sale of participations therein shall be promptly remitted to the Administrative Agent; any such amounts received by the Administrative Agent shall be promptly remitted by the Administrative Agent to the Lenders that shall have made their payments pursuant to this clause and to the Swingline Lender, as their interests may appear. The purchase of participations in a Swingline Loan pursuant to this clause shall not relieve the Borrower (or other party liable for obligations of the Borrower) of any default in the payment thereof. If for any reason the Revolving Credit Commitments are terminated at a time when any Swing Line Loans are outstanding, each Lender shall be deemed to have purchased, and hereby agrees to purchase, a participation in such outstanding Swing Line Loans in an amount equal to its Applicable Percentage calculated immediately prior to such termination of the Revolving Credit Commitments ) of the unpaid amount of such Swing Line Loans together with accrued interest thereon. Upon one Business Day's notice from the Swingline Lender, each Lender shall deliver to the Swingline Lender an amount equal to its respective participation in same day funds to the Administrative Agent at its offices identified in Annex 2. In order to further evidence such participation (and without prejudice to the effectiveness of the participation provisions set forth above), each Lender shall enter into a separate participation agreement at the request of the Swingline Lender in form and substance reasonably satisfactory to such Lender and the Swingline Lender. If any Lender fails to make available to the Swingline Lender the amount of such Lender's participation as provided in this paragraph, the Swingline Lender shall be entitled to recover such amount of demand from such Lender together with interest thereon at the Federal Funds Effective Rate for one Business Day and thereafter at the rate applicable to ABR Revolving Loans. If the Swingline Lender receives a payment of any amount in which other Lenders have purchased participations as provided in the Paragraph, the Swingline Lender shall promptly distribute to each such other Lender its Applicable Percentage of such payment. SECTION 2.23. Letters of Credit. (a) General. The Borrower may request the issuance of a Letter of Credit for its own account, by delivering a Letter of Credit Request at any time and from time to time while the Revolving Credit Commitments remain in effect. This Section shall not be construed to impose an obligation upon the Issuing Bank to issue any Letter of Credit that is inconsistent with the terms and conditions of this Agreement. (b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. In order to request the issuance of a Letter of Credit (or to amend, renew or extend an existing Letter of Credit), the Borrower shall hand deliver or telecopy to the Issuing Bank and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a Letter of Credit Request requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, the date of issuance, amendment, renewal or extension, the date on which such Letter of Credit is to expire (which shall comply with clause (c)), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare such Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if, and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that, after giving effect to such issuance, amendment, renewal or 55 Exhibit 10.1 extension (A) the L/C Exposure shall not exceed $7,500,000 and (B) the Aggregate Revolving Credit Exposure shall not exceed the Total Revolving Credit Commitment. (c) Expiration Date. Each Letter of Credit shall expire at the close of business no later than the first anniversary of the date of the issuance of such Letter of Credit, unless such Letter of Credit expires by its terms on an earlier date; provided, however, that this clause shall not prevent any Issuing Bank from agreeing that a Letter of Credit will automatically be extended for one or more successive periods not to exceed one year each unless such Issuing Bank elects not to extend for any such additional period. Notwithstanding the foregoing, no Letter of Credit shall expire later than the fifth Business Days prior to the Revolving Credit Maturity Date. (d) Participations. By the issuance of a Letter of Credit and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Revolving Credit Lender, and each such Lender hereby acquires from the applicable Issuing Bank, a participation in such Letter of Credit equal to such Lender's Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit, effective upon the issuance of such Letter of Credit. In consideration and in furtherance of the foregoing, each Revolving Credit Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Lender's Applicable Percentage of each L/C Disbursement made by the Issuing Bank and not reimbursed by the Borrower (or, if applicable, another party pursuant to its obligations under any other Credit Document) forthwith on the date due as provided in Section 2.02(e). Each Revolving Credit Lender acknowledges and agrees that its obligation to acquire participations pursuant to this clause in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or an Event of Default, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. (e) Reimbursement. If the Issuing Bank shall make any L/C Disbursement in respect of a Letter of Credit, the Borrower shall pay to the Issuing Bank an amount equal to such L/C Disbursement on the same Business Day on which the Borrower shall have received notice from the Issuing Bank that payment of such draft will be made, or, if the Borrower shall have received such notice later than 12:00 noon, New York City time, on any Business Day, not later than 11:00 a.m., New York City time, on the immediately following Business Day. (f) Obligations Absolute. The Borrower's obligations to reimburse L/C Disbursements as provided in clause (e) shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under any and all circumstances whatsoever, and irrespective of: (i) any lack of validity or enforceability of any Letter of Credit or any Credit Document, or any term or provision therein; (ii) any amendment or waiver of or any consent to departure from all or any of the provisions of any Letter of Credit or any Credit Document; (iii) the existence of any claim, setoff, defense or other right that the Borrower, any other party guaranteeing, or otherwise obligated with, the Borrower, any Subsidiary or other Affiliate thereof or any other person may at any time have against the beneficiary 56 Exhibit 10.1 under any Letter of Credit, the Issuing Bank, the Administrative Agent or any Lender or any other person, whether in connection with this Agreement, any other Credit Document or any other related or unrelated agreement or transaction; (iv) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (v) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit; and (vi) any other act or omission to act or delay of any kind of the Issuing Bank, the Lenders, the Administrative Agent or any other person or any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of the Borrower's obligations hereunder. Without limiting the generality of the foregoing, it is expressly understood and agreed that the absolute and unconditional obligation of the Borrower hereunder to reimburse L/C Disbursements will not be excused by the gross negligence or wilful misconduct of the Issuing Bank. However, the foregoing shall not be construed to excuse the Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Issuing Bank's gross negligence or wilful misconduct in determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof; it is understood that the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary and, in making any payment under any Letter of Credit (i) the Issuing Bank's exclusive reliance on the documents presented to it under such Letter of Credit as to any and all matters set forth therein, including reliance on the amount of any draft presented under such Letter of Credit, whether or not the amount due to the beneficiary thereunder equals the amount of such draft and whether or not any document presented pursuant to such Letter of Credit proves to be insufficient in any respect, if such document on its face appears to be in order, and whether or not any other statement or any other document presented pursuant to such Letter of Credit proves to be forged or invalid or any statement therein proves to be inaccurate or untrue in any respect whatsoever and (ii) any noncompliance in any immaterial respect of the documents presented under such Letter of Credit with the terms thereof shall, in each case, be deemed not to constitute wilful misconduct or gross negligence of the Issuing Bank. (g) Disbursement Procedures. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall as promptly as possible give telephonic notification, confirmed by telecopy, to the Administrative Agent and the Borrower of such demand for payment and whether the Issuing Bank has made or will make an L/C Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Issuing Bank and the Revolving Credit Lenders with respect to any 57 Exhibit 10.1 such L/C Disbursement. The Administrative Agent shall promptly give each Revolving Credit Lender notice thereof. (h) Interim Interest. If the Issuing Bank shall make any L/C Disbursement in respect of a Letter of Credit, then, unless the Borrower shall reimburse such L/C Disbursement in full on such date, the unpaid amount thereof shall bear interest for the account of the Issuing Bank, for each day from and including the date of such L/C Disbursement, to but excluding the earlier of the date of payment by the Borrower or the date on which interest shall commence to accrue thereon as provided in Section 2.02(e), at the rate per annum that would apply to such amount if such amount were an ABR Loan. (i) Resignation or Removal of the Issuing Bank. The Issuing Bank may resign at any time by giving 180 days' prior written notice to the Administrative Agent, the Lenders and the Borrower, and may be removed at any time by the Borrower by notice to the Issuing Bank, the Administrative Agent and the Lenders, to be effective only upon the appointment of a successor Issuing Bank pursuant to the following sentence. Subject to the next succeeding clause, upon the acceptance of any appointment as the Issuing Bank hereunder by a Lender that shall agree to serve as successor Issuing Bank, such successor shall succeed to and become vested with all the interests, rights and obligations of the retiring Issuing Bank and the retiring Issuing Bank shall be discharged from its obligations to issue additional Letters of Credit hereunder. At the time such removal or resignation shall become effective, the Borrower shall pay all accrued and unpaid fees pursuant to Section 2.05(d)(ii). The acceptance of any appointment as the Issuing Bank hereunder by a successor Lender shall be evidenced by an agreement entered into by such successor, in a form satisfactory to the Borrower and the Administrative Agent, and, from and after the effective date of such agreement, (i) such successor Lender shall have all the rights and obligations of the previous Issuing Bank under this Agreement and the other Credit Documents and (ii) references herein and in the other Credit Documents to the term "Issuing Bank" shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the resignation or removal of the Issuing Bank hereunder, the retiring Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement and the other Credit Documents with respect to Letters of Credit issued by it prior to such resignation or removal, but shall not be required to issue additional Letters of Credit. (j) Cash Collateralization. If any Event of Default shall occur and be continuing, the Borrower shall, on the Business Day it receives notice from the Administrative Agent or the Required Lenders (or, if the maturity of the Loans has been accelerated, Revolving Credit Lenders holding participations in outstanding Letters of Credit representing greater than 50% of the aggregate undrawn amount of all outstanding Letters of Credit) thereof and of the amount to be deposited, deposit in an account with the Collateral Agent, for the benefit of the Revolving Credit Lenders, an amount in cash equal to the L/C Exposure as of such date. Such deposits shall be held by the Collateral Agent as collateral for the payment and performance of the Obligations. The Collateral Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Such deposits shall be invested in Permitted Investments, to be selected by the Issuing Bank in its sole discretion, and interest earned on such deposits shall be deposited in such account as additional collateral for the payment and performance of the Obligations. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall (i) automatically be applied by the Administrative 58 Exhibit 10.1 Agent to reimburse the Issuing Bank for L/C Disbursements for which it has not been reimbursed, (ii) be held for the satisfaction of the reimbursement obligations of the Borrower for the L/C Exposure at such time and (iii) if the maturity of the Loans has been accelerated (but subject to the consent of Revolving Credit Lenders holding participations in outstanding Letters of Credit representing greater than 50% of the aggregate undrawn amount of all outstanding Letters of Credit), be applied to satisfy the Obligations. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three Business Days after all Events of Default have been cured or waived. (k) Additional Issuing Banks. The Borrower may, at any time and from time to time with the consent of the Administrative Agent (which consent shall not be unreasonably withheld) and such Lender, designate one or more additional Lenders to act as an issuing bank under the terms of the Agreement. Any Lender designated as an issuing bank pursuant to this clause shall be deemed to be an "Issuing Bank" (in addition to being a Lender) in respect of Letters of Credit issued or to be issued by such Lender, and, with respect to such Letters of Credit, such term shall thereafter apply to the other Issuing Bank and such Lender. ARTICLE III Representations and Warranties Each of Holding and the Borrower represents and warrants to the Administrative Agent, the Collateral Agent, the Issuing Bank and each of the Lenders that: SECTION 3.01. Organization; Powers. Each of Holding, the Borrower and each of the Subsidiaries (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted, (c) is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required, except where the failure so to qualify could not reasonably be expected to result in a Material Adverse Effect, and (d) has the corporate power and authority to execute, deliver and perform its obligations under each of the Credit Documents and each other agreement or instrument contemplated hereby to which it is or will be a party and, in the case of the Borrower, to borrow hereunder. SECTION 3.02. Authorization. The execution, delivery and performance by each Credit Party of each of the Credit Documents and the borrowings hereunder (collectively, the "Transactions") and the Recapitalization (a) have been duly authorized by all requisite corporate and, if required, stockholder action and (b) will not (i) violate (A) any provision of law, statute, rule or regulation, or of the certificate or articles of incorporation or other constitutive documents or by-laws of Holding, the Borrower or any Subsidiary other than any violation which will not have a Material Adverse Effect or the effect (if any) of Chapter 5 of the California Corporations Code, (B) any order of any Governmental Authority or (C) any provision of any indenture, agreement or other instrument to which Holding, the Borrower or any Subsidiary is a party or by which any of them or any of their property is or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under, or give rise 59 Exhibit 10.1 to any right to accelerate or to require the prepayment, repurchase or redemption of any obligation under any such indenture, agreement or other instrument or (iii) result in the creation or imposition of any Lien upon or with respect to any property or assets now owned or hereafter acquired by Holding, the Borrower or any Subsidiary (other than any Lien created hereunder or under the Security Documents). SECTION 3.03. Enforceability. This Agreement has been duly executed and delivered by Holding and the Borrower and constitutes, and each other Credit Document when executed and delivered by the each Credit Party thereto will constitute, a legal, valid and binding obligation of such Credit Party enforceable against such Credit Party in accordance with its terms. SECTION 3.04. Governmental Approvals and Licenses. No action, consent or approval of, registration or filing with or any other action by any Governmental Authority is or will be required in connection with the Transactions and the Recapitalization, except for (a) the filing of Uniform Commercial Code financing statements and filings with the United States Patent and Trademark Office and the United States Copyright Office, (b) recordation of the Mortgages and (c) such as have been made or obtained and are in full force and effect. The Borrower and its Subsidiaries have all licenses, permits, approvals, qualifications, consents, certificates of needs and accreditations (where such are required) and other authorizations necessary for the lawful conduct of their respective businesses or operations wherever now conducted and as planned to be conducted, pursuant to all applicable statutes, laws, ordinances, rules and regulations of all Governmental Authorities having, asserting or claiming jurisdiction over the Borrower and its Subsidiaries on a consolidated basis, except where such failure would not have a Material Adverse Effect. Copies of all such licenses, permits, approvals, qualifications, consents and other authorizations shall be provided to the Administrative Agent upon request. The Borrower and its Subsidiaries are not in default under any of such licenses, permits, approvals, consents, qualifications or authorizations and no event has occurred, and no condition exists, which, with the giving of notice, the passage of time, or both, would constitute a default thereunder or would result in the suspension, revocation, impairment, forfeiture or non-renewal of any such permit, license, authorization or accreditation, except where such failure would not have a Material Adverse Effect. The continuation, validity and effectiveness of all such licenses, permits, approvals, consents, qualifications and authorizations will in no way be adversely affected by the transactions contemplated by this Agreement, except where such a failure of continuation, validly or effectiveness would not have a Material Adverse Effect. The Borrower and its Subsidiaries know of no reason why they will not be able to maintain after the Closing Date all licenses, permits, approvals, consents, qualifications, accreditations and other authorizations necessary or appropriate to own and operate their respective current businesses and to obtain such licenses, permits, approvals, consents, qualifications and other authorizations necessary to own and operate their respective current businesses, and otherwise conduct the business of the Borrower and its Subsidiaries as now conducted and presently proposed to be conducted. SECTION 3.05. Financial Statements. (a) The Borrower has heretofore furnished to the Lenders its consolidated and consolidating balance sheets and statements of income and changes in financial condition as of and for the fiscal year ended December 26, 1997, audited by and accompanied by the opinion of Arthur Andersen LLP, independent public accountants. Such financial statements present fairly the financial condition and results of operations and cash flows of the Borrower and its 60 Exhibit 10.1 consolidated Subsidiaries as of such dates and for such periods. Such balance sheets and the notes thereto disclose all material liabilities, direct or contingent, of the Borrower and its consolidated Subsidiaries as of the dates thereof. Such financial statements were prepared in accordance with GAAP applied on a consistent basis. (b) The Borrower has heretofore delivered to the Lenders its unaudited pro forma consolidated balance sheet as of December 26, 1997 and monthly operating statements for January and February 1998, prepared giving effect to the Recapitalization as if it had occurred on such date. Such pro forma balance sheet and monthly operating statements has been prepared in good faith by the Borrower, based on the assumptions used to prepare the pro forma financial information contained in the Confidential Information Memorandum (which assumptions are believed by the Borrower on the Closing Date to be reasonable), is based on the best information available to the Borrower as of the date of delivery thereof, accurately reflects all adjustments required to be made to give effect to the Recapitalization and presents fairly on a pro forma basis the estimated consolidated financial position of the Borrower and its consolidated Subsidiaries as of such date, assuming that the Recapitalization had actually occurred at such date. SECTION 3.06. No Material Adverse Change. There has been no material adverse change in the business, assets, operations, prospects, condition, financial or otherwise, or material agreements of Holding, the Borrower and the Subsidiaries, taken as a whole, since January 1, 2002. SECTION 3.07. Title to Properties; Possession Under Leases. (a) Each of Holding, the Borrower and the Subsidiaries has good and marketable title to, or valid leasehold interests in, all its material properties and assets (including all Mortgaged Property), except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes. All such material properties and assets of Holding, Borrower and Borrower's Restricted Subsidiaries are free and clear of Liens, other than Liens expressly permitted by Section 6.02. (b) Except as set forth on Schedule 3.07(b), each of Holding, the Borrower and Borrower's Restricted Subsidiaries has complied in all material respects with all obligations under all material leases to which it is a party and all such leases are in full force and effect. Each of Holding, the Borrower and the Subsidiaries enjoys peaceful and undisturbed possession under all such material leases, except where failure to have such possession will not have a Material Adverse Effect. (c) Except as set forth on Schedule 3.07(c), neither Holding nor the Borrower has received any written notice of, nor has any knowledge of, any pending or contemplated condemnation proceeding affecting the Mortgaged Properties or any sale or disposition thereof in lieu of condemnation. (d) None of Holding, the Borrower or any of the Subsidiaries is obligated under any right of first refusal, option or other contractual right to sell, assign or otherwise dispose of any Mortgaged Property or any interest therein. 61 Exhibit 10.1 SECTION 3.08. Subsidiaries. Schedule 3.08 sets forth as of the Effective Date a list of all Subsidiaries and the percentage ownership interest of Holding or the Borrower therein. The shares of capital stock or other ownership interests so indicated on Schedule 3.08 are fully paid and non-assessable and are owned by Holding or the Borrower, directly or indirectly, free and clear of all Liens. SECTION 3.09. Litigation; Compliance with Laws. (a) Except as set forth on Schedule 3.09, there are not any actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to the knowledge of Holding or the Borrower, threatened against or affecting Holding or the Borrower or any Subsidiary or any business, property or rights of any such person (i) that involve any Credit Document, the Transactions or the Recapitalization, or that purport to affect the ability of the parties to consummate the Transactions or the Recapitalization, or (ii) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect. (b) None of Holding, the Borrower or any of the Subsidiaries or any of their respective material properties or assets is in violation of, nor will the continued operation of their material properties and assets as currently conducted violate, any law, rule or regulation (including any zoning, building, Environmental Law, ordinance, code or approval or any building permits) or any restrictions of record or agreements affecting the Mortgaged Property, or is in default with respect to any judgment, writ, injunction, decree or order of any Governmental Authority, where such violation or default could reasonably be expected to result in a Material Adverse Effect. SECTION 3.10. Default in Material Agreements. Other than as set forth in Schedule 3.10, none of Holding, the Borrower or any of the Subsidiaries is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default could reasonably be expected to result in a Material Adverse Effect. SECTION 3.11. Federal Reserve Regulations. (a) None of Holding, the Borrower or any of the Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock. (b) No part of the proceeds of any Loan or any Letter of Credit will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, for any purpose that entails a violation of, or that is inconsistent with, the provisions of the Regulations of the Board, including Regulation T, U or X. SECTION 3.12. Investment Company Act; Public Utility Holding Company Act. None of Holding, the Borrower or any Subsidiary is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. 62 Exhibit 10.1 SECTION 3.13. Use of Proceeds. (a) The proceeds of the Term Loans shall be used solely to pay a portion of the Redemption Amount in connection with the Recapitalization, to repay the Indebtedness to be Paid, and pay a portion of the Transaction Costs. (b) The proceeds of the Revolving Loans may be used for working capital and general corporate purposes of the Borrower (including Permitted Acquisitions); provided, however, that (i) no more than $0 of Revolving Loans may be borrowed on the Closing Date, and (ii) the proceeds of any Revolving Loan made pursuant to Section 2.22(e) shall be applied only to repay Swingline Loans. (c) The proceeds of the Swingline Loans may be used for working capital and general corporate purposes of the Borrower; provided, however, that no Swingline Loans may be borrowed on the Closing Date. (d) The Letters of Credit may be used for general corporate purposes. (e) Notwithstanding anything in this Agreement to the contrary, but subject to Section 2.01(b) on and after the Fifth Amendment Effective Date, (1) not more than $40,000,000 of the Aggregate Revolving Credit Exposure outstanding at any time shall have been used by the Borrower for purposes of Permitted Acquisitions pursuant to Section 6.04(c) (the "Acquisition Loans"), (2) not more than $15,000,000 of the Aggregate Revolving Credit Exposure outstanding at any time may be used by the Borrower for any corporate purpose other than Permitted Acquisitions (the "Working Capital Loans"), and (3) no further Acquisition Loans will be made to the Borrower. SECTION 3.14. Tax Returns. Each of Holding, the Borrower and the Subsidiaries has filed or caused to be filed all Federal, state, local and foreign tax returns or materials required to have been filed by it and has paid or caused to be paid all taxes due and payable by it and all assessments received by it, except taxes that are being contested in good faith by appropriate proceedings and for which Holding, the Borrower or such Subsidiary, as applicable, shall have set aside on its books adequate reserves in accordance with GAAP. SECTION 3.15. No Material Misstatements. None of (a) the Confidential Information Memorandum or (b) any other information, report, financial statement, exhibit or schedule furnished by or on behalf of Holding or the Borrower to the Administrative Agent or any Lender in connection with the negotiation of any Credit Document or included therein or delivered pursuant thereto contained, contains or will contain any material misstatement of fact or omitted, omits or will omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were, are or will be made, not misleading; provided that to the extent any such information, report, financial statement, exhibit or schedule was based upon or constitutes a forecast or projection, each of Holding and the Borrower represents only that it acted in good faith and utilized reasonable assumptions and due care in the preparation of such information, report, financial statement, exhibit or schedule. SECTION 3.16. Employee Benefit Plans. Each of the Borrower and its ERISA Affiliates is in compliance in all material respects with the applicable provisions of ERISA and the Code and the regulations and published interpretations thereunder. No ERISA Event has occurred 63 Exhibit 10.1 or is reasonably expected to occur that, when taken together with all other such ERISA Events, could reasonably be expected to result in material liability of the Borrower or any of its ERISA Affiliates. The present value of all benefit liabilities under each Plan (based on those assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed by more than $1,000,000 the fair market value of the assets of such Plan, and the present value of all benefit liabilities of all underfunded Plans (based on those assumptions used to fund each such Plan) did not, as of the last annual valuation dates applicable thereto, exceed by more than $1,000,000 the fair market value of the assets of all such underfunded Plans. SECTION 3.17. Environmental Matters. Except as set forth in Schedule 3.17: (a) The real properties owned or operated by Holding, the Borrower and the Subsidiaries (the "Environmental Properties") do not contain any Hazardous Materials in amounts or concentrations which (i) constitute, or constituted a violation of, (ii) require Remedial Action under, or (iii) could give rise to liability under, Environmental Laws, which violations, Remedial Actions and liabilities, in the aggregate, could reasonably be expected to result in a Material Adverse Effect; (b) The Environmental Properties and all operations of the Borrower and the Subsidiaries are in compliance, and in the last five years have been in compliance, with all Environmental Laws and all necessary Environmental Permits have been obtained and are in effect, except to the extent that such non-compliance or failure to obtain any necessary permits, in the aggregate, could not reasonably be expected to result in a Material Adverse Effect; (c) There have been no Releases or threatened Releases at, from, under or proximate to the Environmental Properties or otherwise in connection with the operations of the Borrower or the Subsidiaries, which Releases or threatened Releases, in the aggregate, could reasonably be expected to result in a Material Adverse Effect; (d) None of Holding, the Borrower or any of the Subsidiaries has received any Environmental Claim in connection with the Environmental Properties or the operations of the Borrower or the Subsidiaries or with regard to any person whose liabilities for environmental matters Holding, the Borrower or the Subsidiaries has retained or assumed, in whole or in part, contractually, by operation of law or otherwise, which, in the aggregate, could reasonably be expected to result in a Material Adverse Effect, nor do Holding, the Borrower or the Subsidiaries have reason to believe that any such notice will be received or is being threatened; and (e) Hazardous Materials have not been transported from the Environmental Properties, nor have Hazardous Materials been generated, treated, stored or disposed of at, on or under any of the Environmental Properties in a manner that could give rise to liability under any Environmental Law, nor have the Borrower or the Subsidiaries retained or assumed any liability, contractually, by operation of law or otherwise, with respect to the generation, treatment, storage or disposal of Hazardous Materials, which transportation, generation, treatment, storage or disposal, or retained or assumed liabilities, in the aggregate, could reasonably be expected to result in a Material Adverse Effect. SECTION 3.18. Insurance. Schedule 3.18 sets forth a true, complete and correct description of all insurance maintained by the Borrower or by the Borrower for its Restricted 64 Exhibit 10.1 Subsidiaries as of the Effective Date. As of each such date, such insurance is in full force and effect and all premiums have been duly paid. The Borrower and its Subsidiaries have insurance in such amounts and covering such risks and liabilities as are in accordance with normal industry practice. SECTION 3.19. Security Documents. (a) The Pledge Agreement is effective to create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the Pledge Agreement) and, when the Collateral is delivered to the Collateral Agent, the Pledge Agreement shall constitute a fully perfected first priority Lien on, and security interest in, all right, title and interest of the pledgors thereunder in such Collateral, in each case prior and superior in right to any other person. (b) The Security Agreement and the other Security Documents (other than the Pledge Agreement and the Mortgages) are effective to create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the Security Agreement and the other Security Documents (other than the Pledge Agreement and the Mortgages)) and, when financing statements in appropriate form are filed in the offices specified on Schedule 6 to the Perfection Certificate, the Security Agreement and the other Security Documents (other than the Pledge Agreement and the Mortgages) shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the grantors thereunder in such Collateral (other than the Intellectual Property, as defined in the Security Agreement), in each case to the extent such security interests can be so perfected by such filings, and prior and superior in right to any other person, other than with respect to Liens expressly permitted by Section 6.02. (c) When the Security Agreement is filed in the United States Patent and Trademark Office and the United States Copyright Office, the Security Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the grantors thereunder in the Intellectual Property (as defined in the Security Agreement), in each case to the extent such security interests can be so perfected by such filings, and prior and superior in right to any other person (it being understood that subsequent recordings in the United States Patent and Trademark Office and the United States Copyright Office may be necessary to perfect a lien on registered trademarks, trademark applications and copyrights acquired by the grantors after the Closing Date). (d) The Mortgages are effective to create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable Lien on all of the Credit Parties' right, title and interest in and to the Mortgaged Property thereunder and the proceeds thereof, and when the Mortgages are filed in the offices specified on Schedule 3.19(d), the Mortgages shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Credit Parties in such Mortgaged Property and the proceeds thereof, in each case prior and superior in right to any other person, other than with respect to the rights of persons pursuant to Liens expressly permitted by Section 6.02. 65 Exhibit 10.1 SECTION 3.20. Location of Real Property and Leased Premises. (a) Schedule 3.20(a) lists completely and correctly as of the Effective Date all real property owned by the Borrower and the Restricted Subsidiaries and the addresses thereof. The Borrower and the Restricted Subsidiaries own in fee all the real property set forth on Schedule 3.20(a). (b) Schedule 3.20(b) lists completely and correctly as of the Effective Date all real property leased by the Borrower and the Restricted Subsidiaries and the addresses thereof. The Borrower and the Restricted Subsidiaries have valid leases in all the real property set forth on Schedule 3.20(b). SECTION 3.21. Labor Matters. As of the Effective Date, there are no strikes, lockouts or slowdowns against Holding, the Borrower or any Subsidiary pending or, to the knowledge of Holding or the Borrower, threatened. The hours worked by and payments made to employees of Holding, the Borrower and the Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters except where such a violation would not have a Material Adverse Effect. All payments due from Holding, the Borrower or any Subsidiary, or for which any claim may be made against Holding, the Borrower or any Subsidiary, on account of wages and employee health and welfare insurance and other benefits, have been paid or accrued as a liability on the books of Holding, the Borrower or such Subsidiary. The consummation of the Transactions and the Recapitalization will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which Holding, the Borrower or any Subsidiary is bound. SECTION 3.22. Solvency. Immediately after the consummation of the Transactions to occur on the Effective Date, (i) the fair value of the assets of each Credit Party, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise; (ii) the present fair saleable value of the property of each Credit Party will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (iii) each Credit Party will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (iv) each Credit Party will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Effective Date. ARTICLE IV Conditions of Lending The obligations of the Lenders to make Loans (other than a Borrowing pursuant to Section 2.2(e)) and of the Issuing Bank to issue Letters of Credit hereunder are subject to the satisfaction of the following conditions (it being understood for purposes of this Section that making a Loan or Borrowing does not include a change or continuation of the Type of, or a duration of the Interest Period applicable to, a previously outstanding Borrowing pursuant to Section 2.10): 66 Exhibit 10.1 SECTION 4.01. All Credit Events. On the date of each Borrowing (other than a Borrowing pursuant to Section 2.02(e)), including each Borrowing of a Swingline Loan and on the date of each issuance of a Letter of Credit (each such event being called a "Credit Event"): (a) Borrowing Request. The Administrative Agent shall have received a notice of such Borrowing as required by Section 2.03 or, in the case of the issuance of a Letter of Credit, the Issuing Bank and the Administrative Agent shall have received a notice requesting the issuance of such Letter of Credit as required by Section 2.23(b) or, in the case of the Borrowing of a Swingline Loan, the Swingline Lender and the Administrative Agent shall have received a notice requesting such Swingline Loan as required by Section 2.22(b). (b) Representations and Warranties. Except in the case of a Borrowing that does not increase the aggregate principal amount of Loans outstanding of any Lender, the representations and warranties set forth in Article III hereof shall be true and correct in all material respects on and as of the date of such Credit Event with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. (c) No Default. The Borrower and each other Credit Party shall be in compliance with all the terms and provisions set forth herein and in each other Credit Document on its part to be observed or performed, and at the time of and immediately after such Credit Event, no Event of Default or Default shall have occurred and be continuing. (d) No Cash Hoarding. The sum of cash constituting collected and available balances in deposit accounts and Permitted Investments of Borrower and its Restricted Subsidiaries minus any amount being held to pay interest on the Senior Subordinated Notes and/or to make principal and/or interest payments on the Loans within three Business Days does not exceed $5,000,000 or such larger amount as may be approved in writing by Administrative Agent. Each Credit Event shall be deemed to constitute a representation and warranty by the Borrower and Holding on the date of such Credit Event as to the matters specified in clauses (b) (except as aforesaid), (c) and (d) of this Section. SECTION 4.02. Conditions Precedent to Effective Date. On the Effective Date: (a) Purchase and Exchange of Term Notes. Freeman Spogli or its Affiliates shall have purchased from Lenders on a pro rata basis not less than $12,000,000 in Term Loans (the "Purchased Term Loans"), which Purchased Term Loans shall be immediately exchanged by Freeman Spogli or such Affiliates for an equivalent principal amount of Borrower's unsecured Senior Notes, in each case in accordance with the terms of the Master Assignment and Exchange Agreement. Upon exchange of the Purchased Term Loans for Senior Notes, the holders of such Purchased Term Loans and/or Senior Notes shall have no rights with respect to this Agreement or any other Loan Documents, any Loans or Revolving Credit Commitments outstanding hereunder. (b) Loan to HRC Holding. Freeman Spogli or its Affiliates shall have purchased for cash not less than $8,000,000 in aggregate principal amount of HRC Holding Senior Notes. 67 Exhibit 10.1 (c) Purchase of Intercompany Receivable. HRC Holding shall have purchased from Borrower for cash not less than $8,000,000 in an Intercompany Receivable due to Borrower from Hudson Euro Co S.a.r.l and its Subsidiaries. (d) Financial Statements. Borrower shall have delivered to Lenders drafts of the financial statements required to be delivered pursuant to Section 5.04(a) and the related certificates required to be delivered pursuant to Sections 5.04(d) and (e) with respect to Borrower's fiscal year ending on or about December 28, 2001, which draft financial statements shall be in form and substance satisfactory to Administrative Agent. (e) Opinions. The Administrative Agent shall have received, on behalf of itself, the Lenders and the Issuing Bank, a favorable written opinion of Riordan & McKinzie, special California counsel for Holding and the Borrower, substantially to the effect set forth in Exhibit P (A) dated the Effective Date, (B) addressed to the Administrative Agent, the Issuing Bank, the Collateral Agent and the Lenders, and (C) covering such other matters relating to the Credit Documents and the Transactions as the Administrative Agent shall reasonably request, and each of Holding and the Borrower hereby requests such counsel to deliver such opinions. (f) Legal Matters. All legal matters incident to this Agreement, the Borrowings and extensions of credit hereunder and the other Credit Documents shall be satisfactory to the Lenders, to the Issuing Bank and to O'Melveny & Myers, counsel for the Administrative Agent. (g) Organizational Documents. The Administrative Agent shall have received (i) a copy of the certificate or articles of incorporation, including all amendments thereto, of each Credit Party, certified as of a recent date by the Secretary of State of the state of its organization, and a certificate as to the good standing of each Credit Party as of a recent date, from such Secretary of State; (ii) a certificate of the Secretary or Assistant Secretary of each Credit Party dated the Effective Date and certifying (A) that attached thereto is a true and complete copy of the by-laws of such Credit Party as in effect on the Effective Date and at all times since a date prior to the date of the resolutions described in clause (B), (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of such Credit Party authorizing the execution, delivery and performance of the Credit Documents to which such person is a party and, in the case of the Borrower, the borrowings hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the certificate or articles of incorporation of such Credit Party have not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to clause (i), and (D) as to the incumbency and specimen signature of each officer executing any Credit Document or any other document delivered in connection herewith on behalf of such Credit Party; (iii) a certificate of another officer as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to clause (ii); and (iv) such other documents as the Lenders, the Issuing Bank or O'Melveny & Myers, counsel for the Administrative Agent, may reasonably request. (h) Payment of Fees, Etc. The Administrative Agent shall have received from the Borrower (i) the aggregate amount of accrued and unpaid interest at the default rate pursuant to Section 2.07 from and including April 1, 2002, to and excluding the Effective Date, to be payable to each Lender in accordance with its pro rata share; (ii) an amendment fee equal to 35 basis points 68 Exhibit 10.1 on the aggregate amount, without duplication and after giving effect to the purchase of the Purchased Term Loans, of the sum of the outstanding Term Loans plus the Revolving Credit Commitment, to be payable to each Lender in accordance with its pro rata share; and (iii) all other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder or under any other Credit Document, including without limitation the fees and expenses of PricewaterhouseCoopers and O'Melveny & Myers. (i) Nonrecourse Pledge Agreement. The Nonrecourse Pledge Agreement shall have been duly executed by the parties thereto and delivered to the Collateral Agent and shall be in full force and effect, and all the Senior Notes, HRC Holding Senior Notes and senior promissory notes of Borrower or HRC Holding outstanding as of the Effective Date and held by Freeman Spogli or any Affiliate of Freeman Spogli shall have been duly and validly pledged thereunder to the Collateral Agent for the ratable benefit of the Secured Parties and notes and other instruments or documents representing such investments, accompanied by instruments of transfer and endorsements in blank, and Uniform Commercial Code financing statements, shall be in the actual possession of the Collateral Agent. (j) Security Agreement. The Security Agreement, as amended and restated on the Effective Date, shall have been duly executed by Holding, Borrower and the Subsidiary Guarantors, and such Security Agreement shall have been delivered to the Collateral Agent and shall be in full force and effect on such date and each document (including each Uniform Commercial Code financing statement) required by law or reasonably requested by the Administrative Agent to be filed, registered or recorded in order to create in favor of the Collateral Agent for the benefit of the Secured Parties a valid, legal and perfected first-priority security interest in and lien on the Collateral (subject to any Lien expressly permitted by Section 6.02) described in such agreement shall have been delivered to the Collateral Agent. (k) Interest Payment on Senior Subordinated Notes. After payment of the amounts payable pursuant to Section 4.02(h) above, Borrower may make a payment in the approximate amount of $5,300,000 (including default interest) to the holders of its Senior Subordinated Notes. Any remaining proceeds from the Intercompany Receivable purchased pursuant to Section 4.02(c) after the payment of such interest to holders of the Senior Subordinated Notes shall be used to reduce outstanding Revolving Loans (without any Revolving Loan Commitment reduction). (l) Replacement of Missing Certificate. Borrower will re-issue an Exchangeable Preferred Stock certificate for 20,444 shares of its Exchangeable Preferred Stock and deliver it to Collateral Agent under the Pledge Agreement upon receipt of a lost certificate indemnity from Collateral Agent reasonably satisfactory to Borrower. SECTION 4.03. Effective Date Matters. (a) Representations, Warranties, Covenants and Releases. Each of Holding and Borrower hereby represents and warrants that as of the Effective Date (i) after giving effect to the transactions contemplated by this Agreement all of the representations and warranties made or deemed to be made by Holding and the Borrower under the Credit Documents are true and correct, except with respect to such representations and warranties which, by their express terms, are 69 Exhibit 10.1 applicable only to an earlier date; (ii) after giving effect to the transactions contemplated by this Agreement and except as set forth on Schedule 3.10, there exists no Default or Event of Default under this Agreement or any of the other Credit Documents (other than any Default or Event of Default under Section 7.01(f) arising solely as a result of the matters disclosed on Schedule 3.10); (iii) Borrower has the power and is duly authorized to enter into, deliver and perform this Agreement; (iv) this Agreement and each of the other Credit Documents is the legal, valid and binding obligation of Holding and Borrower enforceable against it in accordance with its terms, except as such enforceability maybe limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in equity or in law); (v) the execution, delivery and performance of this Agreement in accordance with its terms do not and will not, with the passage of time, the giving of notice of otherwise: (A) require any approval of any Governmental Authority or violate any applicable law relating to Holding and Borrower; (B) conflict with, result in a breach of or constitute a default under (1) the articles or certificate of incorporation or bylaws of Holding and Borrower, (2) any indenture, material agreement or other material instrument to which any of Holding or Borrower is a party or by which any of their respective properties may be bound, or (3) any approval of any Governmental Authority relating to any of Holding or Borrower; or (C) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by the Holding and Borrower other than Liens permitted hereunder. Each of Holding and Borrower hereby acknowledges and agrees that, as of the date hereof, no right of offset, defense, counterclaim, claim, causes of action or objection in favor of Holding, Borrower or any other Credit Party against the Lenders or the Administrative Agent or the Collateral Agent exists arising out of or with respect to (i) the Obligations, this Agreement or any of the other Credit Documents; (ii) any other documents evidencing, securing or in any way relating to the foregoing, or (iii) the administration or funding of the Loans, the Revolving Credit Commitment or the issuance of Letters of Credit. Each of Holding and Borrower hereby expressly waives, releases and relinquishes any and all defenses, setoffs, claims, counterclaims, causes of action or objections, if any, against the Lenders or the Administrative Agent or the Collateral Agent, whether known or unknown, both at law and in equity, only to the extent arising out of any matter, cause or event occurring on or prior to the date hereof. Each of Holding and Borrower for itself, each other Credit Party and their respective successors and assigns in interest and any person that may derivatively or otherwise assert a claim through or by any of the foregoing to the fullest extent permitted by applicable law (collectively, the "Releasors") waives and releases against Agents and each Lender and each of their respective employees, agents, representatives, consultants, attorneys, fiduciaries, servants, officers, directors, partners, predecessors, successors and assigns, subsidiary corporations, parent corporations, related corporate divisions, participants and assigns (collectively, the "Releasees"), and covenants not to commence or pursue any litigation or action, claims, demands, causes of action, suits, debts, sums of money, accounts, bonds, bills, covenants, contracts, controversies, agreements, promises, setoffs, recoupments, counterclaims, defenses, expenses, damages and/or judgments, whatsoever in law or in equity (whether matured, unmatured, contingent or non-contingent) that relate in any way, either directly or indirectly, to this Agreement, any Credit Documents, the transactions contemplated thereby or any action by Agents, Lenders or any other 70 Exhibit 10.1 Releasee in any way related thereto, whether known or unknown, which each of the Releasors had, now has or may have. Each of the Releasors expressly understands that Section 1542 of the California Civil Code provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH A CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Each of the Releasors hereby agrees that the provisions of Section 1542 of the California Civil Code and all similar federal or state laws, rights, rules or legal principles of any other jurisdiction which may be applicable thereto, to the extent that they apply to the matters released hereby, are knowingly and voluntarily waived and relinquished by such Releasors, to the full extent that such rights and benefits pertaining to the matters released herein may be waived, and each of the Releasors hereby agrees and acknowledges that this waiver is an essential term of this Agreement, without Agents and Lenders would not have entered into this Agreement. Each of the Releasors represents and warrants that it has not purported to transfer, assign, pledge or otherwise convey any of its right, title or interest in any matter released hereby to any other person. In connection with the release in this Agreement, each of the Releasors acknowledges that it is aware it may hereafter discover claims presently unknown or unsuspected, or facts in addition to or different from those which such Credit Parties now knows or believes to be true, with respect to the matters released herein. Nevertheless, it is each of the Releasors' intent in executing this Agreement to fully, finally and forever release and settle such matters. In making this release, each of the Releasors has consulted with counsel concerning the effect thereof, including, without limitation, the effect of the waiver and Section 1542 of the California Civil Code. (b) Limited Waiver. Upon the satisfaction of the conditions set forth in Section 4.02, the undersigned Lenders hereby waive any Defaults or Events of Default arising from the matters described on Schedule 3.10 or from Borrower's failure (i) to make the principal payment on the Term Loans due on March 31, 2002, (ii) to comply with Sections 5.04(a), (b), (c), (d) and (e) of this Agreement with respect to the fiscal year ending on or about December 28, 2001 and/or the first fiscal quarter in 2002 and (iii) to be in compliance with the financial covenants through and including the date on which this Agreement becomes effective pursuant to Section 4.02 hereof (collectively, the "Existing Events of Default"). Without limiting the generality of the provisions of the covenants set forth in this Agreement, the waiver set forth herein shall be limited precisely as written and relates solely to the noncompliance by the Borrower with the provisions of the covenants set forth in this Agreement with respect to the Existing Events of Default in the manner and to the extent described in this paragraph, and nothing in this paragraph shall be deemed to (a) constitute a waiver of compliance by Borrower with respect to (i) the covenants set forth in this Agreement in any other instance or (ii) any other term, provision or condition of this Agreement or any other instrument or agreement referred to therein or (b) prejudice any right or remedy that the Administrative Agent, the Collateral Agent or any Lender may now have (except to the extent such right or remedy was based upon existing defaults that will not exist after giving effect to this waiver) or may have in the future under or in connection with the Agreement or any other instrument or agreement referred to therein. 71 Exhibit 10.1 (c) Lender Representations. Each Lender hereby acknowledges that other than the Existing Events of Default, such Lender does not have actual knowledge, as of the Effective Date, of any Default or Event of Default existing under this Agreement. ARTICLE V Affirmative Covenants SECTION 5.01. Existence; Businesses and Properties. (a) Holding and the Borrower shall, and the Borrower shall cause each Restricted Subsidiary to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, except as otherwise expressly permitted under Section 6.04. (b) Holding and the Borrower shall, and the Borrower shall cause each Restricted Subsidiary to, do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in full force and effect the rights, licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names material to the conduct of its business; comply in all material respects with all applicable laws, rules, regulations (including any zoning, building, Environmental Law, ordinance, code or approval or any building permits or any restrictions of record or agreements affecting the Mortgaged Properties) and decrees and orders of any Governmental Authority, whether now in effect or hereafter enacted, except where the failure to do so will not have a Material Adverse Effect; and at all times maintain and preserve all property material to the conduct of such business and keep such property in good repair, working order and condition and from time to time make renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times. SECTION 5.02. Insurance. The Borrower shall, and shall cause each Restricted Subsidiary to, (a) keep its insurable properties adequately insured at all times by financially sound and reputable insurers; maintain such other insurance, to such extent and against such risks, including fire and other risks insured against by extended coverage, as is customary with companies in the same or similar businesses operating in the same or similar locations, including public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by it; and maintain such other insurance as may be required by law. (b) cause all such policies to be endorsed or otherwise amended to include a "standard" or "New York" lender's loss payable endorsement, in form and substance satisfactory to the Administrative Agent and the Collateral Agent, which endorsement shall provide that, from and after the Closing Date, if the insurance carrier shall have received written notice from the Administrative Agent or the Collateral Agent of the occurrence of an Event of Default, the insurance carrier shall pay all proceeds otherwise payable to the Borrower or the Credit Parties under such policies directly to the Collateral Agent; cause all such policies to provide that neither the Borrower, the Administrative Agent, the Collateral Agent nor any other party shall be a 72 Exhibit 10.1 coinsurer thereunder and to contain a "Replacement Cost Endorsement", without any deduction for depreciation, and such other provisions as the Administrative Agent or the Collateral Agent may reasonably require from time to time to protect their interests; deliver original or certified copies of all such policies to the Collateral Agent; cause each such policy to provide that it shall not be cancelled, modified or not renewed (i) by reason of nonpayment of premium upon not less than 10 days' prior written notice thereof by the insurer to the Administrative Agent and the Collateral Agent (giving the Administrative Agent and the Collateral Agent the right to cure defaults in the payment of premiums) or (ii) for any other reason upon not less than 30 days' prior written notice thereof by the insurer to the Administrative Agent and the Collateral Agent; deliver to the Administrative Agent and the Collateral Agent, prior to the cancellation, modification or nonrenewal of any such policy of insurance, a copy of a renewal or replacement policy (or other evidence of renewal of a policy previously delivered to the Administrative Agent and the Collateral Agent) together with evidence satisfactory to the Administrative Agent and the Collateral Agent of payment of the premium therefor. (c) if at any time the area in which the Premises (as defined in the Mortgages) are located is designated (i) a "flood hazard area" in any Flood Insurance Rate Map published by the Federal Emergency Management Agency (or any successor agency), obtain flood insurance in such total amount as the Collateral Agent or the Required Lenders may from time to time require, and otherwise comply with the National Flood Insurance Program as set forth in the Flood Disaster Protection Act of 1973, as it may be amended from time to time, or (ii) a "Zone 1" area, obtain earthquake insurance in such total amount as the Administrative Agent, the Collateral Agent or the Required Lenders may from time to time require. (d) with respect to any Mortgaged Property, carry and maintain comprehensive general liability insurance including the "broad form CGL endorsement" and coverage on an occurrence basis against claims made for personal injury (including bodily injury, death and property damage) and umbrella liability insurance against any and all claims, in no event for a combined single limit of less than $10,000,000, naming the Collateral Agent as an additional insured, on forms satisfactory to the Collateral Agent. (e) notify the Administrative Agent and the Collateral Agent immediately whenever any separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section is taken out by the Borrower; and promptly deliver to the Administrative Agent and the Collateral Agent a duplicate original copy of such policy or policies. (f) in connection with the covenants set forth in this Section, it is understood and agreed that: (i) none of the Administrative Agent, the Lenders, the Issuing Bank, or their respective agents or employees shall be liable for any loss or damage insured by the insurance policies required to be maintained under this Section, it being understood that (A) the Borrower and the other Credit Parties shall look solely to their insurance companies or any other parties other than the aforesaid parties for the recovery of such loss or damage and (B) such insurance companies shall have no rights of subrogation against the Administrative Agent, the Collateral Agent, the Lenders, the Issuing Bank or their agents or employees. If, however, the insurance policies do not provide waiver of 73 Exhibit 10.1 subrogation rights against such parties, as required above, then the Borrower hereby agrees, to the extent permitted by law, to waive its right of recovery, if any, against the Administrative Agent, the Collateral Agent, the Lenders, the Issuing Bank and their agents and employees; and (ii) the designation of any form, type or amount of insurance coverage by the Administrative Agent, the Collateral Agent or the Required Lenders under this Section shall in no event be deemed a representation, warranty or advice by the Administrative Agent, the Collateral Agent or the Lenders that such insurance is adequate for the purposes of the business of the Borrower and the Subsidiaries or the protection of their properties and the Administrative Agent, the Collateral Agent and the Required Lenders shall have the right from time to time to require the Borrower and the other Credit Parties to keep other insurance in such form and amount as the Administrative Agent, the Collateral Agent or the Required Lenders may reasonably request, provided that such insurance shall be obtainable on commercially reasonable terms. SECTION 5.03. Payment of Taxes. Holding and the Borrower shall, and the Borrower shall cause each Restricted Subsidiary to, pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become delinquent or in default, that, if unpaid, might give rise to a Lien upon such properties or any part thereof; provided, however, that such payment and discharge shall not be required with respect to any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and the Borrower shall have set aside on its books adequate reserves with respect thereto in accordance with GAAP and such contest operates to suspend collection of the contested obligation, tax, assessment or charge and enforcement of a Lien and, in the case of a Mortgaged Property, there is no risk of forfeiture of such property. SECTION 5.04. Financial Statements, Reports, etc. The Borrower shall furnish to the Administrative Agent and each Lender: (a) within 90 days after the end of each fiscal year, its consolidated and consolidating balance sheets and related statements of operations, stockholders' equity and cash flows showing the financial condition of Holding and the Borrower and its consolidated Restricted Subsidiaries as of the close of such fiscal year and the results of its operations and the operations of such Restricted Subsidiaries during such year, all audited by Deloitte & Touche LLP or other independent public accountants of recognized national standing and accompanied by (i) an opinion of such accountants (which shall not be qualified in any material respect) to the effect that such consolidated financial statements fairly present the financial condition and results of operations of Holding and the Borrower and its consolidated Restricted Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, and (ii) any management letter issued by such accountants to the board of directors or finance committee of Holding or the Borrower; provided that Borrower's financial statements and other documents required by this Section 5.04(a) with respect to its fiscal year ended on or about December 28, 2001, shall be delivered within 45 days of the Effective Date and such financial statements shall be substantially the same as the draft financial statements approved by Administrative Agent on the Effective Date; 74 Exhibit 10.1 (b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year, its consolidated and consolidating balance sheets and related statements of operations, stockholders' equity and cash flows showing the financial condition of the Borrower and its consolidated Restricted Subsidiaries as of the close of such fiscal quarter and the results of its operations and the operations of such Restricted Subsidiaries during such fiscal quarter and the then elapsed portion of the fiscal year, all certified by one of its Financial Officers as fairly presenting the financial condition and results of operations of the Borrower and its consolidated Restricted Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to the absence of footnotes and normal year-end audit adjustments; and the Intercompany Receivable balance as of the last day of such quarter and a calculation of the average daily Intercompany Receivable balance for such quarter; provided that Borrower's financial statements and other documents required by this Section 5.04(b) with respect to its first fiscal quarter in 2002 shall be delivered concurrently with its financial statements for its fiscal year ended on or about December 28, 2001; (c) (i) within 30 days after the end of each of month, its consolidated balance sheets and related statements of operations, stockholders' equity and cash flows showing the financial condition of the Borrower and its consolidated Restricted Subsidiaries as of the close of such month and the results of its operations and the operations of such Restricted Subsidiaries during such month and the then elapsed portion of the fiscal year, all certified by one of its Financial Officers as fairly presenting the financial condition and results of operations of the Borrower and its consolidated Restricted Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to the absence of footnotes and normal year-end audit adjustments and a cash flow forecast, by week (the "Cash Flow Forecast"), for the 13 weeks immediately succeeding the calendar month in which such forecast is delivered, including all cash receipts and disbursements, for the Credit Parties on a consolidated basis, such forecast and any modifications or supplements thereto to be in form and substance reasonably satisfactory to Administrative Agent; and (ii) on the 15th day of each month commencing on June 15, 2002, a four/five-week cash flow report describing the cash flow results for the four/five-week fiscal period most recently ended and comparing those results to the Cash Flow Forecast for such four/five-week period, together with a reconciliation of actual cash receipts and disbursements for the immediately preceding four/five-week fiscal period against such forecast; and (iii) the Intercompany Receivable balance as of the last day of such month; (d) concurrently with any delivery of financial statements under clause (a), (b) or (c)(i), a certificate of the accounting firm or a Financial Officer opining on or certifying such statements (which certificate, when furnished by an accounting firm, may be limited to accounting matters and disclaim responsibility for legal interpretations) (i) certifying that no Event of Default or Default has occurred or, if such an Event of Default or Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto and (ii) setting forth computations in reasonable detail satisfactory to the Administrative Agent demonstrating compliance with the covenants contained in Section 3.13(e) and Sections 6.08, 6.10 and 6.14 and, additionally, calculating Borrower's Debt/Adjusted EBITDA Ratio for the period then ended; (e) concurrently with any delivery of financial statements under clause (a) or (b), a Pricing Adjustment Certificate; 75 Exhibit 10.1 (f) not later than January 31 of each year, (i) copies of the Borrower's annual consolidated budget for the Borrower and its consolidated Restricted Subsidiaries for the current fiscal year, in the form presented by management to the Borrower's Board of Directors; and (ii) copies of the Borrower's consolidated financial projections for the Borrower and its consolidated Restricted Subsidiaries for the current fiscal year and the next 3 fiscal years prepared in a manner consistent with the financial projections delivered to the Syndication Agent in connection with the closing of this Agreement; (g) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by the Borrower or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or distributed to its shareholders, as the case may be; (h) (i) within 30 days after the end of each fiscal month of Gibeck AB (other than the last month of a fiscal quarter) copies of the consolidated profit and loss statement of Gibeck AB and its consolidated Subsidiaries in the form in which such statement is required to be delivered any non-Affiliate lender to Gibeck AB, or if such statement is not required to be delivered to any such lender, as prepared for internal use by Gibeck AB in a manner consistent with prior practice; (ii) within 45 days after then end of each fiscal quarter of Gibeck AB (other than the last quarter of a fiscal year), copies of the consolidated profit and loss statement, balance sheet and statement of cash flows of Gibeck AB and its consolidated Subsidiaries, all certified by one of its Financial Officers as fairly presenting the financial condition and results of operations of Gibeck AB and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to the absence of footnotes and normal year-end audit adjustments; and (iii) within 90 days after then end of each fiscal year of Gibeck AB, copies of the consolidated profit and loss statement, balance sheet and statement of cash flows of Gibeck AB and its consolidated Subsidiaries, all certified by one of its Financial Officers as fairly presenting the financial condition and results of operations of Gibeck AB and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to the absence of footnotes and normal year-end audit adjustments; and (i) promptly, from time to time, such other information regarding the operations, business affairs and financial condition of Holding, the Borrower or any Subsidiary, or compliance with the terms of any Credit Document, as the Administrative Agent or any Lender may reasonably request. SECTION 5.05. Litigation and Other Notices. The Borrower shall, promptly after a Responsible Officer becomes aware thereof, furnish to the Administrative Agent, the Issuing Bank and each Lender prompt written notice of the following: (a) any Event of Default or Default, specifying the nature and extent thereof and the corrective action (if any) taken or proposed to be taken with respect thereto; (b) the filing or commencement of, or any threat or notice of intention of any person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against the Borrower or any Affiliate thereof that could 76 Exhibit 10.1 reasonably be expected to result in a Material Adverse Effect; and (c) any development that has resulted in, or could reasonably be expected to result in, a Material Adverse Effect. SECTION 5.06. Employee Benefits. Holding and the Borrower shall, and the Borrower shall cause each Restricted Subsidiary to, (a) comply in all material respects with the applicable provisions of ERISA and the Code and (b) furnish to the Administrative Agent (i) as soon as possible after, and in any event within 10 days after any Responsible Officer of the Borrower or any ERISA Affiliate knows or has reason to know that, any ERISA Event has occurred that, alone or together with any other ERISA Event could reasonably be expected to result in liability of the Borrower in an aggregate amount exceeding $1,000,000 or requiring payments exceeding $500,000 in any year, a statement of a Financial Officer of the Borrower setting forth details as to such ERISA Event and the action, if any, that the Borrower proposes to take with respect thereto. SECTION 5.07. Maintaining Records; Access to Properties and Inspections. (a) The Borrower shall, and shall cause each Restricted Subsidiary to, keep proper books of record and account, in a manner consistent with requirements of law and with sound business practice so as to permit the preparation of financial statements in conformity with GAAP, and in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. (b) Each Credit Party will, and will cause each of its Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender to visit and inspect the financial records and the properties of Holding, the Borrower or any Subsidiary at reasonable times and as often as reasonably requested and to make extracts from and copies of such financial records, and permit any representatives designated by the Administrative Agent or any Lender to discuss the affairs, finances and condition of Holding, the Borrower or any Subsidiary with the officers thereof and independent accountants therefor; provided, however, that (i) so long as no Event of Default has occurred and is continuing, the Administrative Agent and the Lenders shall be limited to visits on four occasions per year, and the Administrative Agent shall use it best efforts to coordinate such visits, and (ii) the Administrative Agent shall give the Borrower reasonable notice of a proposed discussions with such independent accountants, and representatives of the Borrower may at the Borrower's option participate in such discussions. (c) Following an Event of Default resulting from a failure of the Borrower to comply with Section 6.08 or 6.10 hereof and upon the request of the Administrative Agent, each Credit Party will, and will cause its subsidiaries to, cooperate with an Independent Consultant hired on behalf of the Lenders to conduct such examinations and inquiries with respect to the business, operations and prospects of Borrower and its subsidiaries as may be requested by the Administrative Agent in its discretion, the results of such examinations and inquiries to be reported to the Lenders; provided that such Independent Consultant shall be selected by the Borrower from a list of three such Independent Consultants selected by the Administrative Agent and that all costs and expenses of such Independent Consultant shall be paid by the Borrower. SECTION 5.08. Use of Proceeds. The Borrower shall, and shall cause each Restricted Subsidiary to, use the proceeds of the Loans and request the issuance of Letters of Credit only for the purposes set forth in Section 3.13. 77 Exhibit 10.1 SECTION 5.09. Compliance with Environmental Laws. The Borrower shall, and shall cause each Restricted Subsidiary to, comply, and cause all lessees and other persons occupying its Environmental Properties to comply, in all material respects with all Environmental Laws and Environmental Permits applicable to its operations and Environmental Properties; obtain and renew all material Environmental Permits necessary for its operations and Environmental Properties; and conduct any Remedial Action in accordance with Environmental Laws, except to the extent to do the same could not be reasonably be expected to have a Material Adverse Effect; provided, however, that none of Holding, the Borrower or any of the Subsidiaries shall be required to undertake any Remedial Action to the extent that its obligation to do so is being contested in good faith and by proper proceedings and appropriate reserves are being maintained with respect to such circumstances. SECTION 5.10. Preparation of Environmental Reports. The Borrower shall, and shall cause each Restricted Subsidiary to, if a Default caused by reason of a breach of Section 3.17 or 5.09 shall have occurred and be continuing, at the request of the Required Lenders through the Administrative Agent, provide to the Lenders within 45 days after such request, at the expense of the Borrower, an environmental site assessment report for the Environmental Properties which are the subject of such default prepared by an environmental consulting firm acceptable to the Administrative Agent and indicating the presence or absence of Hazardous Materials and the estimated cost of any compliance or Remedial Action in connection with such Environmental Properties. SECTION 5.11. Further Assurances. Holding and the Borrower shall, and the Borrower shall cause each Restricted Subsidiary to, execute any and all further documents, financing statements, agreements and instruments, and take all further action (including filing Uniform Commercial Code and other financing statements, mortgages and deeds of trust) that may be required under applicable law, or that the Required Lenders, the Administrative Agent or the Collateral Agent may reasonably request, in order to effectuate the transactions contemplated by the Credit Documents and in order to grant, preserve, protect and perfect the validity and first priority of the security interests created or intended to be created by the Security Documents. The Borrower will cause any subsequently acquired or organized Domestic Subsidiary to execute a Subsidiary Guarantee Agreement, Indemnity Subrogation and Contribution Agreement and each applicable Security Document in favor of the Collateral Agent. In addition, from time to time, the Borrower will, at its cost and expense, promptly secure the Obligations by pledging or creating, or causing to be pledged or created, perfected security interests with respect to such of its assets and properties as the Administrative Agent or the Required Lenders shall designate (it being understood that it is the intent of the parties that the Obligations shall be secured by, among other things, substantially all the assets of the Borrower (including real and other properties acquired subsequent to the Closing Date)). Such security interests and Liens will be created under the Security Documents and other security agreements, mortgages, deeds of trust and other instruments and documents in form and substance satisfactory to the Collateral Agent, and the Borrower shall deliver or cause to be delivered to the Lenders all such instruments and documents (including legal opinions, title insurance policies and lien searches) as the Collateral Agent shall reasonably request to evidence compliance with this Section. The Borrower agrees to provide such evidence as the Collateral Agent shall reasonably request as to the perfection and priority status of each such security interest and Lien. 78 Exhibit 10.1 SECTION 5.12. Mortgaged Property Casualty and Condemnation. (a) Notwithstanding any other provision of this Agreement or the Security Documents, the Collateral Agent is authorized, at its option (for the benefit of the Secured Parties), to collect and receive, to the extent payable to the Borrower or any other Credit Party, all insurance proceeds, damages, claims and rights of action under any insurance policies with respect to any casualty or other insured damage ("Casualty") to any portion of any Mortgaged Property (collectively, "Casualty Proceeds"), unless the amount of the related Casualty Proceeds is less than $1,000,000 and an Event of Default shall not have occurred and be continuing. The Borrower agrees to notify the Collateral Agent and the Administrative Agent, in writing, promptly after the Borrower obtains notice or knowledge of any Casualty to a Mortgaged Property, which notice shall set forth a description of such Casualty and the Borrower's good faith estimate of the amount of related damages. The Borrower agrees, subject to the foregoing limitations, to endorse and transfer or cause to be endorsed or transferred any Casualty Proceeds received by it or any other Credit Party to the Collateral Agent. (b) The Borrower will notify the Collateral Agent and the Administrative Agent immediately upon obtaining knowledge of the institution of any action or proceeding for the taking of any Mortgaged Property, or any part thereof or interest therein, for public or quasi-public use under the power of eminent domain, by reason of any public improvement or condemnation proceeding, or in any other manner (a "Condemnation"). No settlement or compromise of any claim in connection with any such action or proceeding shall be made without the consent of the Collateral Agent, which consent shall not be unreasonably withheld. The Collateral Agent is authorized, at its option (for the benefit of the Secured Parties), to collect and receive all proceeds of any such Condemnation (in each case, the "Condemnation Proceeds"). The Borrower agrees to execute or cause to be executed such further assignments of any Condemnation Proceeds as the Collateral Agent may reasonably require. (c) In the event of any Condemnation of the Mortgaged Property, or any part thereof and subject to the provisions of clause (e), the Collateral Agent shall apply the Condemnation Proceeds first, in the case of a partial Condemnation, to the repair or restoration of any integrated structure subject to such Condemnation or, in the case of a total or "substantially all" Condemnation, to the location of a replacement property, acquisition of such replacement property and construction of the replacement structures, and second, shall apply the remainder of such Condemnation Proceeds (less the reasonable costs, if any, incurred by the Collateral Agent in the recovery of such Condemnation Proceeds) to prepay obligations outstanding under this Agreement, with any remaining Condemnation Proceeds being returned to the Borrower. (d) In the event of any Casualty of less than 50% of the useable square footage of the improvements of any Mortgaged Property, the Borrower shall, subject to the conditions contained in clause (e), restore the Mortgaged Property to substantially its same condition immediately prior to such Casualty. In the event of any Casualty of greater than 50% of the useable square footage of the improvements of any Mortgaged Property and so long as no Default or Event of Default has occurred and is continuing, the Borrower shall have the option to either: (i) restore the Mortgaged Property to a condition substantially similar to its condition immediately prior to such Casualty and to invest the balance, if any, of any Casualty Proceeds in equipment or other assets used in the Borrower's principal lines of 79 Exhibit 10.1 business within 6 months after the receipt thereof, provided that the Borrower, pending such reinvestment, promptly deposits such excess Casualty Proceeds in a cash collateral account established with the Collateral Agent for the benefit of the Secured Parties, or (ii) direct the Collateral Agent to apply the related Casualty Proceeds to prepay obligations outstanding under this Agreement, with any remaining Casualty Proceeds being returned to the Borrower. Any excess Casualty Proceeds that are not reinvested in the Borrower's principal lines of business as contemplated above will be applied to prepay the Obligations. If required to do so, the Borrower shall make the election contemplated by the immediately preceding clause by notifying the Collateral Agent and the Administrative Agent promptly after the later to occur of (A) five days after the Borrower and its insurance carrier reach a final determination of the amount of any Casualty Proceeds and (B) 30 days after the occurrence of the Casualty. If the Borrower shall be required or shall elect to restore the Mortgaged Property, the insufficiency of any Casualty Proceeds or Condemnation Proceeds to defray the entire expense of such restoration shall in no way relieve the Borrower of such obligation so to restore. In the event the Borrower shall be required to restore or shall notify the Collateral Agent and the Administrative Agent of its election to restore, the Borrower shall diligently and continuously prosecute the restoration of the Mortgaged Property to completion. In the event of a Casualty where the Borrower is required to make the election set forth above and the Borrower shall fail to notify the Collateral Agent and the Administrative Agent of its election within the period set forth above or shall elect not to restore the Mortgaged Property, the Collateral Agent shall (after being reimbursed for all reasonable costs of recovery of such Casualty Proceeds) apply such Casualty Proceeds to prepay obligations outstanding under this Agreement. In addition, upon such prepayment, the Borrower shall be obligated to place the remaining portion, if any, of the Mortgaged Property in a safe condition that is otherwise in compliance with the requirements of applicable Governmental Authorities and the provisions of this Agreement and the applicable Mortgage. (e) Except as otherwise specifically provided in this Section, all Casualty Proceeds and all Condemnation Proceeds recovered by the Collateral Agent (A) are to be applied to the restoration of the applicable Mortgaged Property (less the reasonable cost, if any, to the Collateral Agent of such recovery and of paying out such proceeds, including reasonable attorneys' fees (including the allocated costs of in-house legal counsel), other charges and disbursements and costs allocable to inspecting the Work (as defined below)) and (B) shall be applied by the Collateral Agent to the payment of the cost of restoring or replacing the Mortgaged Property so damaged, destroyed or taken or of the portion or portions of the Mortgaged Property not so taken (the "Work") and (C) shall be paid out from time to time to the Borrower as and to the extent the Work (or the location and acquisition of any replacement of any Mortgaged Property) progresses for the payment thereof, but subject to each of the following conditions: (i) the Borrower must promptly commence the restoration process or the location, acquisition and replacement process (in the case of a total or "substantially all" Condemnation) in connection with the Mortgaged Property; 80 Exhibit 10.1 (ii) the Work shall be in the charge of an architect or engineer and before the Borrower commences any Work, other than temporary work to protect property or prevent interference with business, the Collateral Agent shall have received the plans and specifications and the general contract for the Work from the Borrower. The plans and specifications shall provide for such Work that, upon completion thereof, the improvements shall (A) be in compliance with all requirements of applicable Governmental Authorities such that all representations and warranties of the Borrower relating to the compliance of such Mortgaged Property with applicable laws, rules or regulations in this Agreement or the Security Documents will be correct in all respects and (B) be at least equal in value and general utility to the improvements that were on such Mortgaged Property (or that were on the Mortgaged Property that has been replaced, if applicable) prior to the Casualty or Taking, and in the case of a Taking, subject to the effect of such Taking; (iii) except as provided in clause (iv), each request for payment shall be made on seven days' prior notice to the Collateral Agent and shall be accompanied by a certificate to be made by such architect or engineer, stating (A) that all the Work completed has been done in substantial compliance with the plans and specifications, (B) that the sum requested is justly required to reimburse the Borrower for payments by the Borrower to, or is justly due to, the contractor, subcontractors, materialmen, laborers, engineers, architects or other persons rendering services or materials for the Work (giving a brief description of such services and materials) and that, when added to all sums previously paid out by the Collateral Agent, does not exceed the value of the Work done to the date of such certificate; (iv) each request for payment in connection with the acquisition of a replacement Mortgaged Property (in the case of a total or "substantially all" Condemnation) shall be made on 30 days' prior notice to the Collateral Agent and, in connection therewith, (A) each such request shall be accompanied by a copy of the sales contract or other document governing the acquisition of the replacement property by the Borrower and a certificate of the Borrower stating that the sum requested represents the sales price under such contract or document and the related reasonable transaction fees and expenses (including brokerage fees) and setting forth in sufficient detail the various components of such requested sum and (B) the Borrower shall (I) in addition to any other items required to be delivered under this Section), provide the Administrative Agent and the Collateral Agent with such opinions, documents, certificates, title insurance policies, surveys and other insurance policies as they may reasonably request and (II) take such other actions as the Administrative Agent and the Collateral Agent may reasonably deem necessary or appropriate (including actions with respect to the delivery to the Collateral Agent of a first priority Mortgage with respect to such real property for the ratable benefit of the Secured Parties); (v) each request shall be accompanied by waivers of lien satisfactory to the Collateral Agent covering that part of the Work for which payment or reimbursement is being requested and, if required by the Collateral Agent, by a search prepared by a title company or licensed abstractor or by other evidence satisfactory to the Collateral Agent, that there has not been filed with respect to such Mortgaged Property any mechanics' or 81 Exhibit 10.1 other lien or instrument for the retention of title in respect of any part of the Work not discharged of record or bonded to the reasonable satisfaction of the Collateral Agent; (vi) there shall be no Default or Event of Default that has occurred and is continuing; (vii) the request for any payment after the Work has been completed shall be accompanied by a copy of any certificate or certificates required by law to render occupancy of the improvements being rebuilt, repaired or restored legal; and (viii) after commencing the Work, the Borrower shall continue to perform the Work diligently and in good faith to completion in accordance with the approved plans and specifications. Upon completion of the Work and payment in full therefor, the Collateral Agent will disburse to the Borrower the amount of any Casualty Proceeds or Condemnation Proceeds then or thereafter in the hands of the Collateral Agent on account of the Casualty or Taking that necessitated such Work to be applied (x) to prepay obligations outstanding under this Agreement, with any excess being returned to the Borrower, or (y) to be reinvested in the Borrower's principal lines of business within 180 days after the receipt thereof, provided that the Borrower, pending such reinvestment, promptly deposits such amounts in a cash collateral account established with the Collateral Agent for the benefit of the Secured Parties. (f) Notwithstanding any other provisions of this Section, if the Borrower shall have elected to replace a Mortgaged Property in connection with a total or "substantially all" Condemnation as contemplated in clause (c), all Condemnation Proceeds held by the Collateral Agent in connection therewith shall be applied to prepay obligations outstanding under this Agreement if (i) the Borrower notifies the Collateral Agent and the Administrative Agent that it does not intend to replace the related Mortgaged Property, (ii) a Responsible Officer of the Borrower shall not have notified the Administrative Agent and the Collateral Agent in writing that the Borrower has acquired or has entered into a binding contract to acquire land upon which it will construct the replacement property within six months after the related Condemnation or (iii) the Borrower shall have not notified the Administrative Agent and the Collateral Agent in writing that it has begun construction of the replacement structures within one year after the related Condemnation. (g) Nothing in this Section shall prevent the Collateral Agent from applying at any time all or any part of the Casualty Proceeds or Condemnation Proceeds to (i) the curing of any Event of Default under this Agreement or (ii) the payment of any of the Obligations after the occurrence and during the continuance of an Event of Default. SECTION 5.13. Sale of Excess Real Estate. Borrower shall use commercially reasonable efforts to sell the property identified as "Excess Real Estate" on Schedule 3.20(a) (the "Excess Real Estate") for a sales price in cash equivalent to its Fair Market Value by no later than June 30, 2003. Borrower shall notify the Administrative Agent as soon as practicable of any pending sale date, the expected sales price therefor and the proposed purchaser. Upon the consummation of any such sale of Excess Real Estate, Collateral Agent shall release the Lien on behalf of Lenders on such Excess Real Estate. 82 Exhibit 10.1 SECTION 5.14. Certain Collateral Matters. (a) Borrower will use its commercially reasonable efforts to obtain such lessor consents as may be required to encumber in favor of Collateral Agent for the benefit of Lenders the leases located at the properties identified as being requested to be subject to a leasehold mortgage on Schedule 1.01(b); provided, however other than the payment of reasonable counsel fees and other out-of-pocket expenses, Borrower shall not be required to make payment to a lessor in order to obtain such consent. (b) Other than any domestic Immaterial Subsidiary so designated and identified on Schedule 3.08, Holding, Borrower and each domestic Restricted Subsidiary of Borrower have executed the Security Agreement, the Guaranty, the Pledge Agreement and such other Security Documents as may be reasonably requested by Collateral Agent. (c) If requested by Collateral Agent, as soon as practicable after the Effective Date Borrower will take all such actions as may reasonably be requested by Collateral Agent and as do not create materially adverse tax consequences for the Borrower to assure the Collateral Agent that it has a duly perfected security interest under the laws of Mexico in all of the property and assets of Borrower and its Subsidiaries which are located in Mexico (including a pledge of the ownership interests in such Subsidiaries), including without limitation the execution of a Guarantee and other Security Documents by Borrower and/or the Subsidiaries of Borrower operating in Mexico. (d) Borrower will cause Freeman Spogli or its Affiliates to pledge pursuant to the Nonrecourse Pledge Agreement, all other evidences of senior indebtedness of HRC Holding or Borrower or any of its Restricted Subsidiaries to Freeman Spogli, any Affiliate of Freeman Spogli or any shareholder of Borrower or Holding and outstanding on the Effective Date, and all other investments of Freeman Spogli, any Affiliate of Freeman Spogli or any shareholder of Borrower or Holding made after the Effective Date in Borrower or its Restricted Subsidiaries or in HRC Holding and required to be so pledged pursuant to Section 6.01(k). (e) In the event that the stock of Hudson Euro Co S.a.r.l or any of its Subsidiaries (the "European Companies Shares") is not required to be pledged to support any bona fide third party Indebtedness extended to such companies and no material adverse tax consequences to Borrower would occur as a result thereof, Borrower shall cause the European Companies Shares to be pledged to Collateral Agent for the benefit of Lenders or to the extent not available to Collateral Agent as a result of material adverse tax consequences, Borrower will not permit such European Companies Shares to be otherwise pledged or encumbered except as may be required to support any bona fide third party Indebtedness to such Unrestricted Subsidiaries. ARTICLE VI Negative Covenants SECTION 6.01. Indebtedness. The Borrower will not, and will not permit any Restricted Subsidiary to, incur, create, assume or permit to exist any Indebtedness, except: 83 Exhibit 10.1 (a) Indebtedness for borrowed money existing on the Closing Date and set forth in Schedule 6.01(a); provided, however, that such Indebtedness shall be repaid concurrently with the incurrence of the Borrowing of the Initial Credit Event hereunder ("Indebtedness to be Paid"); (b) Indebtedness represented by the Notes and by the other Credit Documents; (c) Indebtedness under the Senior Subordinated Notes (as the same may be amended from time to time, without increasing the committed amount thereunder, except as otherwise permitted by this Section) and any Refinancing Indebtedness of the Borrower with respect thereto in an aggregate principal amount on the date of Incurrence that, when added to all other Indebtedness Incurred pursuant to this clause and then outstanding, shall not exceed the sum of the then outstanding Indebtedness under the Senior Subordinated Notes; provided that such Refinancing Indebtedness is subordinated to the Obligations on terms and conditions that are no less favorable than the subordination provisions with respect to the Senior Subordinated Notes; (d) Indebtedness (i) of the Borrower to any wholly owned Restricted Subsidiary or to any Guarantor and (ii) of any Restricted Subsidiary to the Borrower or any wholly owned Restricted Subsidiary; (e) Indebtedness represented by the Guarantees of Indebtedness Incurred pursuant to clause (c) (provided, that any Guarantee with respect to the Senior Subordinated Notes will be subordinated to the same extent as the Senior Subordinated Notes) or clause (d); (f) Indebtedness relating to Capital Lease Obligations, Sale/Leaseback Transactions and Permitted Purchase Money Liens; provided, that (i) with respect to Capital Lease Obligations, Indebtedness relating to Purchase Money Liens and Unrestricted Sale/Leaseback Transactions, either (A) the Incurrence of such Indebtedness relating to Capital Expenditures, Unrestricted Sale/Leaseback Transactions and Permitted Purchase Money Liens would be permitted pursuant to Section 6.08 in the fiscal year in which it is Incurred, or (B) the aggregate principal amount of such Indebtedness does not exceed $10,000,000 at any one time; and (ii) with respect to Restricted Sale/Leaseback Transactions, if the Net Cash Proceeds thereof are applied in accordance with Section 2.13(b). (g) Indebtedness under Hedging Obligations; provided, however, that such Hedging Obligations are entered into for bona fide hedging purposes of the Borrower or its Restricted Subsidiaries (as determined in good faith by the Board of Directors or senior management of the Borrower) and correspond in terms of notional amount, duration, currencies and interest rates, as applicable, to Indebtedness of the Borrower or its Restricted Subsidiaries Incurred without violation of this Agreement or to business transactions of the Borrower or its Restricted Subsidiaries on customary terms entered into in the ordinary course of business; (h) Indebtedness represented by Guarantees constituting Investments permitted by Section 6.03(c)(iii) and disclosed on Schedule 6.03(c); 84 Exhibit 10.1 (i) The FS Convertible Senior Subordinated Debt and the Senior Notes outstanding on the Effective Date and any additional Senior Notes issued pursuant to Section 2.11(d); (j) Indebtedness in an aggregate principal amount which, together with all other Indebtedness of the Borrower and the Restricted Subsidiaries outstanding on the date of such Incurrence (other than Indebtedness permitted by clauses (a) through (g) and clause (i)) does not exceed $5,000,000 at any one time outstanding; provided that notwithstanding anything in this Agreement to the contrary, the sum of the aggregate outstanding principal amount of all Indebtedness permitted under clauses (i) and (j) of this Section 6.01 (excluding the Senior Notes permitted pursuant to clause (i)) shall not exceed $15,000,000; and (k) to the extent such Indebtedness is permitted under the terms of the Indenture governing the Senior Subordinated Notes, direct or indirect Indebtedness of Borrower or HRC Holding incurred after the Effective Date to Freeman Spogli, any Affiliate of Freeman Spogli or any shareholder of Borrower or Holding (collectively, the "Affiliate Indebtedness") provided that (i) the first $5,000,000 in aggregate principal amount of such Affiliate Indebtedness constitutes Indebtedness not subordinated to any other Indebtedness of Borrower or HRC Holding, as the case may be, pledged to Collateral Agent under the Nonrecourse Pledge Agreement and (ii) at the time of such incurrence, the principal amount of the Affiliate Indebtedness incurred by Borrower under this clause (k) does not exceed $5,000,000 less the amount of Affiliate Indebtedness previously incurred by HRC Holding after the Effective Date. SECTION 6.02. Liens. The Borrower will not, and will not permit any Restricted Subsidiary to, create, incur, assume or permit to exist any Lien on any property or assets (including stock or other securities of any person, including any Subsidiary) now owned or hereafter acquired by it or on any income or revenues or rights in respect of any thereof, except: (a) Liens on property or assets of the Borrower and its Subsidiaries existing on the Closing Date and set forth in Schedule 6.02(a); provided that such Liens shall secure only those obligations which they secure on the Closing Date; (b) any Lien created under the Credit Documents; (c) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any Subsidiary; provided that (i) such Lien is not created in contemplation of or in connection with such acquisition, and (ii) such Lien does not apply to any other property or assets of the Borrower or any Subsidiary; (d) Liens for taxes not yet due or which are being contested in compliance with Section 5.03; (e) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business and securing obligations that are not due and payable or which are being contested in compliance with Section 5.03; 85 Exhibit 10.1 (f) pledges and deposits made in the ordinary course of business in compliance with workmen's compensation, unemployment insurance and other social security laws or regulations; (g) Liens and deposits to secure the performance of bids, contracts (other than for Indebtedness), leases (other than Capital Lease Obligations), statutory obligations, surety, indemnity and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (h) zoning restrictions, easements, rights-of-way, restrictions on use of real property and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Borrower or any of its Subsidiaries; (i) Liens relating to Indebtedness described in Section 6.01(f); (j) any interest or title of a lessor or any Lien encumbering such lessor's interest with respect to any lease to the Borrower or any Subsidiary; and (k) judgment Liens that do not otherwise constitute an Event of Default. SECTION 6.03. Investments, Loans and Advances. The Borrower will not, and will not permit any Restricted Subsidiary to, make or permit to exist any Investment in any other person, except: (a) Investments by the Borrower existing on the Closing Date in the capital stock of the Subsidiaries; (b) Permitted Investments; (c) (i) Investments in Unrestricted Subsidiaries (other than US Holdco, Euro Holdco and Swedish Acquisitionco and their Subsidiaries) not to exceed $20,000 in the aggregate at any one time; (ii) so long as US Holdco, Euro Holdco and Swedish Acquisitionco are Unrestricted Subsidiaries, the Investment by the Borrower in US Holdco, Euro Holdco or Swedish Acquisitionco and their Subsidiaries to be made as part of the Gibeck AB Acquisition as described in Item 7 of Annex 4; and (iii) so long as US Holdco, Euro Holdco and Swedish Acquisitionco and their Subsidiaries are Unrestricted Subsidiaries, additional Investments by the Borrower in US Holdco, Euro Holdco or Swedish Acquisitionco or any of their Subsidiaries not to exceed in the aggregate the proceeds of any Designated Capital Investments or other Investments received by the Borrower from Holding and disclosed in Schedule 6.03(c) and any other Designated Capital Investment approved in writing by Administrative Agent; and (d) Investments in Restricted Subsidiaries; 86 Exhibit 10.1 (e) Investments made in connection with Permitted Investments; (f) Investments which would be permitted as Indebtedness pursuant to Section 6.01; (g) loans and advances to employees of the Borrower and any Restricted Subsidiary made in the ordinary course of business consistent with past practices of the Borrower or such Restricted Subsidiary; provided that the aggregate principal amount of such loans, advances and Employee Notes payable shall not exceed $1,000,000 at any one time outstanding; (h) loans and advances to, or Employee Notes received from, employees of Holding, the Borrower or any of their Subsidiaries made or received in connection with the substantially concurrent purchase of common stock of Holding or the Borrower by such employees; provided that the aggregate principal amount of such loans, advances and Employee Notes payable shall not exceed $1,000,000 at any one time outstanding; and (i) other Investments in an aggregate amount not in excess of $500,000 at any one time outstanding. SECTION 6.04. Mergers, Consolidations, Sales of Assets and Acquisitions. (a) The Borrower will not merge, consolidate or amalgamate with or into any other person (other than a merger of a wholly owned Subsidiary into the Borrower) unless: (i) the Borrower shall be the surviving person (the "Surviving Person") or the Surviving Person (if other than the Borrower) formed by such merger, consolidation or amalgamation shall be a corporation organized and existing under the laws of the State of Delaware, (ii) the Surviving Person (if other than the Borrower) shall expressly assume, by an agreement satisfactory in form and substance to the Agents, executed and delivered to the Agents by the Surviving Person, the due and punctual performance of all of the obligations and agreements of the Borrower under this Agreement, (iii) immediately after giving effect to such merger, consolidation or amalgamation, no Default or Event of Default shall have occurred, and (iv) the Borrower shall have carried out any acts necessary to ensure that any security interest purported to be created by any Security Document shall continue to be a valid, perfected, first priority (except as otherwise expressly provided in this Agreement or such Security Document) security interest in the applicable Collateral. (b) The Borrower will not permit any Restricted Subsidiary to merge into or consolidate with any other person, or permit any other person to merge into or consolidate with it, except that if at the time thereof and immediately after giving effect thereto no Event of Default or Default shall have occurred and be continuing (i) any wholly owned Subsidiary may merge into the Borrower in a transaction in which the Borrower is the surviving corporation and (ii) any wholly owned Subsidiary may merge into or consolidate with any other wholly owned Subsidiary in a transaction in which the surviving entity is a wholly owned Subsidiary and no person other than the Borrower or a wholly owned Subsidiary receives any consideration. (c) The Borrower will not, and will not permit any Restricted Subsidiary to, purchase, lease, or otherwise acquire (in one transaction or a series of transactions) any Assets or capital stock (or other equity interests) of any person other than as permitted pursuant to Section 6.03 (provided that Investments pursuant to section 6.03(d) shall be limited to Restricted 87 Exhibit 10.1 Subsidiaries existing as of the Fifth Amendment Effective Date), Section 6.08 and, with the consent of Required Lenders, Permitted Acquisitions. (d) The Borrower will not, and will not permit any Restricted Subsidiary to, enter into any Asset Disposition or Sale/Leaseback Transaction, except for (i) Unrestricted Asset Dispositions, (ii) Unrestricted Sale/Leaseback Transactions permitted by Section 6.01(f), (iii) Restricted Asset Dispositions, the Net Cash Proceeds of which are applied in accordance with Section 2.13(b) and any non-cash proceeds of which are pledged pursuant to the Pledge Agreement or the Security Agreement to Collateral Agent for the benefit of Lenders, and (iv) Restricted Sale/Leaseback Transactions which are permitted by Section 6.01(f) and the Net Cash Proceeds of which are applied in accordance with Section 2.13(b) and any non-cash proceeds of which are pledged pursuant to the Pledge Agreement or the Security Agreement to Collateral Agent for the benefit of Lenders; provided that any Restricted Asset Disposition or Restricted Sale/Leaseback Transaction be made for a consideration equal to the Fair Market Value of the asset so transferred, that the proceeds thereof shall be at least 80% cash and that the aggregate amount of all such Restricted Asset Dispositions and Restricted Sale/Leaseback Transactions, excluding the sale of the Excess Real Estate, not exceed $5,000,000 in any fiscal year. SECTION 6.05. Dividends and Distributions; Restrictions on Ability of Subsidiaries to Pay Dividends. Neither Holding nor the Borrower shall, and the Borrower shall not permit any Restricted Subsidiary to, (a) Directly or indirectly, declare or pay any dividend or make any distribution (whether in cash, securities or other Property) on or with respect to the Capital Stock of the Borrower or any Restricted Subsidiary (including any payment in connection with any merger or consolidation with or into the Borrower or any Restricted Subsidiary) except for any dividends or distributions payable solely in its Capital Stock (other than Disqualified Stock) and except any dividend or distribution which is made to the Borrower or a wholly owned Restricted Subsidiary (provided that such Restricted Subsidiary is a Wholly Owned Subsidiary), or any dividend or distribution payable solely in shares of Capital Stock (other than Redeemable Stock) of the Borrower, purchase, repurchase, redeem, retire or otherwise acquire for value any Capital Stock of the Borrower or any Affiliate of the Borrower held by persons other than the Borrower or a Restricted Subsidiary or any Securities exchangeable for or convertible into any such Capital Stock (other than for or into Capital Stock of the Borrower that is not Disqualified Stock), purchase, repurchase, redeem, defease or otherwise acquire or retire for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment any Subordinated Obligations (other than the purchase, repurchase or other acquisition of Subordinated Obligations purchased in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of acquisition, or the refinancing of any Subordinated Obligations with Refinancing Indebtedness other than as permitted pursuant to Section 6.01(c)), or make any Investment (other than pursuant to Section 6.03) in any person or to pay cash interest on the FS Convertible Senior Subordinated Debt (any such dividend, distribution, purchase, redemption, repurchase, defeasance, other acquisition, retirement, Investment or payment being herein referred to as a "Restricted Payment"); provided, however, that (i) the purchase, repurchase, redeem, legally defease, acquire or retire for value, or pay dividends or make loans to Holding to enable Holding substantially concurrently therewith to purchase, repurchase, redeem, legally defease, acquire or retire 88 Exhibit 10.1 for value, shares of, or options to purchase shares of, Capital Stock of the Borrower or Holding from employees or former employees of the Borrower, 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 of the Borrower or Holding, as the case may be, under which such individuals purchase or sell, or are granted the option to purchase or sell, shares of such Capital Stock; provided, that (i) the aggregate amount of such purchases, repurchases, redemptions, defeasances, acquisitions or retirements shall not exceed $1,000,000 in any fiscal year or $3,000,000 in the aggregate after the Closing Date, except that (x) such amounts shall be increased by the aggregate net amount of cash received by the Borrower after the Closing Date from the sale of such Capital Stock to, or the exercise of options to purchase such shares by, employees of the Borrower, Holding or any of their Subsidiaries, and (y) the Borrower may forgive or return Employee Notes without regard to the limitations set forth in clause (d)(i) and such forgiveness or return shall not be treated as a Restricted Payment for purpose of determining compliance with clause (d)(i) and such purchases, repurchases, defeasances, acquisitions or retirements (but not forgiveness or returns of Employee Notes) shall be included in the calculation of the amount of Restricted Payments; (ii) beginning not earlier than the fifth anniversary of the Closing Date and provided that no Default or Event of Default then exists or would occur as a result of such payment, Holding may pay cash dividends on Holding's Exchangeable Preferred Stock, but only in accordance with the terms of Holding's Exchangeable Preferred Stock in amounts not greater than 11 1/2% per annum of the original aggregate liquidation preference of such Exchangeable Preferred Stock plus accreted PIK liquidation preference and provided that the funds used to make such cash dividend payments are not directly or indirectly provided by Borrower or any Subsidiary thereof; (iii) the Borrower may redeem the Borrower's Exchangeable Preferred Stock (including accreted PIK liquidation preference) with Net Cash Proceeds of an Equity Issuance pursuant to Section 2.13(c)(i) in accordance with its terms; provided, however, that Holdings shall concurrently apply the proceeds of such redemption to redeem a like amount of Holding's Exchangeable Preferred Stock; (iv) the Borrower and/or Holding may make Contingent Acquisition-Related Payments; (v) the Borrower may pay dividends on the Borrower's Exchangeable Preferred Stock in cash, but only (A) to the extent that such cash is to be used by Holding to pay in cash dividends on Holding's Exchangeable Preferred Stock that, if paid in kind, would otherwise have required the issuance of a fractional share of Holding's Exchangeable Preferred Stock, and (B) up to an aggregate amount of $25,000 in any fiscal year of the Borrower; (vi) Holding may pay dividends on Holding's Exchangeable Preferred Stock in cash, but only (A) to the extent that such dividend, if paid in kind, would otherwise have required the issuance of a fractional share of Holding's Exchangeable Preferred Stock, and (B) up to an aggregate amount of $25,000 in any fiscal year of Holding; and 89 Exhibit 10.1 (vii) To the extent that the tender offer referred to in Item 6 of Annex 4 is not consummated, and provided that no Default or Event of Default has occurred and is continuing, (A) to the extent that the Borrower has received as a return of capital or dividend any portion of the Investment by the Borrower in US Holdco, Euro Holdco or Swedish Acquisitionco described in Item 7 of Annex 4 (or the Borrower does not make the Investment described in Item 7 of Annex 4), the Borrower may pay as a return of capital or dividend such amount (less the amount of any costs and expenses incurred by the Borrower in connection with the transactions described in Annex 4) to Holding; and (B) to the extent that Holding has received a return of capital or dividend pursuant to clause (A), Holding may pay such amount as a dividend or return of capital to Freeman Spogli; (b) Permit its subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any such subsidiary to (i) pay any dividends or make any other distributions on its capital stock or any other interest or (ii) make or repay any loans or advances to the Borrower or Holding of such subsidiary, or (c) Make any interest payment, or permit its subsidiaries to make any interest payment on any Subordinated Obligations with the proceeds, in whole or in part, of Loans if at any time during the five Business Day period preceding the borrowing of such Loans, the outstanding aggregate Revolving Credit Exposure used by the Borrower for any purpose other than Permitted Acquisitions exceeds $8,000,000, unless the Administrative Agent has consented in writing to such payment. SECTION 6.06. Transactions with Affiliates. Neither Holding nor the Borrower shall, and the Borrower 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 Borrower, other than the payment of Transaction Costs approved by the Syndication Agent prior to the Closing Date (an "Affiliate Transaction"), unless the terms of such Affiliate Transaction are (i) set forth in writing, (ii) in the interests of the Borrower or such Restricted Subsidiary as the case may be, and (iii) no less favorable to the Borrower 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 Borrower; provided that upon the occurrence and during the continuance of a Default or an Event of Default, no fees shall be payable to Freeman Spogli or any of its Affiliates. Notwithstanding the foregoing limitations, the Borrower or any Restricted Subsidiary may enter into or permit to exist the following: (a) any transaction permitted pursuant to Section 6.03, Section 6.05 or Section 6.13; (b) the issuance of Capital Stock for cash; 90 Exhibit 10.1 (c) the payment of compensation (including amounts paid pursuant to employee benefit plans) for the personal services of officers, directors and employees of the Borrower or any of the Restricted Subsidiaries, so long as the board of directors of the Borrower 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; (d) the payment of the Transaction Costs; or (e) the Investment by the Borrower in US Holdco, Euro Holdco and Swedish Acquisitionco in connection with the Gibeck AB Acquisition and Investments by the Borrower in US Holdco, Euro Holdco and Swedish Acquisitionco permitted by Section 6.03(c)(iii). SECTION 6.07. Business of Holding, Borrower and Subsidiaries. The Borrower will not, and will not permit any Restricted Subsidiary to, engage at any time in any business or business activity other than the business currently conducted by it and business activities reasonably related or complementary thereto. Notwithstanding anything to the contrary in this Agreement, Holding shall not engage in any business, or have any assets, operations, obligations, liabilities or employees, except as specifically contemplated in the Credit Documents and the Recapitalization Agreements. SECTION 6.08. Capital Expenditures. The Borrower will not, and will not permit any Restricted Subsidiary to, or make Capital Expenditures if the aggregate amount thereof would exceed $8,000,000 in any fiscal year; provided, that the unused portion of such $8,000,000 (not to exceed $4,000,000) may be carried forward to be used in the following fiscal year. SECTION 6.09. Debt/Adjusted EBITDA Ratio. Reserved. SECTION 6.10. Minimum EBITDA. The Borrower's EBITDA for the three consecutive fiscal quarter period ending on or about September 30, 2002, shall not be less than $13,000,000 and for each four consecutive fiscal quarter period ending nearest to the following dates shall not be less than the following amounts: ---------------------------------------------------------------------- Fiscal Minimum EBITDA Quarter Ending Nearest to --------------------------------------------------- 2002 2003 2004 ---------------------------------------------------------------------- March 31 $21,000,000 $25,000,000 ---------------------------------------------------------------------- June 30 $22,000,000 $25,000,000 ---------------------------------------------------------------------- September 30 $23,000,000 ---------------------------------------------------------------------- December 31 $20,000,000 $24,000,000 ---------------------------------------------------------------------- 91 Exhibit 10.1 SECTION 6.11. Interest Coverage Ratio. Reserved. SECTION 6.12. Fixed Charge Coverage Ratio. Reserved SECTION 6.13. Modification of Certain Agreements. Neither Holding, the Borrower nor any Restricted Subsidiary shall (i) consent to any amendment, supplement or other modification of any of the terms or provisions contained in the Senior Subordinated Notes, the Exchangeable Preferred Stock, the Senior Notes, the HRC Holding Senior Notes, or any document or instrument evidencing or applicable to any Subordinated Obligation, other than any amendment, supplement or other modification which extends the date or reduces the amount of any required repayment or redemption and other than any amendment, supplement or other modification to the Senior Notes which: (a) is consummated without any condition precedent or subsequent remaining unsatisfied or unwaived prior to the six-month anniversary of the Effective Date in connection with a restructuring or exchange of Borrower's Senior Subordinated Notes which reduces Borrower's overall Indebtedness or interest costs, (b) converts the Senior Notes to Capital Stock (other than Disqualified Stock), which Capital Stock remains pledged to Collateral Agent pursuant to the Nonrecourse Pledge Agreement and (c) occurs at a time when no Default or Event of Default has occurred and is continuing or would arise as a result of such transactions under the Credit Documents; or (ii) make any optional payment, prepayment, purchase, redemption or other payment or distribution on or with respect to Senior Notes which have been pledged to Collateral Agent (the "Pledged Senior Notes") other than any payment required to be made under the terms of such Pledged Senior Notes as in effect on the Effective Date and paid to the Collateral Agent pursuant to the terms of the Nonrecourse Pledge Agreement or cancel, terminate or forgive any Indebtedness owing on or with respect to such Pledged Senior Notes (other than the conversion or exchange of such Pledged Senior Notes to or for pledged Capital Stock in compliance with the foregoing clauses (a)-(c)). SECTION 6.14. Additional Provisions Concerning Unrestricted Subsidiaries. (a) The daily average Intercompany Receivable during any quarter may not exceed $3,500,000 and the daily outstanding balance of the Intercompany Receivable may not exceed $5,000,000. (b) Borrower will not permit any of its Unrestricted Subsidiaries to make any payment, prepayment, purchase, redemption or other payment or distribution on or with respect to any Indebtedness owed to Freeman Spogli, any Affiliate of Freeman Spogli or any shareholder of Borrower or Holding, other than any payment on or with respect to the HRC Holding Senior Notes which have been pledged to Collateral Agent (the "Pledged HRC Holding Senior Notes") which payment is required to be made under the terms of such Pledged HRC Holding Senior Notes as in effect on the Effective Date and paid to the Collateral Agent pursuant to the terms of the Nonrecourse Pledge Agreement or cancel, terminate or forgive any Indebtedness owing on or with respect to such Pledged HRC Holding Senior Notes; and Borrower will not permit any of its Unrestricted Subsidiaries to sell, transfer, assign, lease or dispose of any asset or property to or for the benefit of Freeman Spogli, any Affiliate of Freeman Spogli or any shareholder of Borrower or Holding other than in a transaction which is (i) in writing, (ii) in the interests of such Unrestricted Subsidiary, (iii) no less favorable to such Unrestricted Subsidiary than those that could be obtained in a comparable arm's length transaction with a person that is not an Affiliate of such Unrestricted Subsidiary, and (iv) for a consideration which is not less than 80% cash. Borrower will require 92 Exhibit 10.1 HRC Holding to cause each such payee to pledge to Collateral Agent under the Nonrecourse Pledge Agreement any Indebtedness of HRC Holding which is not subordinated to any other Indebtedness of HRC Holding and which is owed to Freeman Spogli, any Affiliate of Freeman Spogli or any shareholder of Borrower or Holding unless such Indebtedness is unsecured and no scheduled payment is required with respect to such Indebtedness prior to the later to occur of the Loan Maturity Date or the Revolving Credit Maturity Date. SECTION 6.15. Bank Accounts. Neither Holding, the Borrower nor any Restricted Subsidiary shall open or maintain any new bank account at any financial institution that is not a Lender. Within 30 days of the Effective Date or such longer period of time as is approved by Administrative Agent, Borrower, the Administrative Agent and each of First Midwest Bank and Union Bank shall enter into a control account agreement providing that upon the occurrence of an Event of Default and notice by the Administrative Agent, all collected amounts in such account will be transferred to Administrative Agent for repayment of the Revolving Loans but without any related commitment reduction. ARTICLE VII Defaults and Remedies SECTION 7.01. Events of Default. In case of the happening of any of the following events ("Events of Default"): (a) any representation or warranty made or deemed made in or in connection with any Credit Document or the borrowings or issuances of Letters of Credit hereunder, or any representation, warranty, statement or information contained in any report, certificate, financial statement or other instrument furnished in connection with or pursuant to any Credit Document, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished; (b) default shall be made in the payment of any principal of any Loan or the reimbursement with respect to any L/C Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; (c) default shall be made in the payment of any interest on any Loan or any Fee or L/C Disbursement (after demand for such reimbursement) or any other amount (other than an amount referred to in clause (b)) due under any Credit Document, when and as the same shall become due and payable, and such default shall continue unremedied for a period of three Business Days; (d) default shall be made in the due observance or performance by Holding, the Borrower or any Restricted Subsidiary of any covenant, condition or agreement contained in Section 5.01(a), 5.05 or 5.07(b) or in Article VI; (e) default shall be made in the due observance or performance by Holding, the Borrower or any Restricted Subsidiary or any party to the Nonrecourse Pledge Agreement (other than Collateral Agent) of any covenant, condition or agreement contained in any Credit Document 93 Exhibit 10.1 (other than those specified in clause (b), (c) or (d) ) and such default shall continue unremedied for a period of 15 days after notice thereof from the Administrative Agent or any Lender to the Borrower; (f) Holding, the Borrower or any Restricted Subsidiary shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any Indebtedness in a principal amount in excess of $2,500,000, when and as the same shall become due and payable, or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument evidencing or governing any such Indebtedness if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such Indebtedness or a trustee on its or their behalf (with or without the giving of notice, the lapse of time or both) to cause, such Indebtedness to become due prior to its stated maturity; (g) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of Holding, the Borrower or any Material Subsidiary, or of a substantial part of the property or assets of Holding, the Borrower or a Material Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Holding, the Borrower or any Material Subsidiary or for a substantial part of the property or assets of Holding, the Borrower or a Material Subsidiary, (iii) the winding-up or liquidation of Holding, the Borrower or any Material Subsidiary; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered, or (iv) any similar relief is granted under any foreign laws; (h) Holding, the Borrower or any Material Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in clause (g), (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Holding, the Borrower or any Material Subsidiary or for a substantial part of the property or assets of Holding, the Borrower or any Material Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing; (i) one or more judgments for the payment of money in an aggregate amount in excess of $2,500,000 shall be rendered against Holding, the Borrower, any Restricted Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken (and not stayed) by a judgment creditor to levy upon assets or properties of Holding, the Borrower or any Subsidiary to enforce any such judgment; (j) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other such ERISA Events, could reasonably be expected to 94 Exhibit 10.1 result in liability of the Borrower and its ERISA Affiliates in an aggregate amount exceeding $1,000,000 or requires payments exceeding $500,000 in any year; (k) any security interest purported to be created by any Security Document shall cease to be, or shall be asserted by the Borrower or any other Credit Party not to be, a valid, perfected, first priority (except as otherwise expressly provided in this Agreement or such Security Document) security interest in securities, assets or properties with a Fair Market Value of $500,000 or more and purported to be covered thereby, except to the extent that any such loss of perfection or priority results from the failure of the Collateral Agent to maintain possession of certificates representing securities pledged under the Pledge Agreement and except to the extent that such loss is covered by a lender's title insurance policy and the related insurer promptly after such loss shall have acknowledged in writing that such loss is covered by such title insurance policy; (l) any Credit Document shall cease, for any reason, to be in full force and effect or any Credit Party or any of its Subsidiaries shall so assert in writing; (m) there shall have occurred a Change in Control; (n) the audited financial statements for the fiscal year ending on or about December 31, 2000 delivered pursuant to Section 5.04(a) are materially adversely different than the draft of such financial statements delivered by the Borrower to the Lenders on May 25, 2001 or are not accompanied by an opinion of the Borrower's accountants complying with Section 5.04(a)(i) of the Credit Agreement and a certificate of an officer complying with Section 5.04(d) of the Credit Agreement; or (o) the financial statements for the fiscal quarter ending on or about March 31, 2001 delivered pursuant to Section 5.04(b) are materially adversely different than the draft of such financial statements delivered by the Borrower to the Lenders on June 18, 2001; then, and in every such event (other than an event with respect to the Borrower described in clause (g) or (h)), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Lenders having Loans (excluding Swingline Loans), L/C Exposure, Swingline Exposure and unused Revolving Credit Commitments and Term Loan Commitments representing at least a majority of the sum of all Loans outstanding (excluding Swingline Loans), L/C Exposure, Swingline Exposure and unused Revolving Credit Commitments and Term Loan Commitments at such time shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate forthwith the Commitments and (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder and under any other Credit Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Credit Document to the contrary notwithstanding; and in any event with respect to the Borrower described in clause (g) or (h), the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder and under any other Credit Document, shall 95 Exhibit 10.1 automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Credit Document to the contrary notwithstanding. ARTICLE VIII The Agents SECTION 8.01. Appointment of Administrative and Collateral Agent. In order to expedite the transactions contemplated by this Agreement, Deutsche Bank Trust Company Americas is hereby appointed to act as Administrative Agent and Collateral Agent on behalf of the Lenders and the Issuing Bank , and Salomon Brothers Inc is hereby appointed to act as Syndication Agent on behalf of the Lenders and the Issuing Bank (for purposes of this Article VIII, the Administrative Agent, the Collateral Agent and the Syndication Agent are referred to collectively as the "Agents"). Each of the Lenders and each subsequent holder of any Note by its acceptance thereof, hereby irrevocably authorizes the Agents to take such actions on behalf of such Lender or holder or the Issuing Bank and to exercise such powers as are specifically delegated to the Agents by the terms and provisions hereof and of the other Credit Documents, together with such actions and powers as are reasonably incidental thereto. The Administrative Agent is hereby expressly authorized by the Lenders and the Issuing Bank, without hereby limiting any implied authority, (a) to receive on behalf of the Lenders and the Issuing Bank all payments of principal of and interest on the Loans, all payments in respect of L/C Disbursements and all other amounts due to the Lenders hereunder, and promptly to distribute to each Lender or the Issuing Bank its proper share of each payment so received; (b) to give notice on behalf of each of the Lenders to the Borrower of any Event of Default specified in this Agreement of which the Administrative Agent has actual knowledge acquired in connection with its agency hereunder; and (c) to distribute to each Lender copies of all notices, financial statements and other materials delivered by the Borrower or any other Credit Party pursuant to this Agreement or the other Credit Documents as received by the Administrative Agent. Without limiting the generality of the foregoing, the Agents are hereby expressly authorized to execute any and all documents (including releases) with respect to the Collateral and the rights of the Secured Parties with respect thereto, as contemplated by and in accordance with the provisions of this Agreement and the Security Documents. SECTION 8.02. Limitations on Liabilities. Neither the Agents nor any of their respective directors, officers, employees or agents shall be liable as such for any action taken or omitted by any of them except for its or his own gross negligence or wilful misconduct, or be responsible for any statement, warranty or representation herein or the contents of any document delivered in connection herewith, or be required to ascertain or to make any inquiry concerning the performance or observance by the Borrower or any other Credit Party of any of the terms, conditions, covenants or agreements contained in any Credit Document. The Agents shall not be responsible to the Lenders or the holders of the Notes for the due execution, genuineness, validity, enforceability or effectiveness of this Agreement, the Notes or any other Credit Documents, instruments or agreements. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof until it shall have received from the payee of such Note notice, given as provided herein, of the transfer thereof in compliance with Section 9.04. The Agents shall in all cases be fully protected in acting, or refraining from acting, in accordance 96 Exhibit 10.1 with written instructions signed by the Required Lenders and, except as otherwise specifically provided herein, such instructions and any action or inaction pursuant thereto shall be binding on all the Lenders and each subsequent holder of any Note. Each Agent shall, in the absence of knowledge to the contrary, be entitled to rely on any instrument or document believed by it in good faith to be genuine and correct and to have been signed or sent by the proper person or persons. Neither the Agents nor any of their respective directors, officers, employees or agents shall have any responsibility to the Borrower or any other Credit Party on account of the failure of or delay in performance or breach by any Lender or the Issuing Bank of any of its obligations hereunder or to any Lender or the Issuing Bank on account of the failure of or delay in performance or breach by any other Lender or the Issuing Bank or the Borrower or any other Credit Party of any of their respective obligations hereunder or under any other Credit Document or in connection herewith or therewith. Each of the Agents may execute any and all duties hereunder by or through agents or employees and shall be entitled to rely upon the advice of legal counsel selected by it with respect to all matters arising hereunder and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. SECTION 8.03. Acting at the Direction of the Required Lenders. The Lenders hereby acknowledge that neither Agent shall be under any duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement unless it shall be requested in writing to do so by the Required Lenders. SECTION 8.04. Resignation of the Administrative Agent or the Collateral Agent. Subject to, and effective upon, the appointment and acceptance of a successor Agent as provided below, either Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right to appoint a successor. If no successor shall have been so appointed by the Required Lenders (subject, so long as no Event of Default has occurred and is continuing, to the consent of the Borrower, which consent shall not be unreasonably withheld or delayed) and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent which shall be a bank with an office in New York, New York, having a combined capital and surplus of at least $500,000,000 or an Affiliate of any such bank. Upon the acceptance of any appointment as Agent hereunder by a successor bank, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations hereunder. After the Agent's resignation hereunder, the provisions of this Article and Section 9.05 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. SECTION 8.05. Other Transactions. With respect to the Loans made by it hereunder and the Notes issued to it, each Agent in its individual capacity and not as Agent shall have the same rights and powers as any other Lender and may exercise the same as though it were not an Agent, and the Agents and their Affiliates may accept deposits from, lend money to and generally engage in any kind of business with Holding, the Borrower or any Subsidiary or other Affiliate thereof as if it were not an Agent. SECTION 8.06. Reimbursement and Indemnity. Each Lender agrees (a) to reimburse the Agents, on demand, in the amount of its pro rata share (based on its Commitments hereunder) of any expenses incurred for the benefit of the Lenders by the Agents, including 97 Exhibit 10.1 counsel fees (including the allocated costs of in-house legal counsel) and compensation of agents and employees paid for services rendered on behalf of the Lenders, that shall not have been reimbursed by the Borrower and (b) to indemnify and hold harmless each Agent and any of its directors, officers, employees or agents, on demand, in the amount of such pro rata share, from and against any and all liabilities, taxes, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by or asserted against it in its capacity as Agent or any of them in any way relating to or arising out of this Agreement or any other Credit Document or any action taken or omitted by it or any of them under this Agreement or any other Credit Document, to the extent the same shall not have been reimbursed by the Borrower or any other Credit Party, provided that no Lender shall be liable to an Agent or any such other indemnified person for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or wilful misconduct of such Agent or any of its directors, officers, employees or agents. Each Revolving Credit Lender agrees to reimburse each the Issuing Bank and its directors, employees and agents, in each case, to the same extent and subject to the same limitations as provided above for the Agents. SECTION 8.07. No Reliance. Each Lender acknowledges that it has, independently and without reliance upon the Agents or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agents or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any other Credit Document, any related agreement or any document furnished hereunder or thereunder. ARTICLE IX Miscellaneous SECTION 9.01. Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to the Borrower or Holding, to it at 27711 Diaz Road, P.O. Box 9020, Temecula, CA 92589-9020, Attention of Chief Financial Officer (telecopy: 909-694-1225) with a copy to Freeman Spogli & Co. Incorporated, 11100 Santa Monica Boulevard, Los Angeles, CA 90025, Attention of Jon Ralph (telecopy: 310-444-1870); (b) if to the Administrative Agent with respect to notices under Article II, to Deutsche Bank Trust Company Americas, 130 Liberty St., 14th Floor, New York, NY 10006, Attention of Stuart Levy, Deal Administrator (telephone: 212-250-4869), (telecopy: 212-250-6029); 98 Exhibit 10.1 (c) if to the Administrative Agent with respect to other matters, to Deutsche Bank Trust Company Americas, 300 South Grand Ave., Floor 41, Los Angeles, CA 90071, Attention of Bob Kolb, Principal (telephone: 213-620-8465), (telecopy: 213-620-8484); and (d) if to a Lender, to it at its address (or telecopy number) set forth on Annex 2 or in the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telecopy or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section or in accordance with the latest unrevoked direction from such party given in accordance with this Section. SECTION 9.02. Survival of Agreement. All covenants, agreements, representations and warranties made by the Borrower or Holding herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Credit Document shall be considered to have been relied upon by the Lenders and the Issuing Bank and shall survive the making by the Lenders of the Loans, the issuance of Letters of Credit by the Issuing Bank and the execution and delivery to the Lenders of the Notes evidencing such Loans, regardless of any investigation made by the Lenders or the Issuing Bank or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement or any other Credit Document is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not been terminated. The provisions of Sections 2.14, 2.16, 2.20 and 9.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the expiration of any Letter of Credit, the invalidity or unenforceability of any term or provision of this Agreement or any other Credit Document, or any investigation made by or on behalf of the Administrative Agent, the Collateral Agent, any Lender or the Issuing Bank. SECTION 9.03. Effectiveness; Termination. This Agreement shall become effective when it shall have been executed by the Borrower, Holding and the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. This Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Credit Document shall have been paid in full and all Letters of Credit have been cancelled or have expired and all amounts drawn thereunder have been reimbursed in full. SECTION 9.04. Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the permitted successors and assigns of such party; and all 99 Exhibit 10.1 covenants, promises and agreements by or on behalf of the Borrower, Holding, the Administrative Agent, the Issuing Bank or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it and the Notes held by it); provided, however, that (x) the Borrower and the Administrative Agent and (only with respect to Revolving Credit Commitments and Revolving Credit Loans) the Swingline Lender and the Issuing Bank must give their prior written consent to such assignment (which consent shall not be unreasonably withheld), except in the case of an assignment to a Lender or an Affiliate of such Lender of any Loan or Note (when no consent of any party is required), or at any time when an Event of Default has occurred and is continuing (when no consent of the Borrower is required), (y) (i) the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 (or, if less, the entire remaining amount of such Lender's Commitment), (ii) unless otherwise approved by Administrative Agent in its sole discretion, each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's rights and obligations with respect to the Revolving Credit Commitments and/or the Term Loans, (iii) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with the Note or Notes subject to such assignment and a processing and recordation fee of $3,500 and (iv) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire. Upon acceptance and recording pursuant to clause (e) of this Section, from and after the effective date specified in each Assignment and Acceptance, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its 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, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.14, 2.16, 2.20 and 9.05, as well as to any Fees accrued for its account and not yet paid); and (z) to the extent that any such assignment is to Freeman Spogli or any Affiliate of Freeman Spogli or is made to a person holding on behalf of Freeman Spogli or any Affiliate thereof, such assignment shall have been approved in writing by Administrative Agent and such holder shall agree in writing that such holder and any assignee of such holder shall have no right to consent to any amendment, modification, waiver or supplement hereto or to otherwise vote in any manner whatsoever with respect to this Agreement or the other Credit Documents and shall not be entitled to participate in any 100 Exhibit 10.1 conference, discussion or meeting of Lenders or to receive any information distributed to any other Lender hereunder. (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Term Loan Commitment and Revolving Credit Commitment, and the outstanding balances of its Term Loans and Revolving Loans, in each case without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance, (ii) except as set forth in clause (i), 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, any other Credit Document or any other instrument or document furnished pursuant hereto, or the financial condition of the Borrower or any Subsidiary or the performance or observance by the Borrower or any Subsidiary of any of its obligations under this Agreement, any other Credit Document or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements referred to in Section 3.05(a) or delivered pursuant to Section 5.04 and 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; (v) such assignee will independently and without reliance upon the Administrative Agent, the Collateral 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; (vi) such assignee appoints and authorizes the Administrative Agent and the Collateral Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent and the Collateral Agent, respectively, by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive and the Borrower, the Administrative Agent, the Issuing Bank, the Collateral Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, the Issuing Bank, the Collateral Agent and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee together with the Note or Notes subject to such assignment, an Administrative Questionnaire completed in respect of the assignee (unless the 101 Exhibit 10.1 assignee shall already be a Lender hereunder), the processing and recordation fee referred to in clause (b) and, if required, the written consent of the Borrower, the Administrative Agent and (only with respect to Revolving Credit Commitments and Revolving Credit Loans) the Swingline Lender and the Issuing Bank to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Lenders, the Issuing Bank and the Swingline Lender. No assignment shall be effective unless it has been recorded in the Register as provided in this clause. Within five Business Days after receipt of notice, (i) the Borrower, at its own expense, shall execute and deliver to the Administrative Agent new Notes payable to the order of such assignee (or, if such assignee shall so request, to such assignee or registered assigns) representing Loans made pursuant to the Commitments assumed by it or Term Loans acquired by it, as the case may be, pursuant to such Assignment and Acceptance and (ii) the assigning Lender, if it shall cease to be a party hereto as provided in clause (a), shall deliver the Notes held by it to the Borrower for cancellation. The new Notes delivered to such assignee shall be dated the date of the original Notes issued hereunder and shall otherwise be in substantially the form of the appropriate Exhibit or Exhibits thereto. (f) Each Lender may without the consent of the Borrower, the Swingline Lender, the Issuing Bank or the Administrative Agent sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it and the Notes held by it); provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.14, 2.16 and 2.20 to the same extent as if they were Lenders and (iv) the Borrower, the Administrative Agent, the Issuing Bank and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrower relating to the Loans or L/C Disbursements and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers which extend the final scheduled maturity of any Loan, Note or Letter of Credit (unless such Letter of Credit is not extended beyond the Maturity Date) in which such participant is participating, or reduce the rate or extend the time of payment of interest or Fees thereon (except in connection with a waiver of applicability of any post-default increase in interest amounts) or reduce the principal amount thereof, or increase the amount of the participant's participation over the amount thereof then in effect (provided that a waiver of any Default or of a mandatory reduction in the Commitment shall not constitute a change in the terms of such participation, and that an increase in any Commitment or Loan shall be permitted without the consent of any participant if the participant's participation is not increased thereby), or consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement). (g) Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure of information designated by the Borrower as confidential, each such assignee or participant or proposed assignee or participant shall agree (subject to customary exceptions) to 102 Exhibit 10.1 preserve the confidentiality of such confidential information on terms no less restrictive than those applicable to the Lenders pursuant to Section 9.16. (h) Any Lender may at any time assign all or any portion of its rights under this Agreement and the Notes issued to it to a Federal Reserve Bank to secure extensions of credit by such Federal Reserve Bank to such Lender; provided that no such assignment shall release a Lender from any of its obligations hereunder or substitute any such Bank for such Lender as a party hereto. (i) Neither Holding nor the Borrower shall assign or delegate any of its rights or duties hereunder without the prior written consent of the Administrative Agent, the Issuing Bank and each Lender, and any attempted assignment without such consent shall be null and void. SECTION 9.05. Expenses; Indemnity. (a) The Borrower and Holding agree, jointly and severally, to pay all out-of-pocket expenses incurred by the Administrative Agent, the Collateral Agent, the Issuing Bank and the Swingline Lender in connection with the syndication of the credit facilities provided for herein and the preparation and administration of this Agreement and the other Credit Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions hereby or thereby contemplated shall be consummated) or incurred by the Administrative Agent, the Collateral Agent or any Lender in connection with the enforcement or protection of its rights in connection with this Agreement and the other Credit Documents or in connection with the Loans made or the Notes or Letters of Credit issued hereunder, including the fees, charges and disbursements of O'Melveny & Myers LLP, counsel for the Administrative Agent and the Collateral Agent, and, in connection with any such enforcement or protection, the fees, charges and disbursements of any other counsel for the Administrative Agent, the Collateral Agent or any Lender (including the allocated costs of in-house legal counsel). (b) The Borrower and Holding agree, jointly and severally, to indemnify the Administrative Agent, the Collateral Agent, each Lender and the Issuing Bank, each Affiliate of any of the foregoing persons and each of their respective directors, officers, employees and agents (each such person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees (including the allocated costs of in-house legal counsel), charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Credit Document or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the Transactions and the other transactions contemplated thereby, (ii) the use of the proceeds of the Loans or issuance of Letters of Credit, (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto, or (iv) any actual or alleged presence or Release of Hazardous Materials on any property owned or operated by the Borrower or any of the Subsidiaries, or any Environmental Claim related in any way to the Borrower or the Subsidiaries; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or 103 Exhibit 10.1 wilful misconduct of such Indemnitee. Borrower and Holding hereby agree that no Indemnitee shall be liable for any indirect or consequential damages. (c) The provisions of this Section shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the expiration of any Letter of Credit, the invalidity or unenforceability of any term or provision of this Agreement or any other Credit Document, or any investigation made by or on behalf of the Administrative Agent, the Collateral Agent, any Lender or the Issuing Bank. All amounts due under this Section shall be payable on written demand therefor. SECTION 9.06. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender and any Affiliate of such Lender is hereby authorized at any time and from time to time, except to the extent prohibited by law (other than as to any requirement as to mutuality), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender or any Affiliate of such Lender to or for the credit or the account of the Borrower or Holding or any Credit Party or any Affiliate of any Credit Party against any of and all the obligations of the Borrower or Holding or any Credit Party or any Affiliate of any Credit Party now or hereafter existing under this Agreement and other Credit Documents held by such Lender or any Affiliate of such Lender, irrespective of whether or not such Lender or any Affiliate of such Lender shall have made any demand under this Agreement or such other Credit Document and although such obligations may be unmatured. The rights of each Lender or any Affiliate of such Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender or any Affiliate of such Lender may have. SECTION 9.07. Applicable Law. THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS (OTHER THAN LETTERS OF CREDIT AND AS EXPRESSLY SET FORTH IN OTHER CREDIT DOCUMENTS) SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. EACH LETTER OF CREDIT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OR RULES DESIGNATED IN SUCH LETTER OF CREDIT, OR IF NO SUCH LAWS OR RULES ARE DESIGNATED, THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 500 (THE "UNIFORM CUSTOMS") AND, AS TO MATTERS NOT GOVERNED BY THE UNIFORM CUSTOMS, THE LAWS OF THE STATE OF NEW YORK. SECTION 9.08. Waivers; Amendment. (a) No failure or delay of the Administrative Agent, the Collateral Agent, any Lender or the Issuing Bank in exercising any power or right hereunder or under any other Credit Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Collateral Agent, the Issuing Bank and the Lenders hereunder and under the other Credit Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this 104 Exhibit 10.1 Agreement or any other Credit Document or consent to any departure by the Borrower or any other Credit Party therefrom shall in any event be effective unless the same shall be permitted by clause (b), and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Borrower or Holding in any case shall entitle the Borrower or Holding to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower, Holding and the Required Lenders; provided, however, that no such agreement shall (i) decrease the principal amount of, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on any Loan or any date for reimbursement of an L/C Disbursement, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan or L/C Disbursement, without the prior written consent of each holder of a Note affected thereby, (ii) change or extend the Commitment or decrease or extend the date for payment of the Commitment Fees of any Lender without the prior written consent of such Lender or (iii) amend or modify the provisions of Section 2.17 or 9.04(i), the provisions of this Section, the definition of the term "Required Lenders" or release any Guarantor or all or substantially all of the Collateral, without the prior written consent of each Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent, the Collateral Agent, the Issuing Bank or the Swingline Lender hereunder or under any other Credit Document without the prior written consent of the Administrative Agent, the Collateral Agent, the Issuing Bank or the Swingline Lender. Each Lender and each holder of a Note shall be bound by any waiver, amendment or modification authorized by this Section regardless of whether its Note shall have been marked to make reference thereto, and any consent by any Lender or holder of a Note pursuant to this Section shall bind any person subsequently acquiring a Note from it, whether or not such Note shall have been so marked. (c) If a Lender refuses to consent to a proposed change, waiver, discharge or termination with respect to this Agreement which requires the consent of all of the Lenders and has been approved by the Required Lenders, the Borrower shall have the right for a 60 day period following such refusal, to replace such Lender (a "Replaced Lender") with one or more assignees permitted pursuant to Section 9.04 (collectively, the "Replacement Lender") acceptable to Administrative Agent, provided that (i) at the time of any replacement pursuant to this clause, the Replacement Lender and Replaced Lender shall enter into one or more Assignment and Acceptances pursuant to Section 9.04(b) (and with all fees payable pursuant to Section 9.04(b) to be paid by the Replacement Lender) pursuant to which the Replacement Lender shall acquire all of the outstanding Loans and Commitments (including principal, interest and Commitment Fees) of, and in each case participations in Letters of Credit and Swingline Loans by, the Replaced Lender, (ii) the Replacement Lender shall pay to the Replaced Lender in respect thereof an amount equal to the sum of (A) an amount equal to the principal of, and all unpaid interest on, all outstanding Loans of the Replaced Lender, and all unpaid Commitment Fees payable to the Replaced Lender, (B) an amount equal to all unpaid drawings with respect to Letters of Credit that have been funded by (and not reimbursed to) such 105 Exhibit 10.1 Replaced Lender, together with all unpaid interest thereon, (C) an amount equal to such Replaced Lender's funded participations in any Swingline Loans, and (D) an amount equal to all unpaid fees owing to the Replaced Lender with respect thereto, (iii) the Replacement Lender shall pay to the appropriate Issuing Bank an amount equal to such Replaced Lender's Applicable Percentage of any unpaid drawings with respect to Letters of Credit issued by it to the extent such amount was not theretofore funded by such Replaced Lender, (iv) the Replacement Lender shall pay to the Swingline Lender an amount equal to the unfunded amount of any participation of the Replaced Lender in a Swingline Loan which is required to be funded, and (v) all obligations of the Borrower owing to the Replaced Lender other than principal, interest and Commitment Fees, shall be paid in full to such Replaced Lender concurrently with such replacement. Upon the execution of the respective Assignment and Acceptance, recordation of such assignment in the Register by Administrative Agent, and the payment of foregoing amounts, the Replacement Lender shall become a Lender hereunder and the Replaced Lender shall cease to constitute a Lender hereunder except with respect to indemnification provisions under this Agreement which by the terms of this Agreement survive the termination of this Agreement, which indemnification provisions shall survive as to such Replaced Lender. Notwithstanding anything to the contrary contained above, no Issuing Bank may be replaced hereunder at any time while it has Letters of Credit outstanding hereunder unless arrangements satisfactory to such Issuing Bank (including the furnishing of a standby letter of credit in form and substance, and issued by an issuer satisfactory to such Issuing Bank or the furnishing of cash collateral in amounts and pursuant to arrangements satisfactory to such Issuing Bank) have been made with respect to such outstanding Letters of Credit. SECTION 9.09. Interest Rate Limitation. Notwithstanding anything herein or in the Notes to the contrary, if at any time the interest rate applicable to any Loan or participation in any L/C Disbursement, together with all fees, charges and other amounts which are treated as interest on such Loan or participation in such L/C Disbursement under applicable law (collectively the "Charges"), shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan or participation in accordance with applicable law, the rate of interest payable in respect of such Loan or participation hereunder or under the Note held by such Lender, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan or participation but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or participations or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender. SECTION 9.10. Entire Agreement. This Agreement, the Fee Letter and the other Credit Documents constitute the entire contract between the parties relative to the subject matter 106 Exhibit 10.1 hereof. Any other previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the other Credit Documents. Nothing in this Agreement or in the other Credit Documents, expressed or implied, is intended to confer upon any party other than the parties hereto and thereto any rights, remedies, obligations or liabilities under or by reason of this Agreement or the other Credit Documents. SECTION 9.11. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER CREDIT DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 9.12. Severability. In the event any one or more of the provisions contained in this Agreement or in any other Credit Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 9.13. Counterparts. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original but all of which when taken together shall constitute a single contract, and shall become effective as provided in Section 9.03. Delivery of an executed signature page to this Agreement by telecopy transmission shall be as effective as delivery of a manually signed counterpart of this Agreement. SECTION 9.14. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 9.15. Jurisdiction; Consent to Service of Process. (a) Each of Holding and the Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Credit Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such 107 Exhibit 10.1 action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto 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. Nothing in this Agreement shall affect any right that the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Credit Documents against the Borrower, Holding or their respective properties in the courts of any jurisdiction. (b) Each of Holding and the Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Credit Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 9.16. Confidentiality. The Administrative Agent, the Collateral Agent, the Issuing Bank and each of the Lenders agrees to keep confidential (and to use its best efforts to cause its respective agents and representatives to keep confidential) the Information (as defined below) and all copies thereof, extracts therefrom and analyses or other materials based thereon, except that the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender shall be permitted to disclose Information (a) to such of its respective officers, directors, employees, agents, affiliates and representatives as need to know such Information, (b) to the extent requested by any regulatory authority, (c) to the extent otherwise required by applicable laws and regulations or by any subpoena or similar legal process, (d) in connection with any suit, action or proceeding relating to the enforcement of its rights hereunder or under the other Credit Documents or (e) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent, the Issuing Bank, any Lender or the Collateral Agent on a nonconfidential basis from a source other than the Borrower or Holding. For the purposes of this Section, "Information" means all financial statements, certificates, reports, agreements and information (including all analyses, compilations and studies prepared by the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender based on any of the foregoing) that are received from the Borrower or Holding and related to the Borrower or Holding, any shareholder of the Borrower or Holding or any employee, customer or supplier of the Borrower or Holding, other than any of the foregoing that were available to the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender on a nonconfidential basis prior to its disclosure thereto by the Borrower or Holding, and which are in the case of Information provided after the Closing Date, clearly identified at the time of delivery as confidential. The provisions of this Section shall remain operative and in full force and effect until the second anniversary of the termination of this Agreement. 108 Exhibit 10.1 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. HUDSON RESPIRATORY CARE INC. by /s/ Patrick G. Yount ------------------------ Name: Patrick G. Yount Title: CFO RIVER HOLDING CORP. by /s/ Patrick G. Yount ------------------------ Name: Patrick G. Yount Title: CFO DEUTSCHE BANK TRUST COMPANY AMERICAS, as Administrative Agent, Collateral Agent, Swingline Lender and Issuing Bank by /s/ Patrick Dowling ------------------------ Name: Patrick Dowling Title: Vice President S-1 Exhibit 10.1 LENDERS DEUTSCHE BANK TRUST COMPANY AMERICAS by /s/ Patrick Dowling ---------------------------- Name: Patrick Dowling Title: Vice President BANK OF AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC. by /s/ Peter A. Heiter ---------------------------- Name: Peter A. Heiter Title: Vice President by /s/ Dister H. Bochoter ---------------------------- Name: Dister H. Bochter Title: Jr. V.P. BANK OF AMERICA, N.A. by /s/ David Maiorella ---------------------------- Name: David Maiorella Title: Vice President BANK OF TOKYO-MITSUBISHI TRUST COMPANY by /s/ Tod Angus ---------------------------- Name: Tod Angus Title: Vice President S-2 Exhibit 10.1 PB CAPITAL CORPORATION by /s/ Renni J. Leopold ---------------------------- Name: Renni J. Leopold Title: Vice President by /s/ Christopher J. Ruzzi ---------------------------- Name: Christopher J. Ruzzi Title: Vice President CITICORP USA, INC. by /s/ Susan McManigal ---------------------------- Name: Susan McManigal Title: Attorney-in-Fact IMPERIAL BANK by /s/ Thomas G. Kinzel ---------------------------- Name: Thomas G. Kinzel Title: Vice President ROYAL BANK OF CANADA by /s/ Chris Abe ---------------------------- Name: Chris Abe Title: Manager SOCIETE GENERALE by /s/ Richard Bernal ---------------------------- Name: Richard Bernal Title: Director S-3 Exhibit 10.1 WELLS FARGO BANK, N.A. by /s/ ---------------------------- Name: Title: S-4 Exhibit 10.1 ANNEX 1 REVOLVING CREDIT COMMITMENTS AND TERM LOAN COMMITMENTS
- ------------------------------------------------------------------------------------------------------------------------ Working Capital Term Loan Lender Acquisition Loans Commitments Commitment - ------------------------------------------------------------------------------------------------------------------------ Deutsche Bank Trust Company Americas (f/k/a Bankers Trust Company) $ 2,959,183.67 $ 1,109,693.88 $ 739,795.92 - ------------------------------------------------------------------------------------------------------------------------ Bank of America, N.A. 8,000,000.00 3,000,000.00 2,000,000.00 - ------------------------------------------------------------------------------------------------------------------------ Bank Austria Creditanstalt Corporate Finance, Inc. 4,000,000.00 1,500,000.00 1,000,000.00 - ------------------------------------------------------------------------------------------------------------------------ Bank of Tokyo-Mitsubishi Trust Company 4,000,000.00 1,500,000.00 1,000,000.00 - ------------------------------------------------------------------------------------------------------------------------ Citicorp USA, Inc. 5,000,000.00 1,875,000.00 1,250,000.00 - ------------------------------------------------------------------------------------------------------------------------ Imperial Bank 2,040,816.33 765,306.12 510,204.08 - ------------------------------------------------------------------------------------------------------------------------ PB Capital Corporation 3,000,000.00 1,125,000.00 750,000.00 - ------------------------------------------------------------------------------------------------------------------------ Royal Bank of Canada 3,000,000.00 1,125,000.00 750,000.00 - ------------------------------------------------------------------------------------------------------------------------ Societe Generale 4,000,000.00 1,500,000.00 1,000,000.00 - ------------------------------------------------------------------------------------------------------------------------ Wells Fargo Bank, N.A. 4,000,000.00 1,500,000.00 1,000,000.00 - ------------------------------------------------------------------------------------------------------------------------ Total $40,000,000.00 $15,000,000.00 $10,000,000.00 - ------------------------------------------------------------------------------------------------------------------------
Annex 1-1 Exhibit 10.1 ANNEX 2 ADMINISTRATIVE INFORMATION Annex 2-1 Exhibit 10.1 ANNEX 3 DESCRIPTION OF THE RECAPITALIZATION 1. Freeman Spogli has caused a Delaware corporation ("Holdings") to be formed. 2. Freeman Spogli will make an equity contribution of at least $55,000,000 to Holdings (of which no more than $30,000,000 is to be in the form of preferred equity issued upon terms acceptable to Salomon Brothers Holding Company Inc, Salomon Brothers Inc and the Administrative Agent (the "Holdings Preferred Equity")), and certain members of the Borrower's management (the "Management Investors"), will make an equity contribution of at least $6,500,000 (in exchange for common stock) to Holdings (for a total of at least $91,500,000 of equity contributions (such common equity and preferred equity investments in such amounts being the "Equity Investment")). All the outstanding common stock of Holdings will be held by Freeman Spogli, certain affiliates thereof and the Management Investors (collectively, the "Investors"). 3. Holdings has caused River Acquisition Corp., a Delaware corporation ("Acquisition Corp."), to be formed, and will make a capital contribution in an aggregate cash amount equal to the Equity Investment (and not less than $91,500,000) to Acquisition Corp. in exchange for 100% of the capital stock of Acquisition Corp. (of which not more than $30,000,000 is to be in the form of preferred equity substantially similar to the Holdings Preferred Equity). 4. Acquisition Corp. will make a capital contribution of an aggregate cash amount equal to the Equity Investment (and not less than $91,500,000) to the Borrower (collectively with the contributions referred to in clause (b) and (c) above, the "Equity Contributions") in exchange for a number (to be determined) of newly issued shares of the Borrower (of which not more than $30,000,000 is to be in the form of preferred equity substantially similar to the Holdings Preferred Equity). 5. The Borrower will obtain new senior secured credit facilities in an aggregate principal amount of up to $100,000,000 (the "Senior Facilities"). 6. The Borrower will issue $115,000,000 in aggregate principal amount of its senior subordinated notes in a Rule 144A or other private placement (the "Senior Subordinated Notes"). 7. The Borrower will apply the Equity Contributions and the proceeds of the Senior Facilities and the Senior Subordinated Notes to redeem a certain number of shares of the Borrower (to be determined) held by Helen Hudson Lovaas and certain affiliated parties (collectively, the "Current Owner") by means of a recapitalization dividend in an amount, based on the Equity Investment and the Equity Contribution Annex 3-1 Exhibit 10.1 received by the Borrower, of not more than $225,000,000 (the "Redemption Amount") payable to the Current Owner. 8. The Current Owner will contribute all of her shares of Industrias Hudson S.A. de C.V. to the Borrower. 9. The Indebtedness to be Paid will be repaid in full. 10. The Transaction Costs will be paid. 11. Acquisition Corp. will then merge with and into the Borrower (the "Merger"), in a transaction structured such that (i) the Borrower remains as the surviving entity of the Merger, and (ii) upon consummation of the Merger, approximately 80.4% of the outstanding capital stock of the Borrower will be held by Holdings and approximately 19.6% of the outstanding capital stock of the Borrower will be held by the Current Owner, based on the Equity Investment described above. Annex 3-2 Exhibit 10.1 ANNEX 4 GIBECK AB ACQUISITION 1. The Borrower will cause a holding company (together with its successors, "US Holdco") to be formed under the laws of a state of the United States, and a holding company (together with its successors, "Euro Holdco") to be formed under the laws of a European Economic Union member nation, each as a wholly-owned direct or indirect Unrestricted Subsidiary of the Borrower. 2. The Borrower will cause a Swedish acquisition company (together with its successors, "Swedish Acquisitionco") be formed as an Unrestricted Subsidiary of the Borrower. 3. Freeman Spogli will purchase a number of shares of Holding to be determined for a cash consideration of at least $20,000,000. 4. Holding will use the proceeds of Item 3 to purchase a number of shares of common stock of the Borrower to be determined. 5. The holders of the Gibeck Family Shares will exchange such shares for a number of shares of Holding to be determined. 6. Holding will exchange the Gibeck Family Shares for a number of shares of common stock of the Borrower to be determined. 7. The Borrower will make an Investment in Swedish Acquisitionco (directly or through US Holdco and/or Euro Holdco) consisting of the proceeds received in Item 4 and the Gibeck Family Shares received in Item 6. 8. Swedish Acquisitionco will obtain approximately $30,000,000 of financing. Such financing, together with the Investment by the Borrower, will be used to acquire all of the shares of Louis Gibeck AB, a Swedish corporation ("Gibeck AB") pursuant to a tender offer (other than shares of Class A Stock of Gibeck AB held by Sten Gibeck (such shares, the "Gibeck Family Shares") . 9. After giving effect to the Gibeck AB Acquisition, US Holdco, Euro Holdco and Swedish Acquisitionco will be an Unrestricted Subsidiaries of the Borrower, and Gibeck AB will be a Subsidiary of Swedish Acquisition. In addition, it is contemplated that the Borrower will transfer ownership of Swedish Acquisitionco to Euro Holdco as soon as practicable under applicable tax regulations. 10. The transactions described in this Annex are referred to as the "Gibeck AB Acquisition". Annex 4-1 EX-10.2 4 dex102.txt AMENDED AND RESTATED SECURITY AGREEMENT Exhibit 10.2 AMENDED AND RESTATED SECURITY AGREEMENT dated as of May 14, 2002 (the "Agreement"), among HUDSON RESPIRATORY CARE INC., a California corporation (the "Borrower"), RIVER HOLDING CORP., a Delaware corporation ("Holding"), each subsidiary of the Borrower listed on Schedule I hereto (each such subsidiary individually a "Subsidiary Guarantor" and collectively, the "Subsidiary Guarantors"; the Subsidiary Guarantors, Holding and the Borrower are referred to collectively herein as the "Grantors") and DEUTSCHE BANK TRUST COMPANY AMERICAS (formerly Bankers Trust Company), a New York banking corporation ("Deutsche Bank"), as collateral agent (in such capacity, the "Collateral Agent") for the Secured Parties (as defined herein). RECITALS WHEREAS, pursuant to the Credit Agreement dated as of April 7, 1998 (the "Original Credit Agreement") among the Borrower, Holding, the lenders from time to time party thereto (the "Lenders"), Salomon Brothers Inc, as arranger, advisor and syndication agent and Bankers Trust Company, as administrative agent for the Lenders, Collateral Agent and as issuing bank, the Grantors entered into that certain Security Agreement dated as of April 7, 1998 (the "Original Security Agreement"), pursuant to which the Grantors granted to the Collateral Agent, for the ratable benefit of the Secured Parties, a first priority security interest in the Collateral as defined in the Original Credit Agreement. WHEREAS, the Borrower, Holding, Deutsche Bank and the Required Lenders party to the Original Credit Agreement are, concurrently herewith, amending and restating the Original Credit Agreement in the form of the Amended and Restated Credit Agreement dated as of May 14, 2002 (as amended, supplemented or otherwise modified from time to time, the "Amended and Restated Credit Agreement"), among the Borrower, Holding, the lenders from time to time party thereto (the "Lenders") and Deutsche Bank, as swingline lender, issuing bank, administrative agent and Collateral Agent for the Lenders. WHEREAS, the Lenders have agreed to make Loans to the Borrower, and the Issuing Bank has agreed to issue Letters of Credit for the account of the Borrower, pursuant to, and upon the terms and subject to the conditions specified in, the Amended and Restated Credit Agreement. Each of Holding and the Subsidiary Guarantors has agreed to guarantee, among other things, all the obligations of the Borrower under the Amended and Restated Credit Agreement. The obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit are conditioned upon, among other things, the execution and delivery by the Grantors of an agreement in the form hereof to secure (a) the due and punctual payment by the Borrower of (i) the principal of and premium, if any, and interest (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, (ii) each payment required to be made by the Borrower under the Amended and Restated Credit Agreement in respect of any Letter of Credit, when and as due, including payments in respect of reimbursement of disbursements, interest thereon and obligations to provide cash collateral and 1 Exhibit 10.2 (iii) all other monetary obligations, including fees, costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), of the Borrower to the Secured Parties under the Amended and Restated Credit Agreement and the other Credit Documents, (b) the due and punctual performance of all covenants, agreements, obligations and liabilities of the Borrower under or pursuant to the Amended and Restated Credit Agreement and the other Credit Documents, (c) the due and punctual payment and performance of all the covenants, agreements, obligations and liabilities of each Credit Party under or pursuant to this Agreement and the other Credit Documents and (d) the due and punctual payment and performance of all obligations of the Borrower under each Interest Rate Agreement entered into with any counterparty that was a Lender at the time such Interest Rate Agreement was entered into (all the monetary and other obligations described in the preceding clauses (a) through (d) being collectively called the "Obligations"). WHEREAS, in connection with the execution of the Amended and Restated Credit Agreement Deutsche Bank, the Required Lenders and the Grantors desire to amend and restate Original Security Agreement in is entirety pursuant to this Agreement. WHEREAS, it is the intention of Deutsche Bank, the Required Lenders and the Grantors party to the Original Credit Agreement that security interests granted and the Liens created by the Original Security Agreement shall continue, uninterrupted, in full force and effect under and as amended by this Agreement. Accordingly, the Grantors and the Collateral Agent, on behalf of itself and each Secured Party (and each of their respective successors or assigns), hereby agree as follows: ARTICLE I. Definitions SECTION 1.01. Definition of Terms Used Herein. Unless the context otherwise requires, all capitalized terms used but not defined herein shall have the meanings set forth in the Amended and Restated Credit Agreement and all references to the Uniform Commercial Code shall mean the Uniform Commercial Code in effect in the State of New York on the date hereof. Each item of Collateral listed in Section 1.02 that is defined in Articles 8 or 9 of the Uniform Commercial Code, as it exists on the date of this Agreement or as it may hereafter be amended, in the State of New York (the "UCC") shall have the meaning set forth in the UCC , it being the intention of the Grantors that the description of the Collateral set forth below be construed to include the broadest possible range of assets. SECTION 1.02. Definition of Certain Terms Used Herein. As used herein, the following terms shall have the following meanings: "Account Debtor" shall mean any person who is or who may become obligated to any Grantor under, with respect to or on account of an Account. 2 Exhibit 10.2 "Accounts" shall mean any and all right, title and interest of any Grantor to payment for goods and services sold or leased, including any such rights evidenced by chattel paper, and, accounts, contract rights, chattel paper, documents, instruments , health care insurance receivables, letter-of-credit rights and other rights and obligations of any kind owned by or owing to such Grantor and all rights in, to and under all security agreements, leases and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, documents, instruments, health care insurance receivables, letter-of-credit rights or other rights and obligations (any and all such accounts, contract rights, chattel paper, documents, instruments, health care insurance receivables, letter-of-credit rights and other rights and obligations) whether due or to become due, whether or not they have been earned by performance, and whether now or hereafter acquired or arising in the future, including accounts receivable from Affiliates of the Grantors. "Accounts Receivable" shall mean all Accounts and all right, title and interest in any returned goods, together with all rights, titles, securities and guarantees with respect thereto, including any rights to stoppage in transit, replevin, reclamation and resales, and all related security interests, liens and pledges, whether voluntary or involuntary, in each case whether now existing or owned or hereafter arising or acquired. "Amended and Restated Credit Agreement" shall have the meaning assigned to such term in the preliminary statement of this Agreement. "Chattel Paper" shall mean (a) a writing or writings which evidence both a monetary obligation and a security interest in or a lease of specific Equipment and (b) all other property now or hereafter constituting "chattel paper" or "electronic chattel paper" under the Uniform Commercial Code as in effect in the State of New York or its equivalent in other jurisdictions, in each case that are now or hereafter owned by any Grantor. "Collateral" shall mean all (a) Accounts Receivable, (b) Documents, (c) Chattel Paper, (d) Equipment, (e) General Intangibles, (f) Inventory, (g) cash and cash accounts, (h) Proceeds, (i) Investment Property, (j) Financial Assets and (k) Equity Interests. "Commodity Account" shall mean an account maintained by a Commodity Intermediary in which a Commodity Contract is carried out for a Commodity Customer. "Commodity Contract" shall mean a commodity futures contract, an option on a commodity futures contract, a commodity option or any other contract that, in each case, is (a) traded on or subject to the rules of a board of trade that has been designated as a contract market for such a contract pursuant to the federal commodities laws or (b) traded on a foreign commodity board of trade, exchange or market, and is carried on the books of a Commodity Intermediary for a Commodity Customer. "Commodity Customer" shall mean a person for whom a Commodity Intermediary carries a Commodity Contract on its books. "Commodity Intermediary" shall mean (a) a person who is registered as a futures commission merchant under the federal commodities laws or (b) a person who in the ordinary 3 Exhibit 10.2 course of its business provides clearance or settlement services for a board of trade that has been designated as a contract market pursuant to federal commodities laws. "Copyright License" shall mean any written agreement, now or hereafter in effect, granting any right to any third party under any Copyright now or hereafter owned by any Grantor or which such Grantor otherwise has the right to license, or granting any right to such Grantor under any Copyright now or hereafter owned by any third party, and all rights of such Grantor under any such agreement. "Copyrights" shall mean all of the following now owned or hereafter acquired by any Grantor: (a) all copyright rights in any work subject to the copyright laws of the United States or any other country, whether as author, assignee, transferee or otherwise, and (b) all registrations and applications for registration of any such copyright in the United States or any other country, including registrations, recordings, supplemental registrations and pending applications for registration in the United States Copyright Office, including those listed on Schedule II. "Documents" shall mean all instruments, files, records, ledger sheets and documents covering or relating to any of the Collateral. "Entitlement Holder" shall mean a person identified in the records of a Securities Intermediary as the person having a Security Entitlement against the Securities Intermediary. If a person acquires a Security Entitlement by virtue of Section 8-501(b)(2) or (3) of the New York Uniform Commercial Code, such person is the Entitlement Holder. "Equipment" shall mean all equipment, furniture and furnishings, and all tangible personal property similar to any of the foregoing, including tools, parts and supplies of every kind and description, and all improvements, accessions or appurtenances thereto, that are now or hereafter owned by any Grantor. The term Equipment shall include Fixtures. "Equity Interest" shall mean shares of capital stock, partnership interests, membership interests in a limited liability company or beneficial interests in a trust or other equity ownership interests in a person. "Financial Asset" shall mean (a) a Security, (b) an obligation of a person or a share, participation or other interest in a person or in property or an enterprise of a person, which is, or is of a type, dealt with in or traded on financial markets, or which is recognized in any area in which it is issued or dealt in as a medium for investment or (c) any property that is held by a Securities Intermediary for another person in a Securities Account if the Securities Intermediary has expressly agreed with the other person that the property is to be treated as a Financial Asset under Article 8 of the Uniform Commercial Code. As the context requires, the term "Financial Asset" shall mean either the interest itself or the means by which a person's claim to it is evidenced, including a certificated or uncertificated Security, a certificate representing a Security or a Security Entitlement. "Fixtures" shall mean all items of Equipment, whether now owned or hereafter acquired, of any Grantor that become so related to particular real estate that an interest in them arises under any real estate law applicable thereto. 4 Exhibit 10.2 "General Intangibles" shall mean all choses in action and causes of action and all other intangible personal property of any Grantor of every kind and nature (other than Accounts Receivable) now owned or hereafter acquired by any Grantor, including corporate or other business records, indemnification claims, contract rights (including rights under leases, whether entered into as lessor or lessee, Interest Rate Agreements and other agreements), Intellectual Property, goodwill, registrations, franchises, tax refund claims, permits, licenses, rights of access and any letter of credit, guarantee, claim, security interest or other security held by or granted to any Grantor to secure payment by an Account Debtor of any of the Accounts Receivable. "Health care insurance receivable" means an interest in or claim under a policy of insurance which is a right to payment of a monetary obligation for health-care goods or services provided. "Intellectual Property" shall mean all right, title and interest in and to all intellectual and similar property of any Grantor of every kind and nature now owned or hereafter acquired by any Grantor, including inventions, designs, Patents, Copyrights, Licenses, Trademarks, trade secrets, confidential or proprietary technical and business information, know-how, show-how or other data or information, software and databases and all embodiments or fixations thereof and related documentation, registrations and franchises, and all additions, improvements and accessions to, and books and records describing or used in connection with, any of the foregoing. "Inventory" shall mean all goods of any Grantor, whether now owned or hereafter acquired, held for sale or lease, or furnished or to be furnished by any Grantor under contracts of service, or consumed in any Grantor's business, including raw materials, intermediates, work in process, packaging materials, finished goods, semi-finished inventory, scrap inventory, manufacturing supplies and spare parts, and all such goods that have been returned to or repossessed by or on behalf of any Grantor. "Investment Property" shall mean all Securities (whether certificated or uncertificated), Security Entitlements, Securities Accounts, Commodity Contracts and Commodity Accounts of any Grantor, whether now owned or hereafter acquired by any Grantor. "License" shall mean any Patent License, Trademark License, Copyright License or other license or sublicense to which any Grantor is a party, including those listed on Schedule III. "Obligations" shall have the meaning assigned to such term in the preliminary statement of this Agreement. "Patent License" shall mean any written agreement, now or hereafter in effect, granting to any third party any right to make, use or sell any invention on which a Patent, now or hereafter owned by any Grantor or which any Grantor otherwise has the right to license, is in existence, or granting to any Grantor any right to make, use or sell any invention on which a Patent, now or hereafter owned by any third party, is in existence, and all rights of any Grantor under any such agreement. "Patents" shall mean all of the following now owned or hereafter acquired by any Grantor: (a) all letters patent of the United States or any other country, all registrations and recordings thereof, and all applications for letters patent of the United States or any other 5 Exhibit 10.2 country, including registrations, recordings and pending applications in the United States Patent and Trademark Office or any similar offices in any other country, including those listed on Schedule IV, and (b) all reissues, continuations, divisions, continuations-in-part, renewals or extensions thereof, and the inventions disclosed or claimed therein, including the right to make, use and/or sell the inventions disclosed or claimed therein. "Perfection Certificate" shall mean a certificate substantially in the form of Annex 1 hereto, completed and supplemented with the schedules and attachments contemplated thereby, and duly executed by a Financial Officer and the chief legal officer of the Borrower. "Proceeds" shall mean any consideration received from the sale, exchange, license, lease or other disposition of any asset or property that constitutes Collateral, any value received as a consequence of the possession of any Collateral and any payment received from any insurer or other person or entity as a result of the destruction, loss, theft, damage or other involuntary conversion of whatever nature of any asset or property which constitutes Collateral, and shall include (a) any claim of any Grantor against any third party for (and the right to sue and recover for and the rights to damages or profits due or accrued arising out of or in connection with) (i) past, present or future infringement of any Patent now or hereafter owned by any Grantor, or licensed under a Patent License, (ii) past, present or future infringement or dilution of any Trademark now or hereafter owned by any Grantor or licensed under a Trademark License or injury to the goodwill associated with or symbolized by any Trademark now or hereafter owned by any Grantor, (iii) past, present or future breach of any License and (iv) past, present or future infringement of any Copyright now or hereafter owned by any Grantor or licensed under a Copyright License and (b) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. "Secured Parties" shall mean (a) the Lenders, (b) the Administrative Agent, (c) the Collateral Agent, (d) the Issuing Bank, (e) each counterparty to an Interest Rate Agreement entered into with the Borrower if such counterparty was a Lender at the time the Interest Rate Agreement was entered into, (f) the beneficiaries of each indemnification obligation undertaken by any Grantor under any Credit Document and (g) the successors and assigns of each of the foregoing. "Securities" shall mean (i) the shares of stock, partnership interests, interests in joint ventures, limited liability company interests and all other equity interests in a person that is, or becomes, a direct Subsidiary of such Grantor, including all securities convertible into, and rights, warrants, options and other rights to purchase or otherwise acquire, any of the foregoing now or hereafter owned by such Grantor, including those owned on the date hereof, and the certificates or other instruments representing any of the foregoing and any interest of such Grantor in the entries on the books of any securities intermediary pertaining thereto (the "Pledged Shares"), and all dividends, distributions, returns of capital, cash, warrants, option, rights, instruments, rights to vote or manage the business of such person pursuant to organizational documents governing the rights and obligations of the stockholders, partners, members or other owners thereof 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 Pledged Shares; 6 Exhibit 10.2 (ii) the indebtedness from time to time owed to such Grantor by any obligor that is, or becomes, a direct or indirect Subsidiary of such Grantor, or by any obligor of which Grantor is a direct or indirect Subsidiary and issued by the obligors named therein, and the instruments evidencing such indebtedness (the "Pledged Debt"), and all interest, cash, 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 the Pledged Debt; and (iii) all other investment property of such Grantor "Securities Account" shall mean an account to which a Financial Asset is or may be credited in accordance with an agreement under which the person maintaining the account undertakes to treat the person for whom the account is maintained as entitled to exercise rights that comprise the Financial Asset. "Security Interest" shall have the meaning assigned to such term in Section 2.01. "Security Entitlements" shall mean the rights and property interests of an Entitlement Holder with respect to a Financial Asset. "Security Intermediary" shall mean (a) a clearing corporation or (b) a person, including a bank or broker, that in the ordinary course of its business maintains securities accounts for others and is acting in that capacity. "Trademark License" shall mean any written agreement, now or hereafter in effect, granting to any third party any right to use any Trademark now or hereafter owned by any Grantor or which any Grantor otherwise has the right to license, or granting to any Grantor any right to use any Trademark now or hereafter owned by any third party, and all rights of any Grantor under any such agreement. "Trademarks" shall mean all of the following now owned or hereafter acquired by any Grantor: (a) all trademarks, service marks, 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, all registrations and recordings thereof, and all registration and recording applications filed in connection therewith, including registrations and registration applications in the United States Patent and Trademark Office, any State of the United States or any similar offices in any other country or any political subdivision thereof, and all extensions or renewals thereof, including those listed on Schedule V, (b) all goodwill associated therewith or symbolized thereby and (c) all other assets, rights and interests that uniquely reflect or embody such goodwill. SECTION 1.03. Rules of Interpretation. The rules of interpretation specified in Section 1.02 of the Amended and Restated Credit Agreement shall be applicable to this Agreement. 7 Exhibit 10.2 ARTICLE II Security Interest SECTION 2.01. Security Interest. As security for the payment or performance, as the case may be, in full of the Obligations, each Grantor hereby mortgages, pledges, hypothecates and transfers as security for the Obligations as contemplated hereunder to the Collateral Agent, its successors and assigns, for the ratable benefit of the Secured Parties, and hereby grants to the Collateral Agent, its successors and assigns, for the ratable benefit of the Secured Parties, a security interest in, all of such Grantor's right, title and interest in, to and under the Collateral (the "Security Interest"); provided, however, that no mortgage, pledge, hypothecation or security interest shall be created or granted hereunder if such creation or grant would constitute a violation of a valid and enforceable restriction on such creation or grant, unless and until any required consents shall have been obtained. Without limiting the foregoing, the Collateral Agent is hereby authorized to file one or more financing statements (including fixture filings), continuation statements, filings with the United States Patent and Trademark Office or United States Copyright Office (or any successor office or any similar office in any other country) or other documents for the purpose of perfecting, confirming, continuing, enforcing or protecting the Security Interest granted by each Grantor, without the signature of any Grantor, and naming any Grantor or the Grantors as debtors and the Collateral Agent as secured party. SECTION 2.02. No Assumption of Liability. The Security Interest is granted as security only and shall not subject the Collateral Agent or any other Secured Party to, or in any way alter or modify, any obligation or liability of any Grantor with respect to or arising out of the Collateral. ARTICLE III Representations and Warranties The Grantors severally represent and warrant to the Collateral Agent and the Secured Parties that: SECTION 3.01. Title and Authority. Each Grantor has good and valid rights in and title to the Collateral with respect to which it has purported to grant a Security Interest hereunder and has full power and authority to grant to the Collateral Agent the Security Interest in such Collateral pursuant hereto 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 other than any consent or approval which has been obtained. SECTION 3.02. Filings. The Perfection Certificate has been duly prepared, completed and executed and the information set forth therein is correct and complete in all material respects. Fully executed Uniform Commercial Code financing statements (including fixture filings, as applicable) or other appropriate filings, recordings or registrations containing a description of the Collateral have been delivered to the Collateral Agent for filing in each governmental, municipal or other office specified in Schedule 6 to the Perfection Certificate, 8 Exhibit 10.2 which are all the filings, recordings and registrations (other than filings required to be made in the United States Patent and Trademark Office and the United States Copyright Office in order to perfect the Security Interest in Collateral consisting of United States Patents, Trademarks and Copyrights) that are necessary to publish notice of and protect the validity of and to establish a legal, valid and perfected security interest in favor of the Collateral Agent (for the ratable benefit of the Secured Parties) in respect of all Collateral in which the Security Interest may be perfected by filing, recording or registration in the United States (or any political subdivision thereof) and its territories and possessions, and no further or subsequent filing, refiling, recording, rerecording, registration or reregistration is necessary in any such jurisdiction, except as provided under applicable law with respect to the filing of continuation statements or with respect to the filing of amendments or new filings to reflect the change of any Grantor's name, location, identity or corporate structure. SECTION 3.03. Validity of Security Interest. The Security Interest constitutes (a) a legal and valid security interest in all the Collateral securing the payment and performance of the Obligations, (b) subject to the filings described in Section 3.02, a perfected security interest in all Collateral in which a security interest may be perfected by filing, recording or registering a financing statement or analogous document in the United States (or any political subdivision thereof) and its territories and possessions pursuant to the Uniform Commercial Code or other applicable law in such jurisdictions and (c) a security interest that shall be perfected in all Collateral in which a security interest may be perfected upon the receipt and recording of this Agreement with the United States Patent and Trademark Office and the United States Copyright Office, as applicable, and otherwise as may be required pursuant to the laws of any other necessary jurisdiction. The Security Interest is and shall be prior to any other Lien on any of the Collateral, other than Liens expressly permitted to be prior to the Security Interest pursuant to Section 6.02 of the Amended and Restated Credit Agreement. SECTION 3.04. Absence of Other Liens. The Collateral is owned by the Grantors free and clear of any Lien, except for Liens expressly permitted pursuant to Section 6.02 of the Amended and Restated Credit Agreement. The Grantor has not filed or consented to the filing of (a) any financing statement or analogous document under the Uniform Commercial Code or any other applicable laws covering any Collateral, (b) any assignment in which any Grantor assigns any Collateral or any security agreement or similar instrument covering any Collateral with the United States Patent and Trademark Office or the United States Copyright Office or (c) any assignment in which any Grantor assigns any Collateral or any security agreement or similar instrument covering any Collateral with any foreign governmental, municipal or other office, which financing statement or analogous document, assignment, security agreement or similar instrument is still in effect, except, in each case, for Liens expressly permitted pursuant to Section 6.02 of the Amended and Restated Credit Agreement. ARTICLE IV Covenants SECTION 4.01. Change of Name; Location of Collateral; Records; Place of Business. 9 Exhibit 10.2 (a) Each Grantor agrees promptly to notify the Collateral Agent in writing of any change (i) in its corporate name or jurisdiction of incorporation, (ii) in the location of any office in which it maintains books or records relating to Collateral owned by it or any office or facility at which Collateral owned by it is located (including the establishment of any such new office or facility) other than (A) with respect to goods in transit between facilities, whether in vehicles owned by the applicable Grantor or on common carriers and (B) in the case of temporary warehousing which will last for no longer than one month, (iii) in its identity or corporate structure or (iv) in its Federal Taxpayer Identification Number. Each Grantor agrees not to effect or permit any change referred to in the preceding sentence unless all filings have been made under the Uniform Commercial Code or otherwise that are required in order for the Collateral Agent to continue at all times following such change to have a valid, legal and perfected first priority security interest in all the Collateral. Each Grantor agrees promptly to notify the Collateral Agent if any material portion of the Collateral owned or held by such Grantor is damaged or destroyed. (b) Each Grantor agrees to maintain, at its own cost and expense, such complete and accurate records with respect to the Collateral owned by it as is consistent with its current practices and in accordance with such prudent and standard practices used in industries that are the same as or similar to those in which such Grantor is engaged, but in any event to include complete accounting records indicating all payments and proceeds received with respect to any part of the Collateral, and, at such time or times as the Collateral Agent may reasonably request, promptly to prepare and deliver to the Collateral Agent a duly certified schedule or schedules in form and detail satisfactory to the Collateral Agent showing the identity, amount and location of any and all Collateral. SECTION 4.02. Periodic Certification. Each year, at the time of delivery of annual financial statements with respect to the preceding fiscal year pursuant to Section 5.04 of the Amended and Restated Credit Agreement, the Borrower shall deliver to the Collateral Agent a certificate executed by a Financial Officer of the Borrower (a) setting forth the information required pursuant to Section 2 of the Perfection Certificate or confirming that there has been no change in such information since the date of such certificate or the date of the most recent certificate delivered pursuant to Section 4.02 and (b) certifying that all Uniform Commercial Code financing statements (including fixture filings, as applicable) or other appropriate filings, recordings or registrations, including all refilings, rerecordings and reregistrations, containing a description of the Collateral have been filed of record in each governmental, municipal or other appropriate office in each jurisdiction identified pursuant to clause (a) to the extent necessary to protect and perfect the Security Interest for a period of not less than 18 months after the date of such certificate (except as noted therein with respect to any continuation statements to be filed within such period). Each certificate delivered pursuant to this Section 4.02 shall identify in the format of Schedule II, III, IV or V, as applicable, all Patents, Trademarks, Copyrights and Licenses of any Grantor in existence on the date thereof and not then listed on such Schedules or previously so identified to the Collateral Agent. SECTION 4.03. Protection of Security. Each Grantor shall, at its own cost and expense, take any and all actions necessary to defend title to the Collateral against all persons and to defend the Security Interest of the Collateral Agent in the Collateral and the priority 10 Exhibit 10.2 thereof against any Lien not expressly permitted pursuant to Section 6.02 of the Amended and Restated Credit Agreement. SECTION 4.04. Further Assurances. Each Grantor agrees, at its own expense, to execute, acknowledge, deliver and cause to be duly filed all such further instruments and documents and take all such actions as the Collateral Agent may from time to time reasonably request to better assure, preserve, protect and perfect the Security Interest and the rights and remedies created hereby, including the payment of any fees and taxes required in connection with the execution and delivery of this Agreement, the granting of the Security Interest and the filing of any financing statements (including fixture filings) or other documents in connection herewith or therewith. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note or other instrument, such note or instrument shall be promptly pledged and delivered to the Collateral Agent, duly endorsed in a manner satisfactory to the Collateral Agent. Without limiting the generality of the foregoing, each Grantor hereby authorizes the Collateral Agent, with prompt notice thereof to the Grantors, to supplement this Agreement by supplementing Schedule II, III, IV or V hereto or adding additional schedules hereto to specifically identify any asset or item that may constitute Copyrights, Licenses, Patents or Trademarks; provided, however, that any Grantor shall have the right, exercisable within 10 days after it has been notified by the Collateral Agent of the specific identification of such Collateral, to advise the Collateral Agent in writing of any inaccuracy of the representations and warranties made by such Grantor hereunder with respect to such Collateral. Each Grantor agrees that it will use its best efforts to take such action as shall be necessary in order that all representations and warranties hereunder shall be true and correct with respect to such Collateral within 30 days after the date it has been notified by the Collateral Agent of the specific identification of such Collateral. SECTION 4.05. Inspection and Verification. The Collateral Agent and such persons as the Collateral Agent may reasonably designate shall have the right, subject to compliance with Section 5.07 of the Amended and Restated Credit Agreement, to inspect the Collateral, all records related thereto (and to make extracts and copies from such records) and the premises upon which any of the Collateral is located, to discuss the Grantors' affairs with the officers of the Grantors and their independent accountants and to verify under reasonable procedures the validity, amount, quality, quantity, value, condition and status of, or any other matter relating to, the Collateral, including, in the case of Accounts or Collateral in the possession of any third person, by contacting Account Debtors or the third person possessing such Collateral for the purpose of making such a verification; provided, however, that the Collateral Agent shall give the applicable Grantor reasonable notice of proposed discussions with such Grantor's accountants and representatives of such Grantor shall be entitled to participate in such discussions. The Collateral Agent shall have the absolute right to share any information it gains from such inspection or verification with any Secured Party (it being understood that any such information shall be deemed to be "Information" subject to the provisions of Section 9.16 of the Amended and Restated Credit Agreement). SECTION 4.06. Taxes; Encumbrances. At its option and after notice to the applicable Grantor, the Collateral Agent may discharge past due taxes, assessments, charges, fees, Liens, 11 Exhibit 10.2 security interests or other encumbrances at any time levied or placed on the Collateral and not permitted pursuant to Section 6.02 of the Amended and Restated Credit Agreement, and may pay for the maintenance and preservation of the Collateral to the extent any Grantor fails to do so as required by the Amended and Restated Credit Agreement or this Agreement, and each Grantor jointly and severally agrees to reimburse the Collateral Agent on demand for any payment made or any expense incurred by the Collateral Agent pursuant to the foregoing authorization; provided, however, that nothing in this Section 4.06 shall be interpreted as excusing any Grantor from the performance of, or imposing any obligation on the Collateral Agent or any Secured Party to cure or perform, any covenants or other promises of any Grantor with respect to taxes, assessments, charges, fees, liens, security interests or other encumbrances and maintenance as set forth herein or in the other Credit Documents. SECTION 4.07. Assignment of Security Interest. If at any time any Grantor shall take a security interest in any property of an Account Debtor or any other person to secure payment and performance of an Account, such Grantor shall promptly assign such security interest to the Collateral Agent. Such assignment need not be filed of public record unless necessary to continue the perfected status of the security interest against creditors of and transferees from the Account Debtor or other person granting the security interest. SECTION 4.08. Continuing Obligations of the Grantors. Each Grantor shall remain liable to observe and perform all the conditions and obligations to be observed and performed by it under each contract, agreement or instrument relating to the Collateral, all in accordance with the terms and conditions thereof, and each Grantor jointly and severally agrees to indemnify and hold harmless the Collateral Agent and the Secured Parties from and against any and all liability for such performance. SECTION 4.09. Limitation on Possession of Inventory by Bailee. Each Grantor agrees that it shall not permit any Inventory to be in the possession or control of any warehouseman, bailee, agent or processor at any time unless such warehouseman, bailee, agent or processor shall have been notified of the Security Interest and shall have agreed in writing to hold the Inventory subject to the Security Interest and the instructions of the Collateral Agent and to waive and release any Lien held by it with respect to such Inventory, whether arising by operation of law or otherwise. SECTION 4.10. Limitation on Modification of Accounts. None of the Grantors will, without the Collateral Agent's prior written consent, grant any extension of the time of payment of any of the Accounts Receivable, compromise, compound or settle the same for less than the full amount thereof, release, wholly or partly, any person liable for the payment thereof or allow any credit or discount whatsoever thereon, other than extensions, credits, discounts, compromises or settlements granted or made in the ordinary course of business and in accordance with such prudent and standard practices used in industries that are the same as or similar to those in which such Grantor is engaged. SECTION 4.11. Insurance. The Grantors, at their own expense, shall maintain or cause to be maintained insurance covering physical loss or damage to the Inventory and Equipment in accordance with Section 5.02 of the Amended and Restated Credit Agreement. Each Grantor irrevocably makes, constitutes and appoints the Collateral Agent (and all officers, employees or 12 Exhibit 10.2 agents designated by the Collateral Agent) as such Grantor's true and lawful agent (and attorney-in-fact) for the purpose, during the continuance of an Event of Default, of making, settling and adjusting claims in respect of Collateral under policies of insurance, endorsing the name of such Grantor on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and for making all determinations and decisions with respect thereto. In the event that any Grantor at any time or times shall fail to obtain or maintain any of the policies of insurance required hereby or to pay any premium in whole or part relating thereto, the Collateral Agent may, without waiving or releasing any obligation or liability of the Grantors hereunder or any Event of Default, in its sole discretion, obtain and maintain such policies of insurance and pay such premium and take any other actions with respect thereto as the Collateral Agent deems advisable. All sums disbursed by the Collateral Agent in connection with this Section 4.11, including reasonable attorneys' fees, court costs, expenses and other charges relating thereto, shall be payable, upon demand, by the Grantors to the Collateral Agent and shall be additional Obligations secured hereby. SECTION 4.12. Covenants Regarding Patent, Trademark and Copyright Collateral. (a) Each Grantor agrees that it will not, nor will it permit any of its licensees to, do any act, or omit to do any act, whereby any Patent which is material to the conduct of such Grantor's business may become invalidated or dedicated to the public, and agrees that it shall continue to mark any products covered by a Patent with the relevant patent number as necessary and sufficient to establish and preserve its maximum rights under applicable patent laws. (b) Each Grantor (either itself or through its licensees or its sublicensees) will, for each Trademark material to the conduct of such Grantor's business, (i) maintain such Trademark in full force free from any claim of abandonment or invalidity for non-use, (ii) maintain the quality of products and services offered under such Trademark, (iii) display such Trademark with notice of Federal or foreign registration to the extent necessary and sufficient to establish and preserve its maximum rights under applicable law and (iv) not knowingly use or knowingly permit the use of such Trademark in violation of any third party rights. (c) Each Grantor (either itself or through licensees) will, for each work covered by a material Copyright, continue to publish, reproduce, display, adopt and distribute the work with appropriate copyright notice as necessary and sufficient to establish and preserve its maximum rights under applicable copyright laws. (d) Each Grantor shall notify the Collateral Agent immediately if it knows or has reason to know that any Patent, Trademark or Copyright material to the conduct of its business may become abandoned, lost or dedicated to the public, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, United States Copyright Office or any court or similar office of any country) regarding such Grantor's ownership of any Patent, Trademark or Copyright, its right to register the same, or to keep and maintain the same. (e) In no event shall any Grantor, either itself or through any agent, employee, licensee or designee, file an application for any Patent, Trademark or Copyright (or for the 13 Exhibit 10.2 registration of any Trademark or Copyright) with the United States Patent and Trademark Office, United States Copyright Office or any office or agency in any political subdivision of the United States or in any other country or any political subdivision thereof, unless it promptly informs the Collateral Agent, and, upon request of the Collateral Agent, executes and delivers any and all agreements, instruments, documents and papers as the Collateral Agent may request to evidence the Collateral Agent's security interest in such Patent, Trademark or Copyright, and each Grantor hereby appoints the Collateral Agent as its attorney-in-fact to execute and file such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; such power, being coupled with an interest, is irrevocable. (f) Each Grantor will take all necessary steps that are consistent with the practice in any proceeding before the United States Patent and Trademark Office, United States Copyright Office or any office or agency in any political subdivision of the United States or in any other country or any political subdivision thereof, to maintain and pursue each material application relating to the Patents, Trademarks and/or Copyrights (and to obtain the relevant grant or registration) and to maintain each issued Patent and each registration of the Trademarks and Copyrights that is material to the conduct of any Grantor's business, including timely filings of applications for renewal, affidavits of use, affidavits of incontestability and payment of maintenance fees, and, if consistent with good business judgment, to initiate opposition, interference and cancellation proceedings against third parties. (g) In the event that any Grantor has reason to believe that any Collateral consisting of a Patent, Trademark or Copyright material to the conduct of any Grantor's business has been or is about to be infringed, misappropriated or diluted by a third party, such Grantor promptly shall notify the Collateral Agent and shall, if consistent with good business judgment, promptly sue for infringement, misappropriation or dilution and to recover any and all damages for such infringement, misappropriation or dilution, and take such other actions as are appropriate under the circumstances to protect such Collateral. (h) Upon and during the continuance of an Event of Default, each Grantor shall use its best efforts to obtain all requisite consents or approvals by the licensor of each Copyright License, Patent License or Trademark License to effect the assignment of all of such Grantor's right, title and interest thereunder to the Collateral Agent or its designee. (i) Each Grantor shall ensure that fully executed security agreements in the form hereof and containing a description of all Collateral consisting of Intellectual Property shall have been received and recorded within three months after the execution of this Agreement with respect to United States Patents, United States registered Trademarks (and Trademarks for which United States registration applications are pending) and United States registered Copyrights have been delivered to the Collateral Agent for recording by the United States Patent and Trademark Office and the United States Copyright Office pursuant to 35 U.S.C. (S) 261, 15 U.S.C. (S) 1060 or 17 U.S.C. (S) 205 and the regulations thereunder, as applicable, and otherwise as may be required pursuant to the laws of any other necessary jurisdiction, to protect the validity of and to establish a legal, valid and perfected security interest in favor of the Collateral Agent (for the ratable benefit of the Secured Parties) in respect of all Collateral consisting of Patents, Trademarks and registered Copyrights in which a security interest may be perfected by filing, recording or registration in the United States (or any political subdivision thereof) and its territories and 14 Exhibit 10.2 possessions, or in any other necessary jurisdiction, and no further or subsequent filing, refiling, recording, rerecording, registration or reregistration is necessary (other than such actions as are necessary to perfect the Security Interest with respect to any Collateral consisting of Patents, Trademarks and Copyrights (or registration or application for registration thereof) acquired or developed after the date hereof). ARTICLE V Power of Attorney Each Grantor irrevocably makes, constitutes and appoints the Collateral Agent (and all officers, employees or agents designated by the Collateral Agent) as such Grantor's true and lawful agent and attorney-in-fact, and in such capacity the Collateral Agent shall have the right, with power of substitution for each Grantor and in each Grantor's name or otherwise, for the use and benefit of the Collateral Agent and the Secured Parties, upon the occurrence and during the continuance of an Event of Default (a) to receive, endorse, assign and/or deliver any and all notes, acceptances, checks, drafts, money orders or other evidences of payment relating to the Collateral or any part thereof; (b) to demand, collect, receive payment of, give receipt for and give discharges and releases of all or any of the Collateral; (c) to sign the name of any Grantor on any invoice or bill of lading relating to any of the Collateral; (d) to send verifications of Accounts Receivable to any Account Debtor; (e) to commence and prosecute any and all suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect or otherwise realize on all or any of the Collateral or to enforce any rights in respect of any Collateral; (f) to settle, compromise, compound, adjust or defend any actions, suits or proceedings relating to all or any of the Collateral; (g) to notify, or to require any Grantor to notify, Account Debtors to make payment directly to the Collateral Agent; and (h) to use, sell, assign, transfer, pledge, make any agreement with respect to or otherwise deal with all or any of the Collateral, and to do all other acts and things necessary to carry out the purposes of this Agreement, as fully and completely as though the Collateral Agent were the absolute owner of the Collateral for all purposes; provided, however, that nothing herein contained shall be construed as requiring or obligating the Collateral Agent or any Secured Party to make any commitment or to make any inquiry as to the nature or sufficiency of any payment received by the Collateral Agent or any Secured Party, or to present or file any claim or notice, or to take any action with respect to the Collateral or any part thereof or the moneys due or to become due in respect thereof or any property covered thereby, and no action taken or omitted to be taken by the Collateral Agent or any Secured Party with respect to the Collateral or any part thereof shall give rise to any defense, counterclaim or offset in favor of any Grantor or to any claim or action against the Collateral Agent or any Secured Party. It is understood and agreed that the appointment of the Collateral Agent as the agent and attorney-in-fact of the Grantors for the purposes set forth above is coupled with an interest and is irrevocable. The provisions of this Section shall in no event relieve any Grantor of any of its obligations hereunder or under any other Credit Document with respect to the Collateral or any part thereof or impose any obligation on the Collateral Agent or any Secured Party to proceed in any particular manner with respect to the Collateral or any part thereof, or in any way limit the exercise by the Collateral Agent or any Secured Party of any other or further right which it may have on the date of this Agreement or hereafter, whether hereunder, under any other Credit Document, by law or otherwise. 15 Exhibit 10.2 ARTICLE VI Remedies SECTION 6.01. Remedies upon Default. Upon the occurrence and during the continuance of an Event of Default, each Grantor agrees to deliver each item of Collateral to the Collateral Agent on demand, and it is agreed that the Collateral Agent shall have the right to take any of or all the following actions at the same or different times: (a) with respect to any Collateral consisting of Intellectual Property, on demand, to cause the Security Interest to become an assignment, transfer and conveyance of any of or all such Collateral by the applicable Grantors to the Collateral Agent, or to license or sublicense, whether general, special or otherwise, and whether on an exclusive or nonexclusive basis, any such Collateral throughout the world on such terms and conditions and in such manner as the Collateral Agent shall determine (other than in violation of any then-existing licensing arrangements to the extent that waivers cannot be obtained), and (b) with or without legal process and with or without prior notice or demand for performance, to take possession of the Collateral and without liability for trespass to enter any premises where the Collateral may be located for the purpose of taking possession of or removing the Collateral and, generally, to exercise any and all rights afforded to a secured party under the Uniform Commercial Code or other applicable law. Without limiting the generality of the foregoing, each Grantor agrees that the Collateral Agent shall have the right, subject to the mandatory requirements of applicable law, to sell or otherwise dispose of all or any part of the Collateral, at public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or for future delivery as the Collateral Agent shall deem appropriate. The Collateral Agent shall be authorized at any such sale (if it deems it advisable to do so) to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing the Collateral for their own account for investment and not with a view to the distribution or sale thereof, and upon consummation of any such sale the Collateral Agent shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof the Collateral so sold. Each such purchaser at any such sale shall hold the property sold absolutely, free from any claim or right on the part of any Grantor, and each Grantor hereby waives (to the extent permitted by law) all rights of redemption, stay and appraisal which such Grantor now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. The Collateral Agent shall give the Grantors 10 days' written notice (which each Grantor agrees is reasonable notice within the meaning of Section 9-504(3) of the Uniform Commercial Code as in effect in the State of New York or its equivalent in other jurisdictions) of the Collateral Agent's intention to make any sale of Collateral. Such notice, in the case of a public sale, shall state the time and place for such sale and, in the case of a sale at a broker's board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Collateral, or portion thereof, will first be offered for sale at such board or exchange. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Collateral Agent may fix and state in the notice (if any) of such sale. At any such sale, the Collateral, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as the Collateral Agent may (in its sole and absolute discretion) determine. The Collateral Agent shall not be obligated to make any sale of any 16 Exhibit 10.2 Collateral if it shall determine not to do so, regardless of the fact that notice of sale of such Collateral shall have been given. The Collateral Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case any sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by the Collateral Agent until the sale price is paid by the purchaser or purchasers thereof, but the Collateral Agent shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may be sold again upon like notice. At any public (or, to the extent permitted by law, private) sale made pursuant to this Section, any Secured Party may bid for or purchase, free (to the extent permitted by law) from any right of redemption, stay, valuation or appraisal on the part of any Grantor (all said rights being also hereby waived and released to the extent permitted by law), the Collateral or any part thereof offered for sale and may make payment on account thereof by using any claim then due and payable to such Secured Party from any Grantor as a credit against the purchase price, and such Secured Party may, upon compliance with the terms of sale, hold, retain and dispose of such property without further accountability to any Grantor therefor. For purposes hereof, a written agreement to purchase the Collateral or any portion thereof shall be treated as a sale thereof; the Collateral Agent shall be free to carry out such sale pursuant to such agreement and no Grantor shall be entitled to the return of the Collateral or any portion thereof subject thereto, notwithstanding the fact that after the Collateral Agent shall have entered into such an agreement all Events of Default shall have been remedied and the Obligations paid in full. As an alternative to exercising the power of sale herein conferred upon it, the Collateral Agent may proceed by a suit or suits at law or in equity to foreclose this Agreement and to sell the Collateral or any portion thereof pursuant to a judgment or decree of a court or courts having competent jurisdiction or pursuant to a proceeding by a court-appointed receiver. SECTION 6.02. Application of Proceeds. The Collateral Agent shall apply the proceeds of any collection or sale of the Collateral, as well as any Collateral consisting of cash, as follows: FIRST, to the payment of all costs and expenses incurred by the Administrative Agent or the Collateral Agent (in its capacity as such hereunder or under any other Credit Document) in connection with such collection or sale or otherwise in connection with this Agreement or any of the Obligations, including all court costs and the fees and expenses of its agents and legal counsel, the repayment of all advances made by the Collateral Agent hereunder or under any other Credit Document on behalf of any Grantor and any other costs or expenses incurred in connection with the exercise of any right or remedy hereunder or under any other Credit Document; SECOND, to the payment in full of the Obligations (the amounts so applied to be distributed among the Secured Parties pro rata in accordance with the amounts of the Obligations owed to them on the date of any such distribution); and THIRD, to the Grantors, their successors or assigns, or as a court of competent jurisdiction may otherwise direct. 17 Exhibit 10.2 The Collateral Agent shall have absolute discretion as to the time of application of any such proceeds, moneys or balances in accordance with this Agreement. Upon any sale of the Collateral by the Collateral Agent (including pursuant to a power of sale granted by statute or under a judicial proceeding), the receipt of the Collateral Agent or of the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral so sold and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Collateral Agent or such officer or be answerable in any way for the misapplication thereof. SECTION 6.03. Grant of License to Use Intellectual Property. For the purpose of enabling the Collateral Agent to exercise rights and remedies under this Article at such time as the Collateral Agent shall be lawfully entitled to exercise such rights and remedies, each Grantor hereby grants to the Collateral Agent an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to the Grantors) to use, license or sub-license any of the Collateral consisting of Intellectual Property now owned or hereafter acquired by such Grantor, and wherever the same may be located, and including in such license reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof. The use of such license by the Collateral Agent shall be exercised, at the option of the Collateral Agent, upon the occurrence and during the continuation of an Event of Default; provided that any license, sub-license or other transaction entered into by the Collateral Agent in accordance herewith shall be binding upon the Grantors notwithstanding any subsequent cure of an Event of Default. ARTICLE VII Miscellaneous SECTION 7.01. Notices. All communications and notices hereunder shall (except as otherwise expressly permitted herein) be in writing and given as provided in Section 9.01 of the Amended and Restated Credit Agreement. All communications and notices hereunder to any Subsidiary Guarantor shall be given to it at its address or telecopy number set forth on Schedule I, with a copy to the Borrower. SECTION 7.02. Security Interest Absolute. All rights of the Collateral Agent hereunder, the Security Interest and all obligations of the Grantors hereunder shall be absolute and unconditional irrespective of (a) any lack of validity or enforceability of the Amended and Restated Credit Agreement, any other Credit Document, any agreement with respect to any of the Obligations or any other agreement or instrument relating to any of the foregoing, (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Amended and Restated Credit Agreement, any other Credit Document or any other agreement or instrument, (c) any exchange, release or non-perfection of any Lien on other collateral, or any release or amendment or waiver of or consent under or departure from any guarantee, securing or guaranteeing all or any of the Obligations, or (d) any other circumstance that might otherwise constitute a defense available to, or a discharge of, any Grantor in respect of the Obligations or this Agreement (other than indefeasible payment in full of all Obligations and termination of all commitments of the Lenders and the Issuing Banks). 18 Exhibit 10.2 SECTION 7.03. Survival of Agreement. All covenants, agreements, representations and warranties made by any Grantor herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the Secured Parties and shall survive the making by the Lenders of the Loans, and the execution and delivery to the Lenders of any notes evidencing such Loans, regardless of any investigation made by the Lenders or on their behalf, and shall continue in full force and effect until this Agreement shall terminate. SECTION 7.04. Binding Effect; Several Agreement. This Agreement shall become effective as to any Grantor when a counterpart hereof executed on behalf of such Grantor shall have been delivered to the Collateral Agent and a counterpart hereof shall have been executed on behalf of the Collateral Agent, and thereafter shall be binding upon such Grantor and the Collateral Agent and their respective successors and assigns, and shall inure to the benefit of such Grantor, the Collateral Agent and the other Secured Parties and their respective successors and assigns, except that no Grantor shall have the right to assign or transfer its rights or obligations hereunder or any interest herein or in the Collateral (and any such assignment or transfer shall be void) except as expressly contemplated by this Agreement or the Amended and Restated Credit Agreement. This Agreement shall be construed as a separate agreement with respect to each Grantor and may be amended, modified, supplemented, waived or released with respect to any Grantor without the approval of any other Grantor and without affecting the obligations of any other Grantor hereunder. SECTION 7.05. Successors and Assigns. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of any Grantor or the Collateral Agent that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. SECTION 7.06. Collateral Agent's Fees and Expenses; Indemnification. (a) Each Grantor jointly and severally agrees to pay upon demand to the Collateral Agent the amount of any and all reasonable expenses, including the reasonable fees, disbursements and other charges of its counsel and of any experts or agents, which the Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from or other realization upon any of the Collateral, (iii) the exercise, enforcement or protection of any of the rights of the Collateral Agent hereunder or (iv) the failure of any Grantor to perform or observe any of the provisions hereof. (b) Without limitation of its indemnification obligations under the other Credit Documents, each Grantor jointly and severally agrees to indemnify the Collateral Agent and the other Indemnitees against, and hold each of them harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable fees, disbursements and other charges of counsel, incurred by or asserted against any of them arising out of, in any way connected with, or as a result of, the execution, delivery or performance of this Agreement or any claim, litigation, investigation or proceeding relating hereto or to the Collateral, whether or not any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related 19 Exhibit 10.2 expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. (c) Any such amounts payable as provided hereunder shall be additional Obligations secured hereby and by the other Security Documents. The provisions of this Section 7.06 shall remain operative and in full force and effect regardless of the termination of this Agreement or any other Credit Document, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the invalidity or unenforceability of any term or provision of this Agreement or any other Credit Document, or any investigation made by or on behalf of the Collateral Agent or any Lender. All amounts due under this Section 7.06 shall be payable on written demand therefor. SECTION 7.07. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. SECTION 7.08. Waivers; Amendment. (a) No failure or delay of the Collateral Agent in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Collateral Agent hereunder and of the Collateral Agent, the Issuing Bank, the Administrative Agent and the Lenders under the other Credit Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provisions of this Agreement or any other Credit Document or consent to any departure by any Grantor therefrom shall in any event be effective unless the same shall be permitted by clause (b), and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any Grantor in any case shall entitle such Grantor or any other Grantor to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Collateral Agent and the Grantor or Grantors with respect to which such waiver, amendment or modification is to apply, subject to any consent required in accordance with Section 9.08 of the Amended and Restated Credit Agreement. SECTION 7.09. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER CREDIT DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY 20 Exhibit 10.2 WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 7.09. SECTION 7.10. Severability. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 7.11. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract (subject to Section 7.04), and shall become effective as provided in Section 7.04. Delivery of an executed signature page to this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. SECTION 7.12. Headings. Article and Section headings used herein are for the purpose of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 7.13. Jurisdiction; Consent to Service of Process. (a) Each Grantor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Credit Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto 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. Nothing in this Agreement shall affect any right that the Collateral Agent, the Administrative Agent, the Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Credit Documents against any Grantor or its properties in the courts of any jurisdiction. (b) Each Grantor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Credit Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. 21 Exhibit 10.2 (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 7.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 7.14. Termination; Release of Collateral. (a) This Agreement and the Security Interest shall terminate when all the Obligations (other than inchoate rights to indemnification and reimbursement) have been indefeasibly paid in full, the Lenders have no further commitment to lend, the L/C Exposure has been reduced to zero and the Issuing Bank has no further commitment to issue Letters of Credit under the Amended and Restated Credit Agreement, at which time the Collateral Agent shall execute and deliver to the Grantors, at the Grantors' expense, all Uniform Commercial Code termination statements and similar documents which the Grantors shall reasonably request to evidence such termination. Any execution and delivery of termination statements or documents pursuant to this Section 7.14 shall be without recourse to or warranty by the Collateral Agent. A Subsidiary Guarantor shall automatically be released from its obligations hereunder and the Security Interest in the Collateral of such Subsidiary Guarantor shall be automatically released in the event that all the capital stock of such Subsidiary Guarantor shall be sold, transferred or otherwise disposed of to a person that is not an Affiliate of the Borrower in accordance with the terms of the Amended and Restated Credit Agreement; provided that the Required Lenders shall have consented to such sale, transfer or other disposition (to the extent required by the Amended and Restated Credit Agreement) and the terms of such consent did not provide otherwise. (b) In the event any Collateral is sold or transferred in an Asset Sale or other transaction permitted by the Amended and Restated Credit Agreement or is to be subject to a Lien permitted by Section 6.02(i) of the Amended and Restated Credit Agreement, the Administrative Agent shall (i) concurrently with the consummation of such Asset Sale or other transaction release the Collateral that is subject of such sale or transfer free and clear of the Lien and security interest under this Agreement, or (ii) in connection with a financing contemplated by Sections 6.01 and 6.02(i) of the Amended and Restated Credit Agreement, at the request of the lender providing the financing and at such lender's election, either (A) subordinate the Lien and security interest under this Agreement on any assets being financed to the Lien and security interest of such lender pursuant to an intercreditor and/or subordination agreement in form and substance satisfactory to such lender, the Administrative Agent and the Grantor, or (B) release the Lien and security interest under this Agreement on any such assets to the extent required by such lender. In connection with any release or subordination pursuant to this Section 7.14(b), the Administrative Agent shall execute and deliver, at the Grantors' expense, any Uniform Commercial Code termination statements or other documents necessary to effect and evidence such release or subordination as may be reasonably requested by the Grantors. SECTION 7.15. Additional Grantors. Pursuant to Section 5.11 of the Amended and Restated Credit Agreement, each Domestic Subsidiary of the Borrower that was not in existence or not a Subsidiary on the date of the Amended and Restated Credit Agreement is required to enter into this Agreement as a Grantor upon becoming a Subsidiary. Upon execution and delivery by the Collateral Agent and a Subsidiary of an instrument in the form of Annex 2 hereto, such Subsidiary shall become a Grantor hereunder with the same force and effect as if originally named as a Grantor herein. The execution and delivery of any such instrument shall not require the consent of any Grantor hereunder. The rights and obligations of each Grantor 22 Exhibit 10.2 hereunder shall remain in full force and effect notwithstanding the addition of any new Grantor as a party to this Agreement. SECTION 7.16. Certain Other Rights and Waivers. (a) The Grantors authorize the Collateral Agent, without notice or demand and without affecting their liability hereunder, from time to time, either before or after revocation hereof, to (i) renew, compromise, extend, accelerate, or otherwise change the time for payment of, or otherwise change the terms of the indebtedness or any part thereof, including increase or decrease of the rate of interest thereon; (ii) receive and hold security for the payment of the Obligations, and exchange, enforce, waive, release, fail to perfect, sell, or otherwise dispose of any such security; (iii) apply such security and direct the order or manner of sale thereof as the Collateral Agent in its discretion may determine; and (iv) release or substitute any one or more of the endorsers or guarantors. (b) The Grantors waive any right to require the Collateral Agent to (i) proceed against the Borrower; (ii) proceed against or exhaust any security held from the Borrower; or (iii) pursue any other remedy in the Collateral Agent's power whatsoever. The Grantors waive any defense arising by reason of any disability or other defense of the Borrower, or the cessation from any cause whatsoever of the liability of the Borrower, or any claim that the Grantors' obligations exceed or are more burdensome than those of the Borrower. Until the indebtedness shall have been paid in full, even though the indebtedness is in excess of the Grantors' liability hereunder, the Grantors will not pursue any right of subrogation, reimbursement, indemnification, and contribution (contractual, statutory, or otherwise) including, without limitation, any claim or right of subrogation under the Bankruptcy Code (Title 11, United States Code) or any successor statute, arising from the existence or performance of this Agreement, and until such payment in full, the Grantors will not pursue any right to enforce any remedy which the Collateral Agent and the Lenders now have or may hereafter have against the Borrower and will not pursue any benefit of, and any right to participate in, any security now or hereafter held by the Collateral Agent. The Grantors waive all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance of this Agreement and of the existence, creation, or incurring of new or additional indebtedness. (c) (i) The Grantors understand and acknowledge that if the Collateral Agent forecloses, either by judicial foreclosure or by exercise of power of sale, any deed of trust securing the Obligations, that foreclosure could impair or destroy any ability that the Grantors may have to seek reimbursement, contribution, or indemnification from the Borrower or others based on any right the Grantors may have of subrogation, reimbursement, contribution, or indemnification for any amounts paid by the Grantors under this Agreement. The Grantors further understand and acknowledge that in the absence of this paragraph, such potential impairment or destruction of the Grantors' rights, if any, may entitle the Grantors to assert a defense to this Agreement based on Section 580d of the California Code of Civil Procedure as interpreted in Union Bank v. Gradsky, 265 Cal. App. 2d 40 (1968). By executing this Agreement, the Grantors freely, irrevocably, and unconditionally: (A) waive and relinquish that defense and agree that the Grantors will be fully liable under this Agreement even though the Collateral Agent may foreclose, either by judicial foreclosure or by exercise of power of sale, any deed of trust securing the Obligations; (B) agree that the Grantors will not assert that defense in any action or proceeding which the Collateral Agent may commence to enforce this Agreement; (C) acknowledge and agree that the rights and defenses waived by the Grantors in 23 Exhibit 10.2 this Agreement include any right or defense that the Grantors may have or be entitled to assert based upon or arising out of any one or more of Sections 580a, 580b, 580d, or 726 of the California Civil Code; and (iv) acknowledge and agree that the Collateral Agent and the Lenders are relying on this waiver in creating the indebtedness, and that this waiver is a material part of the consideration which the Collateral Agent and the Lenders are receiving for creating the indebtedness. (ii) The Grantors waive any rights and defenses that are or may become available to the Grantors by reason of Sections 2787 to 2855, inclusive, of the California Civil Code. (iii) The Grantors waive all rights and defenses that the Grantors may have because any of the indebtedness is secured by real property. This means, among other things: (A) the Collateral Agent may collect from the Grantors without first foreclosing on any real or personal property collateral pledged by the Borrower; and (B) if the Collateral Agent forecloses on any real property collateral pledged by the Borrower: (x) the amount of the indebtedness may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price, and (y) the Collateral Agent may collect from the Grantors even if the Collateral Agent, by foreclosing on the real property collateral, has destroyed any right the Grantors may have to collect from the Borrower. This is an unconditional and irrevocable waiver of any rights and defenses the Grantors may have because any of the indebtedness 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) The Grantors waive any right or defense they may have at law or equity, including California Code of Civil Procedure Section 580a, to a fair market value hearing or action to determine a deficiency judgment after a foreclosure. (v) No provision or waiver in this Agreement shall be construed as limiting the generality of any other waiver contained in this Agreement. (d) The Grantors acknowledge and agree that they shall have the sole responsibility for obtaining from the Borrower such information concerning the Borrower's financial conditions or business operations as the Grantors may require, and that the Collateral Agent has no duty at any time to disclose to the Grantors any information relating to the business operations or financial conditions of the Borrower. SECTION 7.17. Confirmation. For avoidance of doubt, the parties hereto agree that on the Amended and Restated Credit Agreement Closing Date, the security interests granted and the Liens created by the Original Security Agreement shall continue, uninterrupted, in full force and effect under and as amended by this Agreement. 24 Exhibit 10.2 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. HUDSON RESPIRATORY CARE INC., By: ______________________________________ Name: Title: By: ______________________________________ Name: Title: RIVER HOLDING CORP., By: ______________________________________ Name: Title: By: ______________________________________ Name: Title: S-1 Exhibit 10.2 IH HOLDING LLC By: HUDSON RESPIRATORY CARE INC., its Managing Member By: ___________________________________ Name: Title: S-2 Exhibit 10.2 DEUTSCHE BANK TRUST COMPANY AMERICAS, as Collateral Agent, By: __________________________________ Name: ____________________________ Title: ___________________________ S-3 Exhibit 10.2 Schedule 1 Subsidiary Guarantors Schedule-1 Exhibit 10.2 Schedule 2 Copyrights Schedule-2 Exhibit 10.2 Schedule 3 Licenses Schedule-3 Exhibit 10.2 Schedule 4 Patents Schedule-4 Exhibit 10.2 Schedule 5 Trademarks Schedule-5 Exhibit 10.2 Annex 1 to the Amended and Restated Security Agreement [Form of] PERFECTION CERTIFICATE Reference is made to the Amended and Restated Credit Agreement dated as of May ___, 2002 (as amended, supplemented or otherwise modified from time to time, the "Amended and Restated Credit Agreement"), among the Borrower, Holding, the lenders from time to time party thereto (the "Lenders") and Deutsche Bank Trust Company Americas, as swingline lender, issuing bank, administrative agent and collateral agent (in such capacity, the "Collateral Agent") for the Lenders. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Amended and Restated Credit Agreement. The undersigned, a Financial Officer and the chief legal officer, respectively, of the Borrower, hereby certify to the Collateral Agent and each other Secured Party as follows: 1. Names. (a) The exact corporate name of each Grantor, as such name appears in its respective certificate of incorporation, and the jurisdiction of corporate organization of such Grantor, is as follows: Grantor Jurisdiction of Corporate Organization (b) Except as set forth in Schedule 1 hereto, no Grantor has changed its identity or corporate structure in any way within the past five years. Changes in identity or corporate structure would include mergers, consolidations and acquisitions, as well as any change in the form, nature or jurisdiction of corporate organization. If any such change has occurred, include in Schedule 1 the information required by Sections 1 and 2 of this certificate as to each acquiree or constituent party to a merger or consolidation. (c) Set forth below is the Federal Taxpayer Identification Number of each Grantor: 1 Exhibit 10.2 2. Current Locations. (a) Set forth below opposite the name of each Grantor are all locations where such Grantor maintains any books or records relating to any Accounts Receivable (with each location at which chattel paper, if any, is kept being indicated by an "*"): Grantor Mailing Address County State (b) Set forth below opposite the name of each Grantor are all the locations where such Grantor maintains any Collateral not identified above: Grantor Mailing Address County State (c) Set forth below opposite the name of each Grantor are the names and addresses of all persons other than such Grantor that have possession of any of the Collateral of such Grantor: Grantor Mailing Address County State 3. Unusual Transactions. All Accounts Receivable have been originated by the Grantors and all Inventory has been acquired by the Grantors in the ordinary course of business. 4. File Search Reports. Attached hereto as Schedule 4(A) are true copies of file search reports from the Uniform Commercial Code filing offices where filings described in Section 3.19 of the Amended and Restated Credit Agreement are to be made. Attached hereto as Schedule 4(B) is a true copy of each financing statement or other filing identified in such file search reports. 5. UCC Filings. Duly authorized financing statements on Form UCC-1 in substantially the form of Schedule 5 hereto have been prepared for filing in the Uniform Commercial Code filing office in the jurisdiction of corporate organization of each Grantor identified in Section 1 hereof. 6. Schedule of Filings. Attached hereto as Schedule 6 is a schedule setting forth, with respect to the filings described in Section 5 above, each filing and the filing office in which such filing is to be made. 7. Filing Fees. All filing fees and taxes payable in connection with the filings described in Section 5 above have been paid. 2 Exhibit 10.2 8. Stock Ownership and other Equity Interests. Attached hereto as Schedule 8 is a true and correct list of all the duly authorized, issued and outstanding stock, partnership interest, membership interests or other Equity Interests of the Borrower and of each Subsidiary and the record and beneficial owners of such stock, partnership interests, membership interests or other Equity Interests. Also set forth on Schedule 8 is each equity Investment of the Borrower and each Subsidiary that represents 50% or less of the equity of the entity in which such investment was made. 9. Notes. Attached hereto as Schedule 9 is a true and correct list of all notes held by each Subsidiary and all intercompany notes between the Borrower and each Subsidiary of the Borrower and between each Subsidiary of the Borrower and each other such Subsidiary. 10. Advances. Attached hereto as Schedule 10 is (a) a true and correct list of all advances made by the Borrower to any Subsidiary of the Borrower or made by any Subsidiary of the Borrower to the Borrower or any other Subsidiary of the Borrower, which advances will be on and after the date hereof evidenced by one or more intercompany notes pledged to the Collateral Agent under the Pledge Agreement, and (b) a true and correct list of all unpaid intercompany transfers of goods sold and delivered by or to the Borrower or any Subsidiary of the Borrower. 11. Mortgage Filings. Attached hereto as Schedule 11 is a schedule setting forth, with respect to each Mortgaged Property, (i) the exact corporate name of the corporation that owns such property as such name appears in its certificate of incorporation, (ii) if different from the name identified pursuant to clause (i), the exact name of the current record owner of such property reflected in the records of the filing office for such property identified pursuant to the following clause and (iii) the filing office in which a Mortgage with respect to such property must be filed or recorded in order for the Collateral Agent to obtain a perfected security interest therein. 3 Exhibit 10.2 IN WITNESS WHEREOF, the undersigned have duly executed this certificate on this [_] day of May, 2002. HUDSON RESPIRATORY CARE INC., By: ___________________________________________ Name: Title: By: ___________________________________________ Name: Title: S-1 Annex 2 to the Amended and Restated Security Agreement SUPPLEMENT NO. __ dated as of , to the Amended and Restated Security Agreement dated as of May ___, 2002 (the "Security Agreement"), among HUDSON RESPIRATORY CARE INC., a California corporation (the "Borrower"), RIVER HOLDING CORP., a Delaware corporation ("Holding"), each subsidiary of the Borrower listed on Schedule I thereto (each such subsidiary individually a "Subsidiary Guarantor" and collectively, the "Subsidiary Guarantors"; the Subsidiary Guarantors, Holding and the Borrower are referred to collectively herein as the "Grantors") DEUTSCHE BANK TRUST COMPANY AMERICAS, a New York banking corporation, as collateral agent (in such capacity, the "Collateral Agent") for the Secured Parties (as defined therein). A. Reference is made to (a) the Amended and Restated Credit Agreement dated as of May ___, 2002 (as amended, supplemented or otherwise modified from time to time, the "Amended and Restated Credit Agreement"), among the Borrower, Holding, the lenders from time to time party thereto (the "Lenders") and Deutsche Bank Trust Company Americas, as swingline lender, issuing bank, administrative agent and Collateral Agent for the Lenders. B. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Security Agreement and the Amended and Restated Credit Agreement. C. The Grantors have entered into the Security Agreement in order to induce the Lenders to make Loans and the Issuing Bank to issue Letters of Credit. Section 7.15 of Security Agreement provides that additional Domestic Subsidiaries of the Borrower may become Grantors under the Security Agreement by execution and delivery of an instrument in the form of this Supplement. The undersigned Domestic Subsidiary (the "New Grantor") is executing this Supplement in accordance with the requirements of the Amended and Restated Credit Agreement to become a Grantor under the Security Agreement in order to induce the Lenders to make additional Loans and the Issuing Bank to issue additional Letters of Credit and as consideration for Loans previously made and Letters of Credit previously issued. Accordingly, the Collateral Agent and the New Grantor agree as follows: SECTION 1. In accordance with Section 7.15 of the Security Agreement, the New Grantor by its signature below becomes a Grantor under the Security Agreement with the same force and effect as if originally named therein as a Grantor and the New Grantor hereby (a) agrees to all the terms and provisions of the Security Agreement applicable to it as a Grantor thereunder and (b) represents and warrants that the representations and warranties made by it as a Grantor thereunder are true and correct on and as of the date hereof. In furtherance of the foregoing, the New Grantor, as security for the payment and performance in full of the Obligations (as defined in the Security Agreement), does hereby create and grant to the Collateral Agent, its successors and assigns, for the benefit of the Secured Parties, their successors and assigns, a security interest in and lien on all of the New Grantor's right, title and interest in and to the Collateral (as defined in the Security Agreement) of the New Grantor. Each 1 reference to a "Grantor" in the Security Agreement shall be deemed to include the New Grantor. The Security Agreement is hereby incorporated herein by reference. SECTION 2. The New Grantor represents and warrants to the Collateral Agent and the other Secured Parties that this Supplement has been duly authorized, executed and delivered by it and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms. SECTION 3. This Supplement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Supplement shall become effective when the Collateral Agent shall have received counterparts of this Supplement that, when taken together, bear the signatures of the New Grantor and the Collateral Agent. Delivery of an executed signature page to this Supplement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Supplement. SECTION 4. The New Grantor hereby represents and warrants that (a) set forth on Schedule I attached hereto is a true and correct schedule of the location of any and all Collateral of the New Grantor other than (i) Collateral which is in transit between facilities, whether in vehicles owned by the applicable Grantor or on common carriers and (ii) Collateral which is located in temporary warehousing and will remain in such warehousing for no longer than one month, and (b) set forth under its signature hereto, is the true and correct location of the chief executive office of the New Grantor. SECTION 5. Except as expressly supplemented hereby, the Security Agreement shall remain in full force and effect. SECTION 6. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. SECTION 7. In case any one or more of the provisions contained in this Supplement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and in the Security Agreement shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties hereto shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 8. All communications and notices hereunder shall be in writing and given as provided in Section 7.01 of the Security Agreement. All communications and notices hereunder to the New Grantor shall be given to it at the address set forth under its signature below. S-1 SECTION 9. The New Grantor agrees to reimburse the Collateral Agent for its reasonable out-of-pocket expenses in connection with this Supplement, including the reasonable fees, other charges and disbursements of counsel for the Collateral Agent. IN WITNESS WHEREOF, the New Grantor and the Collateral Agent have duly executed this Supplement to the Security Agreement as of the day and year first above written. [Name of New Grantor], by _______________________________ Name: Title: Address: DEUTSCHE BANK TRUST COMPANY AMERICAS, as Collateral Agent, by _______________________________ Name: Title: S-1 SCHEDULE I to Supplement No. ___to the Amended and Restated Security Agreement LOCATION OF COLLATERAL Description Location EXCEPTED COLLATERAL Schedule-I EX-10.13 5 dex1013.txt PLEDGE AGREEMENT Exhibit 10.13 NONRECOURSE PLEDGE AGREEMENT PLEDGE AGREEMENT dated as of May 14, 2002 (this "Agreement"), among the parties listed as pledgors on the signature pages hereto (the "Pledgors"), DEUTSCHE BANK TRUST COMPANY AMERICAS (formerly Bankers Trust Company), a New York banking corporation ("Deutsche Bank"), as collateral agent (in such capacity, the "Collateral Agent") for the Lenders. Reference is made to that certain Amended and Restated Credit Agreement dated as of May 14, 2002 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Hudson Respiratory Care Inc. (the "Borrower"), River Holding Corp. ("Holdings"), the lenders from time to time party thereto (the "Lenders") and Deutsche Bank, as Administrative Agent for the Lenders, Collateral Agent, Swingline Lender and as Issuing Bank (in such capacity, the "Issuing Bank"). All capitalized terms used herein but not defined herein shall have the meaning ascribed to them in the Credit Agreement. The effectiveness of the Credit Agreement is conditioned upon, among other things, the execution and delivery by the Pledgors of a Nonrecourse Pledge Agreement in the form hereof to secure (a) the due and punctual payment by the Borrower of (i) the principal of and premium, if any, and interest (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, (ii) each payment required to be made by the Borrower under the Credit Agreement in respect of any Letter of Credit, when and as due, including payments in respect of reimbursement of disbursements, interest thereon and obligations to provide cash collateral and (iii) all other monetary obligations, including fees, costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), of the Borrower to the Lenders and the Secured Parties (as defined in the Security Agreement) under the Credit Agreement and the other Credit Documents and (b) the due and punctual payment and performance of all monetary obligations of the Borrower under each Interest Rate Agreement entered into with any counterparty that was a Lender at the time such Interest Rate Agreement was entered into (all the monetary obligations referred to in the preceding clauses (a) through (b) being referred to collectively as the "Obligations"). Capitalized terms used herein and not defined herein shall have meanings assigned to such terms in the Credit Agreement. As an owner or an Affiliate of an owner of Holdings (and indirectly the Borrower), it is in the Pledgors' interest that the Credit Agreement become effective. Accordingly, in consideration of the premises and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Pledgors and the Collateral Agent, on behalf of itself and each Secured Party (and each of their respective successors or assigns), hereby agree as follows: Exhibit 10.13 SECTION 1. Pledge. (a) As security for the payment and performance, as the case may be, in full of the Obligations, each Pledgor hereby grants, hypothecates, and pledges to the Collateral Agent, its successors and assigns, and hereby grants to the Collateral Agent, its successors and assigns, for the ratable benefit of the Secured Parties, a security interest in all of such Pledgor's right, title and interest in, to and under: (i)(w) the debt securities owned by it and listed on Schedule I hereto, (x) any debt hereafter acquired by such Pledgor and representing all or a portion of the next $5,000,000 in aggregate principal amount of debt of the Borrower or any of its Subsidiaries to the Pledgors incurred after the date hereof, which debt securities each Pledgor covenants shall be in substantially the form of the securities referred to in items 3 and 4 on Schedule I hereto, (y) any other debt issued after the Effective Date of the Borrower or any of its Subsidiaries to such Pledgor (which debt securities shall be in substantially the form of the securities referred to in items 3 and 4 of Schedule I hereto) other than (1) debt of Borrower, Holdings or any other Credit Party that is subordinate or junior to the Obligations and in a form satisfactory to the Collateral Agent and (2) unsecured debt of HRC Holding in excess of the $5,000,000 referred to in clause (x) above and which matures no earlier than July 1, 2004 and has no scheduled payments prior to maturity, and (z) any promissory notes and any other instruments evidencing the debt securities referred to in (w), (x) and (y); (ii) all other property that may be delivered to and held by the Collateral Agent pursuant to the terms hereof; (iii) all payments of principal or interest, cash, instruments and other property from time to time received, receivable or otherwise distributed, in respect of, in exchange for or upon the conversion of the property referred to in clauses (i) and (ii); (iv) all rights and privileges of such Pledgor with respect to the securities and other property referred to in clauses (i), (ii) and (iii); and (v) all proceeds of any of the foregoing (the items referred to in clauses (i) through (v) being collectively referred to as the "Collateral"). Upon delivery to the Collateral Agent, (i) any promissory notes or other securities now or hereafter included in the Collateral (the "Pledged Securities") shall be accompanied by instruments of transfer satisfactory to the Collateral Agent and by such other instruments and documents as the Collateral Agent may reasonably request and (ii) all other property comprising part of the Collateral shall be accompanied by proper instruments of assignment duly executed by the applicable Pledgor and such other instruments or documents as the Collateral Agent may reasonably request. Each delivery of Pledged Securities shall be accompanied by a schedule describing the securities theretofore and then being pledged hereunder, which schedule shall be attached hereto as Schedule I and made a part hereof. Each schedule so delivered shall supersede any prior schedules so delivered. (b) THE PLEDGORS HAVE SECURED THE OBLIGATIONS BY A PLEDGE OF THE COLLATERAL PURSUANT TO THE TERMS AND CONDITIONS OF THIS AGREEMENT. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, IN ANY OTHER CREDIT DOCUMENT, IN APPLICABLE LAW OR OTHERWISE, RECOURSE TO THE PLEDGORS UNDER THIS AGREEMENT, ANY OTHER CREDIT DOCUMENT OR OTHERWISE SHALL BE LIMITED TO THE COLLATERAL, AND THE SOLE AND EXCLUSIVE REMEDY OF ANY SECURED PARTY, UPON AN EVENT OF DEFAULT OR A BANKRUPTCY EVENT OR OTHERWISE, SHALL BE TO EXERCISE REMEDIES HEREUNDER WITH RESPECT TO THE COLLATERAL PURSUANT TO THIS AGREEMENT AND NO 2 Exhibit 10.13 OTHER RECOURSE SHALL BE HAD UNDER THIS AGREEMENT, ANY OTHER CREDIT DOCUMENT OR OTHERWISE TO ANY PLEDGOR OR TO ANY OF THE OTHER PROPERTIES OR ASSETS OF ANY PLEDGOR. NEITHER THE COLLATERAL AGENT NOR ANY LENDER MAY BRING ANY ACTION OR SUIT AGAINST ANY PLEDGOR WITH RESPECT TO THE PLEDGE UNDER THIS AGREEMENT OF THE PLEDGED COLLATERAL OTHER THAN AN ACTION (A) AGAINST SUCH PLEDGOR LIMITED TO ENFORCEMENT OF THE SPECIFIC OBLIGATIONS OF SUCH PLEDGOR UNDER THIS AGREEMENT WITH RESPECT TO THE COLLATERAL OR (B) FOR DECLARATORY OR INJUNCTIVE RELIEF TO DECLARE THE EXISTENCE OF THE COLLATERAL SECURITY PROVIDED HEREBY OR TO PROTECT THE ABILITY TO SEEK SUCH ENFORCEMENT. THIS SECTION 1(b) SHALL BE BINDING ON ANY SUCCESSOR OR ASSIGN OF THE COLLATERAL AGENT AND THE LENDERS AND ANY FUTURE COLLATERAL AGENT OR LENDER. SECTION 2. Delivery of the Collateral. Each Pledgor agrees promptly to deliver or cause to be delivered to the Collateral Agent any and all Pledged Securities, and any and all certificates or other instruments or documents representing the Collateral. SECTION 3. Representations, Warranties and Covenants. Each Pledgor hereby represents, warrants and covenants, as to itself and the Collateral pledged by it hereunder, to and with the Collateral Agent that: (a) except for the security interest granted hereunder, the Pledgor (i) is and will at all times continue to be the direct owner, beneficially and of record, of the Pledged Securities indicated on Schedule I, (ii) holds the same free and clear of all Liens, (iii) will make no assignment, pledge, hypothecation or transfer of, or create or permit to exist any security interest in or other Lien on, the Collateral, other than pursuant hereto, and (iv) will cause any and all Pledged Securities, whether for value paid by the Pledgor or otherwise, to be forthwith deposited with the Collateral Agent and pledged or assigned hereunder; (b) the Pledgor (i) has the power and authority to pledge the Collateral in the manner hereby done or contemplated and (ii) will defend its title or interest thereto or therein against any and all Liens (other than the Lien created by this Agreement), however arising, of all persons whomsoever; (c) no consent of any other person (including stockholders or creditors of the Pledgor) and no consent or approval of any Governmental Authority or any securities exchange was or is necessary to the validity of the pledge effected hereby; (d) by virtue of the execution and delivery by the Pledgors of this Agreement, when the Pledged Securities, notes or other documents representing or evidencing the Pledged Securities are delivered to the Collateral Agent in accordance with this Agreement, the Collateral Agent will obtain a valid and perfected first lien upon and security interest in such Pledged Securities as security for the payment and performance of the Obligations; 3 Exhibit 10.13 (e) upon delivery of the Pledged Securities to the Collateral Agent, the pledge effected hereby is effective to vest in the Collateral Agent, on behalf of the Secured Parties, the rights of the Collateral Agent in the Pledged Securities as set forth herein; (f) all information set forth herein relating to the Collateral is accurate and complete in all material respects as of the date hereof; (g) the pledge of the Pledged Securities pursuant to this Agreement does not violate Regulation T, U or X of the Federal Reserve Board or any successor thereto as of the date hereof; (h) the Pledged Securities listed on Schedule I hereto constitute all of the Inebtedness owed by the Borrower and its Subsidiaries to the Pledgors and their Affiliates required to be pledged hereunder pursuant hereto and pursuant to the Credit Agreement. All of the Indebtedness owed by the Borrower and its Subsidiaries to the Pledgors and their Affiliates as of the Effective Date (other than the Pledged Securities) is subordinated to the Obligations; and (i) No Pledgor shall consent to any amendment, supplement or other modification of any of the terms or provisions contained in the Pledged Securities, other than any amendment, supplement or other modification which extends the date or reduces the amount of any required repayment or redemption and other than any amendment, supplement or other modification to the Senior Notes which: (a) is consummated without any condition precedent or subsequent remaining unsatisfied or unwaived prior to the six-month anniversary of the Effective Date in connection with a restructuring or exchange of the Borrower's Senior Subordinated Notes which reduces the Borrower's overall Indebtedness or interest costs, (b) converts the Senior Notes to Capital Stock (other than Disqualified Stock), which Capital Stock remains pledged to Collateral Agent pursuant to this Agreement and (c) no Default, Event of Default or Bankruptcy Event has occurred and is continuing or would arise as a result of such transactions under the Credit Documents. SECTION 4. Registration in Nominee Name; Denominations. The Collateral Agent, on behalf of the Secured Parties, shall have the right (in its sole and absolute discretion) to hold the Pledged Securities in its own name as pledgee, the name of its nominee (as pledgee or as sub-agent) or the name of the applicable Pledgor, endorsed or assigned in blank or in favor of the Collateral Agent. Each Pledgor will promptly give to the Collateral Agent copies of any notices or other communications received by it with respect to the Pledged Securities. The Collateral Agent shall at all times have the right to exchange the certificates representing Pledged Securities for certificates of smaller or larger denominations for any purpose consistent with this Agreement. SECTION 5. Voting Rights; Dividends and Interest, etc. (a) Unless and until an Event of Default or one of the events described in Sections 7.01(g) and (h) of the Credit Agreement (a "Bankruptcy Event") shall have occurred and be continuing: 4 Exhibit 10.13 (i) Each Pledgor shall be entitled to exercise any and all voting and/or other consensual rights and powers inuring to an owner of Pledged Securities or any part thereof for any purpose consistent with the terms of this Agreement, the Credit Agreement and the other Credit Documents; provided, however, that such Pledgor will not be entitled to exercise any such right if the result thereof would reasonably be expected to materially and adversely affect the rights inuring to a holder of the Pledged Securities or the rights and remedies of any of the Secured Parties under this Agreement or the Credit Agreement or any other Credit Document or the ability of the Secured Parties to exercise the same; provided further that no Pledgor shall exercise any of its rights as a holder of "Designated Senior Debt" with respect to the Senior Subordinated Notes without the prior written approval of the Collateral Agent; and provided further that upon the written direction of the Collateral Agent, such Pledgor shall exercise its rights as a holder of "Designated Senior Debt" with respect to the Senior Subordinated Notes in accordance with such written direction. (ii) The Collateral Agent shall execute and deliver to each Pledgor, or cause to be executed and delivered to each Pledgor, all such proxies, powers of attorney and other instruments as such Pledgor may reasonably request for the purpose of enabling such Pledgor to exercise the voting and/or consensual rights and powers it is entitled to exercise pursuant to subclause (i). (b) The Collateral Agent shall have the sole and exclusive right and authority to receive and retain any and all cash and noncash dividends, interest, principal or other property on account of the Collateral paid or delivered on or with respect to the Collateral. All interest, principal or other property on account of the Collateral received by any Pledgor contrary to the provisions of this Section 5 shall be held in trust for the benefit of the Collateral Agent, shall be segregated from other property or funds of such Pledgor and shall be forthwith delivered to the Collateral Agent upon demand in the same form as so received (with any necessary endorsement). Any and all money and other property paid over or delivered to or received by the Collateral Agent pursuant to the provisions of this clause (b) shall be retained by the Collateral Agent in an account to be established by the Collateral Agent upon receipt of such money or other property and, upon the occurrence of an Event of Default or a Bankruptcy Event, shall be reduced to cash and applied in accordance with the provisions of Sections 6 and 7. (c) Upon the occurrence and during the continuance of an Event of Default or a Bankruptcy Event, all rights of any Pledgor to exercise the voting and consensual rights and powers it is entitled to exercise pursuant to clause (a)(i) of this Section 5, and the obligations of the Collateral Agent under clause (a)(ii) of this Section 5, shall cease, and all such rights shall thereupon become vested in the Collateral Agent, which shall have the sole and exclusive right and authority to exercise such voting and consensual rights and powers, provided that, unless otherwise directed by the Required Lenders, the Collateral Agent shall have the right from time to time following and during the continuance of an Event of Default to permit a Pledgor to exercise such rights. After all Events of Default have been cured or waived and provided that no Bankruptcy Event exists, each Pledgor will have the right to exercise the voting and consensual rights and 5 Exhibit 10.13 powers that it would otherwise be entitled to exercise pursuant to the terms of clause (a)(i). SECTION 6. Remedies upon Default. Upon the occurrence and during the continuance of an Event of Default or a Bankruptcy Event, subject to applicable regulatory and legal requirements, the Collateral Agent may sell the Collateral, or any part thereof, at public or private sale or at any broker's board or on any securities exchange, for cash, on credit or for future delivery as the Collateral Agent shall deem appropriate. The Collateral Agent shall be authorized at any such sale (if it deems it advisable to do so) to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing the Collateral for their own account for investment and not with a view to the distribution or sale thereof, and upon consummation of any such sale the Collateral Agent shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof the Collateral so sold. Each such purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of any Pledgor, and, to the extent permitted by applicable law, the Pledgors hereby waive all rights of redemption, stay, valuation and appraisal any Pledgor now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. The Collateral Agent shall give the applicable Pledgor 10 days' prior written notice (which each Pledgor agrees is reasonable notice within the meaning of Section 9-611 of the Uniform Commercial Code as in effect in the State of New York or its equivalent in other jurisdictions) of the Collateral Agent's intention to make any sale of such Pledgor's Collateral. Such notice, in the case of a public sale, shall state the time and place for such sale and, in the case of a sale at a broker's board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Collateral, or portion thereof, will first be offered for sale at such board or exchange. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Collateral Agent may fix and state in the notice of such sale. At any such sale, the Collateral, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as the Collateral Agent may (in its sole and absolute discretion) determine. The Collateral Agent shall not be obligated to make any sale of any Collateral if it shall determine not to do so, regardless of the fact that notice of sale of such Collateral shall have been given. The Collateral Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case any sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by the Collateral Agent until the sale price is paid in full by the purchaser or purchasers thereof, but the Collateral Agent shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may be sold again upon like notice. At any public (or, to the extent permitted by applicable law, private) sale made pursuant to this Section 6, any Secured Party may bid for or purchase, free from any right of redemption, stay or appraisal on the part of any Pledgor (all said rights being also hereby waived and released), the Collateral or any part thereof offered for sale and may make payment on account thereof by using any claim then due and payable to it from such Pledgor as a credit against the purchase price, and it may, upon compliance with the terms of sale, hold, retain and dispose of such property without further accountability to such Pledgor therefor. For purposes hereof, (a) a written agreement to purchase the Collateral or any portion 6 Exhibit 10.13 thereof shall be treated as a sale thereof, (b) the Collateral Agent shall be free to carry out such sale pursuant to such agreement and (c) such Pledgor shall not be entitled to the return of the Collateral or any portion thereof subject thereto, notwithstanding the fact that after the Collateral Agent shall have entered into such an agreement all Events of Default and Bankruptcy Events shall have been remedied and the Obligations paid in full. As an alternative to exercising the power of sale herein conferred upon it, the Collateral Agent may proceed by a suit or suits at law or in equity to foreclose upon the Collateral and to sell the Collateral or any portion thereof pursuant to a judgment or decree of a court or courts having competent jurisdiction or pursuant to a proceeding by a court-appointed receiver. Any sale pursuant to the provisions of this Section 6 shall be deemed to conform to the commercially reasonable standards as provided in Section 9-610 of the Uniform Commercial Code as in effect in the State of New York or its equivalent in other jurisdictions. SECTION 7. Application of Proceeds of Sale. The proceeds of any sale of Collateral pursuant to Section 6, as well as (following an Event of Default or a Bankruptcy Event) any Collateral consisting of cash, shall be applied by the Collateral Agent as follows: FIRST, to the payment of all costs and expenses incurred by the Collateral Agent in connection with such sale or otherwise in connection with this Agreement, any other Credit Document or any of the Obligations, including all court costs and the reasonable fees and expenses of its agents and legal counsel, the repayment of all advances made by the Collateral Agent hereunder or under any other Credit Document on behalf of the Pledgors and any other costs or expenses incurred in connection with the exercise of any right or remedy hereunder or under any other Credit Document; SECOND, to the payment in full of the Obligations (the amounts so applied to be distributed among the Secured Parties pro rata in accordance with the amounts of the Obligations owed to them on the date of any such distribution); and THIRD, to the Pledgors, their successors or assigns, or as a court of competent jurisdiction may otherwise direct. The Collateral Agent shall have absolute discretion as to the time of application of any such proceeds, moneys or balances in accordance with this Agreement. Upon any sale of the Collateral by the Collateral Agent (including pursuant to a power of sale granted by statute or under a judicial proceeding), the receipt of the purchase money by the Collateral Agent or of the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral so sold and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Collateral Agent or such officer or be answerable in any way for the misapplication thereof. SECTION 8. Reimbursement of Collateral Agent. (a) Each Pledgor agrees to pay upon demand to the Collateral Agent the amount of any and all reasonable expenses, including the reasonable fees, other charges and disbursements of its counsel and of any experts or agents, that the Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of 7 Exhibit 10.13 the Collateral, (iii) the exercise or enforcement of any of the rights of the Collateral Agent hereunder or (iv) the failure by such Pledgor to perform or observe any of the provisions hereof. (b) Each Pledgor agrees to indemnify the Collateral Agent and the Indemnitees (as defined in Section 9.05 of the Credit Agreement) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees, other charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Credit Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto of their respective obligations thereunder or the consummation of the Transactions and the other transactions contemplated thereby or (ii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto, provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. (c) Any amounts payable as provided hereunder shall be additional Obligations secured hereby and by the other Security Documents. The provisions of this Section 8 shall remain operative and in full force and effect regardless of the termination of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Obligations, the invalidity or unenforceability of any term or provision of this Agreement or any other Credit Document or any investigation made by or on behalf of the Collateral Agent or any other Secured Party. All amounts due under this Section 8 shall be payable on written demand therefor and shall bear interest at the rate specified in Section 2.06 of the Credit Agreement. SECTION 9. Collateral Agent Appointed Attorney-in-Fact. Each Pledgor irrevocably makes, constitutes and appoints the Collateral Agent (and all officers, employees or agents designated by the Collateral Agent) as such Pledgor's true and lawful agent and attorney-in-fact, and in such capacity the Collateral Agent shall have the right, with power of substitution for each Pledgor and in each Pledgor's name or otherwise, for the use and benefit of the Collateral Agent and the Secured Parties, upon the occurrence and during the continuance of an Event of Default or a Bankruptcy Event, to ask for, demand, sue for, collect, receive and give acquittance for any and all moneys due or to become due under and by virtue of any Collateral, to endorse checks, drafts, orders and other instruments for the payment of money payable to such Pledgor representing any interest or dividend or other distribution payable in respect of the Collateral or any part thereof or on account thereof and to give full discharge for the same, to settle, compromise, prosecute or defend any action, claim or proceeding with respect thereto, and to sell, assign, endorse, pledge, transfer and to make any agreement respecting, or otherwise deal with, the same; provided, however, that nothing herein contained shall be construed as requiring or obligating the Collateral Agent to make any commitment or to make any inquiry as to the nature or sufficiency of any payment received by the Collateral Agent, or to present or file any claim or notice, or to take any action with respect to the Collateral or any part thereof or the moneys due or to become due in respect thereof or any property covered thereby. The Collateral Agent and the other Secured Parties shall be accountable only for amounts actually received as a 8 Exhibit 10.13 result of the exercise of the powers granted to them herein, and neither they nor their officers, directors, employees or agents shall be responsible to any Pledgor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. SECTION 10. Waivers; Amendment. (a) No failure or delay of the Collateral Agent in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Collateral Agent hereunder and of the other Secured Parties under the other Credit Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provisions of this Agreement or consent to any departure by any Pledgor therefrom shall in any event be effective unless the same shall be permitted by clause (b), and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on any Pledgor in any case shall entitle such Pledgor to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to a written agreement entered into between the Collateral Agent and the Pledgor or Pledgors with respect to which such waiver, amendment or modification is to apply, subject to any consent required in accordance with Section 9.08 of the Credit Agreement. SECTION 11. Securities Act, etc. In view of the position of the Pledgors in relation to the Pledged Securities, or because of other current or future circumstances, a question may arise under the Securities Act of 1933, as now or hereafter in effect, or any similar statute hereafter enacted analogous in purpose or effect (such Act and any such similar statute as from time to time in effect being called the "Federal Securities Law") with respect to any disposition of the Pledged Securities permitted hereunder. Each Pledgor understands that compliance with the Federal Securities Laws might very strictly limit the course of conduct of the Collateral Agent if the Collateral Agent were to attempt to dispose of all or any part of the Pledged Securities, and might also limit the extent to which or the manner in which any subsequent transferee of any Pledged Securities could dispose of the same. Similarly, there may be other legal restrictions or limitations affecting the Collateral Agent in any attempt to dispose of all or part of the Pledged Securities under applicable Blue Sky or other state securities laws or similar laws analogous in purpose or effect. Each Pledgor recognizes that in light of such restrictions and limitations the Collateral Agent may, with respect to any sale of the Pledged Securities, limit the purchasers to those who will agree, among other things, to acquire such Pledged Securities for their own account, for investment, and not with a view to the distribution or resale thereof. Each Pledgor acknowledges and agrees that in light of such restrictions and limitations, the Collateral Agent, in its sole and absolute discretion, (a) may proceed to make such a sale whether or not a registration statement for the purpose of registering such Pledged Securities or part thereof shall have been filed under the Federal Securities Laws and (b) may approach and negotiate with a single potential purchaser to effect such sale. Each Pledgor acknowledges and agrees that any such sale might result in prices and other terms less favorable to the seller than if such sale were a public sale without such restrictions. In the event of any such sale, the Collateral Agent shall incur no 9 Exhibit 10.13 responsibility or liability for selling all or any part of the Pledged Securities at a price that the Collateral Agent, in its sole and absolute discretion, may in good faith deem commercially reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might have been realized if the sale were deferred until after registration as aforesaid or if more than a single purchaser were approached. The provisions of this Section 11 will apply notwithstanding the existence of a public or private market upon which the quotations or sales prices may exceed substantially the price at which the Collateral Agent sells. SECTION 12. Registration, etc. Each Pledgor agrees that, upon the occurrence and during the continuance of an Event of Default or a Bankruptcy Event hereunder, if for any reason the Collateral Agent desires to sell any of the Pledged Securities of the Borrower at a public sale, it will, at any time and from time to time, upon the written request of the Collateral Agent, use its best efforts to take or to cause the issuer of such Pledged Securities to take such action and prepare, distribute and/or file such documents, as are required or advisable in the reasonable opinion of counsel for the Collateral Agent to permit the public sale of such Pledged Securities. Each Pledgor further agrees to indemnify, defend and hold harmless the Collateral Agent, each other Secured Party, any underwriter and their respective officers, directors, affiliates and controlling persons from and against all loss, liability, expenses, costs of counsel (including, without limitation, reasonable fees and expenses to the Collateral Agent of legal counsel), and claims (including the costs of investigation) that they may incur insofar as such loss, liability, expense or claim arises out of or is based upon any alleged untrue statement of a material fact contained in any prospectus (or any amendment or supplement thereto) or in any notification or offering circular, or arises out of or is based upon any alleged omission to state a material fact required to be stated therein or necessary to make the statements in any thereof not misleading, except insofar as the same may have been caused by any untrue statement or omission based upon information furnished in writing to such Pledgor or the issuer of such Pledged Securities by the Collateral Agent or any other Secured Party expressly for use therein. Each Pledgor further agrees, upon such written request referred to above, to use its best efforts to qualify, file or register, or cause the issuer of such Pledged Securities to qualify, file or register, any of the Pledged Securities under the Blue Sky or other securities laws of such states as may be requested by the Collateral Agent and keep effective, or cause to be kept effective, all such qualifications, filings or registrations. Each Pledgor will bear all costs and expenses of carrying out its obligations under this Section 12. Each Pledgor acknowledges that there is no adequate remedy at law for failure by it to comply with the provisions of this Section 12 and that such failure would not be adequately compensable in damages, and therefore agrees that its agreements contained in this Section 12 may be specifically enforced. SECTION 13. Security Interest Absolute. All rights of the Collateral Agent hereunder, the grant of a security interest in the Collateral and all obligations of the Pledgors hereunder, shall be absolute and unconditional irrespective of (a) any lack of validity or enforceability of the Credit Agreement, any other Credit Document, any agreement with respect to any of the Obligations or any other agreement or instrument relating to any of the foregoing, (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Credit Agreement, any other Credit Document or any other agreement or instrument relating to any of the foregoing, (c) any exchange, release or nonperfection of any other collateral, or any release or amendment or waiver of or consent to or departure from any guaranty, for all or any of the 10 Exhibit 10.13 Obligations or (d) any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Pledgors in respect of the Obligations or in respect of this Agreement (other than the indefeasible payment in full of all the Obligations). SECTION 14. Termination or Release. (a) This Agreement and the security interests granted hereby shall terminate when all the Obligations (other than inchoate indemnification and expense reimbursement obligations) have been indefeasibly paid in full and the Lenders have no further commitment to lend under the Credit Agreement, the L/C Exposure has been reduced to zero and the Issuing Bank has no further obligation to issue Letters of Credit under the Credit Agreement. (b) In connection with any termination or release pursuant to clause (a), the Collateral Agent shall execute and deliver to the applicable Pledgor, at such Pledgor's expense, all documents that such Pledgor shall reasonably request to evidence such termination or release. Any execution and delivery of documents pursuant to this Section 14 shall be without recourse to or warranty by the Collateral Agent. SECTION 15. Notices. All communications and notices hereunder shall be in writing and given as provided in Section 9.01 of the Credit Agreement. All communications and notices hereunder to a Pledgor shall be given to it at the address for notices set forth under its signature hereto. SECTION 16. Further Assurances. Each Pledgor agrees that from time to time, at its own expense, such Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Collateral Agent may request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Secured Parties to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, each Pledgor will: (i) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Collateral Agent may request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (ii) at the Collateral Agent's request, appear in and defend any action or proceeding that may affect such Pledgor's title to or the Secured Parties' security interest in all or any part of the Collateral. Each Pledgor hereby authorizes the Collateral Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of such Pledgor. Each Pledgor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by such Pledgor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. SECTION 17. Binding Effect; Several Agreement; Assignments. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Pledgors that are contained in this Agreement shall bind and inure to the benefit of its successors and assigns. This Agreement shall inure to the benefit of the Pledgors, the Collateral Agent and the other Secured Parties, and their respective successors and assigns, except that no Pledgor may assign its rights hereunder or any interest herein or in the Collateral (and any such 11 Exhibit 10.13 attempted assignment shall be void), except as expressly contemplated by this Agreement or the other Credit Documents. SECTION 18. Survival of Agreement, Severability. All covenants, agreements, representations and warranties made by the Pledgors herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Credit Document shall be considered to have been relied upon by the Collateral Agent and the other Secured Parties and shall survive the making by the Lenders of the Loans, the issuance of the Letters of Credit by the Issuing Bank and the execution and delivery to the Lenders of the Notes evidencing such Loans, regardless of any investigation made by the Secured Parties or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any other fee or amount payable under this Agreement or any other Credit Document is outstanding and unpaid or the L/C Exposure does not equal zero and as long as the Commitments and the L/C Commitments have not been terminated. (a) In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 19. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. SECTION 20. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute a single contract, and shall become effective as provided in Section 17. Delivery of an executed counterpart of a signature page to this Agreement by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Agreement. SECTION 21. Rules of Interpretation. The rules of interpretation specified in Section 1.02 of the Credit Agreement shall be applicable to this Agreement. Section headings used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting this Agreement. SECTION 22. Jurisdiction; Consent to Service of Process. (a) Each Pledgor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Credit Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby 12 Exhibit 10.13 irrevocably and unconditionally agrees that, to the extent permitted by applicable law, all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such Federal court. Each of the parties hereto 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. Nothing in this Agreement shall affect any right that the Collateral Agent or any other Secured Party may otherwise have to bring any action or proceeding relating to this Agreement or the other Credit Documents against any Pledgor or its properties in the courts of any jurisdiction. (b) Each Pledgor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Credit Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 15. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 23. Waiver Of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 24. Additional Pledgors. Each person that becomes holder of debt securities required to be pledged pursuant to Section 1(a) hereof is required to enter in this Agreement as a Pledgor upon the holder of such debt securities if such Subsidiary owns or possesses property of a type that would be considered Collateral hereunder. Upon execution and delivery by the Collateral Agent and a holder of such debt securities of an instrument in the form of Annex 1, such holder shall become a Pledgor hereunder with the same force and effect as if originally named as a Pledgor herein. The execution and delivery of such instrument shall not require the consent of any Pledgor hereunder. The rights and obligations of each Pledgor hereunder shall remain in full force and effect notwithstanding the addition of any new Pledgor as a party to this Agreement. 13 Exhibit 10.13 SECTION 25. Certain Other Rights. (a) Each Pledgor agrees that its obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Obligations. In furtherance of the foregoing and without limiting the generality thereof, each Pledgor agrees as follows: (i) the Collateral Agent or any Lender may from time to time, without notice or demand and without affecting the validity or enforceability of this Agreement or giving rise to any limitation, impairment or discharge of such Pledgor's liability hereunder, (A) renew, extend, accelerate or otherwise change the time, place, manner or terms of payment of the Obligations, (B) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations, (C) request and accept guaranties of the Obligations and take and hold other security for the payment of the Obligations, (D) release, exchange, compromise, subordinate or modify, with or without consideration, any other security for payment of the Obligations, any guaranties of the Obligations, or any other obligation of any Person with respect to the Obligations, (E) enforce and apply any other security now or hereafter held by or for the benefit of the Collateral Agent or any Lender in respect of the Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that the Collateral Agent or the Lenders, or any of them, may have against any such security, as the Collateral Agent in its discretion may determine consistent with the Credit Agreement and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and (F) exercise any other rights available to the Collateral Agent or the Lenders or any of them, under the Credit Documents, at law or in equity; and (ii) this Agreement and the obligations of such Pledgor hereunder shall be valid and enforceable and shall not be subject to any limitation, impairment or discharge for any reason (other than payment in full of the Obligations), including without limitation the occurrence of any of the following, whether or not such Pledgor shall have had notice or knowledge of any of them: (A) any failure to assert or enforce or agreement not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy with respect to the Obligations or any agreement relating thereto, or with respect to any guaranty of or other security for the payment of the Obligations, (B) any waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including without limitation provisions relating to events of default) of the Credit Agreement, any of the other Credit Documents or any agreement or instrument executed pursuant thereto, or of any guaranty or other security for the Obligations, (C) the Obligations, or any agreement relating thereto, at any time being found to be illegal, invalid or unenforceable in any respect, (D) the application of payments received from any source to the payment of indebtedness other than the Obligations, even though the Collateral Agent or the Lenders or any of them, might have elected to apply such payment to any part or all of the Obligations, (E) any failure to perfect or continue perfection of a security interest in any other collateral which secures any of the Obligations, (F) any defenses, set-offs or counterclaims which the Borrower or any Guarantor may allege or assert against the 14 Exhibit 10.13 Collateral Agent or any in respect of the Obligations, including but not limited to failure of consideration, breach of warranty, payment, statute of frauds, statute of limitations, accord and satisfaction and usury, and (G) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of such Pledgor as an obligor in respect of the Obligations. (b) Each Pledgor hereby waives, for the benefit of the Lenders and the Collateral Agent: (i) any right to require the Collateral Agent or the Lenders, as a condition of payment or performance by such Pledgor, to (A) proceed against the Borrower, any guarantor of the Obligations, any other Pledgor or any other Person, (B) proceed against or exhaust any other security held from the Borrower, any guarantor of the Obligations or any other Person, (C) proceed against or have resort to any balance of any deposit account or credit on the books of the Collateral Agent any Lender in favor of the Borrower or any other Person, or (D) pursue any other remedy in the power of the Collateral Agent or any Lender whatsoever; (ii) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of the Borrower including, without limitation, any defense based on or arising out of the lack of validity or the unenforceability of the Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of the Borrower from any cause other than payment in full of the Obligations; (iii) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (iv) any defense based upon the Collateral Agent's or any Lender's errors or omissions in the administration of the Obligations, except behavior which amounts to bad faith; (v) (A) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Agreement and any legal or equitable discharge of such Pledgor's obligations hereunder, (B) the benefit of any statute of limitations affecting such Pledgor's liability hereunder or the enforcement hereof, (C) any rights to set-offs, recoupments and counterclaims, and (D) promptness, diligence and any requirement that the Collateral Agent or any Lender protect, secure, perfect or insure any other security interest or lien or any property subject thereto; (vi) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, notices of default under the Credit Agreement or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Obligations or any agreement related thereto, notices of any extension of credit to the Borrower and notices of any of the matters referred to in Section 25(a) and any right to consent to any thereof; and (vii) to the fullest extent permitted by law, any defenses or benefits that may be derived from or afforded by law which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms of this Agreement. (c) As used in this Section 25(c), any reference to "the principal" includes the Borrower, and any reference to "the creditor" includes the Collateral Agent and each Lender. In accordance with Section 2856 of the California Civil Code (a) each Pledgor waives any and all rights and defenses available to the Pledgor by reason of Sections 2787 to 2855, inclusive, 2899 and 3433 of the California Civil Code, including without limitation any and all rights or defenses the Pledgor or any guarantor of the Obligations may have because the Obligations are secured by real property. This means, among other 15 Exhibit 10.13 things: (1) the creditor may collect from each Pledgor without first foreclosing on any real or personal property collateral pledged by the principal; and (2) if the creditor forecloses on any real property collateral pledged by the principal: (A) the amount of the Obligations 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) the creditor may collect from each Pledgor even if the creditor, by foreclosing on the real property collateral, has destroyed any right such Pledgor may have to collect from the principal. This is an unconditional and irrevocable waiver of any right and defenses any Pledgor may have because the Obligations are secured by real property. These rights and defenses include, but are not limited to, any rights and defenses based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure. Each Pledgor also waives all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for any of the Obligations, has destroyed such Pledgor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the Code of Civil Procedure or otherwise; and even though that election of remedies by the creditor, such as nonjudicial foreclosure with respect to security for an obligation of any guarantor of any of the Obligations, has destroyed such Pledgor's rights of contribution against such guarantor. No other provision of this Agreement shall be construed as limiting the generality of any of the covenants and waivers set forth in this Section 25(c). As provided in Section 19, this Agreement shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of New York, without regard to conflicts of laws principles. This Section 25(c) is included solely out of an abundance of caution, and shall not be construed to mean that any of the above-referenced provisions of California law are in any way applicable to this Agreement or to any of the Obligations. (d) Until the Obligations shall have been paid in full, each Pledgor shall withhold exercise of (i) any claim, right or remedy, direct or indirect, that such Pledgor now has or may hereafter have against the Borrower or any of its assets in connection with this Agreement or the performance by such Pledgor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise and including without limitation (A) any right of subrogation, reimbursement or indemnification that such Pledgor now has or may hereafter have against the Borrower, Holdings or any of their respective Subsidiaries, (B) any right to enforce, or to participate in, any claim, right or remedy that the Collateral Agent or any Lender now has or may hereafter have against the Borrower or any Guarantor, and (C) any benefit of, and any right to participate in, any other collateral or security now or hereafter held by the Collateral Agent or any Lender, and (ii) any right of contribution such Pledgor may have against any guarantor of any of the Obligations. Each Pledgor further agrees that, to the extent the waiver of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification such Pledgor may have against the Borrower or against any other collateral or security, and any rights of contribution such Pledgor may have against any such guarantor, shall be junior and subordinate to any rights the Collateral Agent or the Lenders may have against the Borrower, to all right, title and 16 Exhibit 10.13 interest the Collateral Agent or the Lenders may have in any such other collateral or security, and to any right the Collateral Agent or the Lenders may have against any such guarantor. (e) The Pledgors acknowledge and agree that they shall have the sole responsibility for obtaining from the Borrower such information concerning the Borrower's financial conditions or business operations as the Pledgors may require, and that the Collateral Agent has no duty at any time to disclose to the Pledgor any information relating to the business operations or financial conditions of the Borrower. SECTION 26. (a) So long as no Default or Event of Default under the Credit Agreement has occurred and is continuing (or with the consent of the Collateral Agent if a Default or Event of Default has occurred and is continuing), any Pledgor may transfer any Pledged Securities to another party that is (1) a shareholder of the Borrower or Holdings or (2) an Affiliate thereof; provided that prior to or concurrently therewith, the transferee becomes a party to this Agreement, the transferred Pledged Securities are immediately pledged and delivered to the Collateral Agent in accordance with this Agreement and the transferred Pledged Securities and the transferee will immediately become subject to all of the terms hereof. (b) Any Pledgor may convert or exchange Pledged Securities for Capital Stock of the Borrower (other than Disqualified Stock) so long as (i) the conversion or exchange is consummated without any condition precedent or subsequent remaining unsatisfied or unwaived prior to the six-month anniversary of the Effective Date in connection with a restructuring or exchange of the Borrower's Senior Subordinated Notes which reduces the Borrower's overall Indebtedness or interest costs, (ii) the Capital Stock is immediately pledged to the Collateral Agent in accordance with this Agreement and (iii) no Default, Event of Default or Bankruptcy Event has occurred and is continuing or would arise as a result of such transactions under the Credit Documents. (c) In connection with a transfer, conversion or exchange permitted under this Section 26, the Collateral Agent agrees to deliver the instrument evidencing the transferred Pledged Securities to the issuer thereof against delivery to the Collateral Agent of a replacement security registered to the transferee and duly endorsed to the Collateral Agent. For the avoidance of doubt, nothing in this Section 26 shall require the Collateral Agent to deliver the proceeds of any Collateral. [remainder of page intentionally left blank] 17 Exhibit 10.13 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. DEUTSCHE BANK TRUST COMPANY AMERICAS, as Collateral Agent, by ________________________________ Name: Title: Pledgors FS EQUITY PARTNERS IV, L.P. By: FS Capital Partners LLC, Its: General Partner by ________________________________ Name: Title: Notice address: 11100 Santa Monica Boulevard Los Angeles, California 90025 Attn: Jon Ralph Telecopy: (310) 444-1870 S-1 Exhibit 10.13 Schedule I to the Nonrecourse Pledge Agreement PLEDGED DEBT SECURITIES 1. HRC Holding Inc. Promissory Note, due August 1, 2006, issued by HRC Holding Inc. to FS Equity Partners IV, L.P., in the principal amount of $759,128. 2. HRC Holding Inc. Promissory Note, due August 1, 2006, issued by HRC Holding Inc. to FS Equity Partners IV, L.P., in the principal amount of $1,505,113. 3. Unsecured Senior Promissory Note Due 2004, due December 31, 2004, issued by HRC Holding Inc. to FS Equity Partners IV, L.P., in the principal amount of $8,000,000. 4. Unsecured Senior Promissory Note Due 2004, due December 31, 2004, issued by Hudson Respiratory Care Inc. to FS Equity Partners IV, L.P., in the principal amount of $12,000,000. I-1 Exhibit 10.13 Annex 1 to the Pledge Agreement SUPPLEMENT NO. ___________ dated as of _________, to the PLEDGE AGREEMENT dated as of May 14, 2002, among the parties listed as pledgors on the signature pages thereto (the "Pledgors"), DEUTSCHE BANK TRUST COMPANY AMERICAS (formerly Bankers Trust Company), a New York banking corporation ("Deutsche Bank"), as collateral agent (in such capacity, the "Collateral Agent") for the Lenders. A. Reference is made to that certain Amended and Restated Credit Agreement dated as of May __, 2002 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Hudson Respiratory Care Inc. (the "Borrower"), River Holding Corp. ("Holdings"), the lenders from time to time party thereto (the "Lenders") and Deutsche Bank, as Administrative Agent for the Lenders, Collateral Agent, Swingline Lender and as Issuing Bank (in such capacity, the "Issuing Bank"). B. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. C. The Pledgors have entered into the Pledge Agreement in order to induce the Lenders to make Loans and the Issuing Bank to issue Letters of Credit. Pursuant to the Credit Agreement, each person that becomes a holder of debt securities required to be pledged pursuant to section 1(a) of the Pledge Agreement is required to enter into the Pledge Agreement as a Pledgor upon becoming the holder of such debt securities. Section 24 of the Pledge Agreement provides that such Subsidiaries may become Pledgors under the Pledge Agreement by execution and delivery of an instrument in the form of this Supplement. The undersigned Person (the "New Pledgor") is executing this Supplement in accordance with the requirements of the Credit Agreement to become a Pledgor under the Pledge Agreement in order to induce the Lenders to make additional Loans and the Issuing Bank to issue additional Letters of Credit and as consideration for Loans previously made and Letters of Credit previously issued. Accordingly, the Collateral Agent and the New Pledgor agree as follows: SECTION 1. In accordance with Section 24 of the Pledge Agreement, the New Pledgor by its signature below becomes a Pledgor under the Pledge Agreement with the same force and effect as if originally named therein as a Pledgor and the New Pledgor hereby agrees (a) to all the terms and provisions of the Pledge Agreement applicable to it as a Pledgor thereunder and (b) represents and warrants that the representations and warranties made by it as a Pledgor thereunder are true and correct on and as of the date hereof. In furtherance of the foregoing, the New Pledgor, as security for the payment and performance in full of the Obligations (as defined in the Pledge Agreement), does hereby create and grant to the Collateral Agent, its successors and assigns, for the benefit of the Secured Parties (as defined in the Security Agreement), their successors and assigns, a security interest in and lien on all of the New Pledgor's right, title and interest in and to the Collateral (as defined in the Pledge Agreement) of the New Pledgor. Each reference to a "Pledgor" in the Pledge Agreement shall be deemed to include the New Pledgor. The Pledge Agreement is hereby incorporated herein by reference. Annex 1-1 Exhibit 10.13 SECTION 2. This Supplement may be executed in counterparts, each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Supplement shall become effective when the Collateral Agent shall have received counterparts of this Supplement that, when taken together, bear the signatures of the New Pledgor and the Collateral Agent. Delivery of an executed signature page to this Supplement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Supplement. SECTION 3. The New Pledgor hereby represents and warrants that set forth on Schedule I attached hereto is a true and correct schedule of all its Pledged Securities. SECTION 4. Except as expressly supplemented hereby, the Pledge Agreement shall remain in full force and effect. SECTION 5. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD FOR PRINCIPLES OF CONFLICTS OF LAWS. SECTION 6. In case any one or more of the provisions contained in this Supplement should be held invalid, illegal or unenforceable in any respect, neither party hereto shall be required to comply with such provision for so long as such provision is held to be invalid, illegal or unenforceable, but the validity, legality and enforceability of the remaining provisions contained herein and in the Pledge Agreement shall not in any way be affected or impaired. The parties hereto shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 7. All communications and notices hereunder shall be in writing and given as provided in Section 15 of the Pledge Agreement. All communications and notices hereunder to the New Pledgor shall be given to it at the address set forth under its signature hereto. SECTION 8. The New Pledgor agrees to reimburse the Collateral Agent for its reasonable out-of-pocket expenses in connection with this Supplement, including the reasonable fees, other charges and disbursements of counsel for the Collateral Agent. Annex 1-2 Exhibit 10.13 IN WITNESS WHEREOF, the New Pledgor and the Collateral Agent have duly executed this Supplement to the Pledge Agreement as of the day and year first above written. [Name of New Pledgor], by -------------------------------- Name: Title: Address: DEUTSCHE BANK TRUST COMPANY AMERICAS, as Collateral Agent, by -------------------------------- Name: Title: Annex 1-3 Exhibit 10.13 Schedule I to Supplement No. to the Pledge Agreement Pledged Securities of the New Pledgor DEBT SECURITIES Issuer Principal Amount Date of Note Maturity Date - -------------------- -------------------- ------------------ ------------------- Annex 1-4 EX-10.15 6 dex1015.txt TECATE FACILITY LEASE Exhibit 10.15 SUB LEASE AGREEMENT ENTERED BY AND BETWEEN LEVIMEX INMOBILIARIA, S.A. DE C.V., REPRESENTED BY MR. ANTONIO RANGEL HEREIN AFTER REFERRRED TO AS THE "SUB-LESSOR", AND HUDSON RESPIRATORY CARE TECATE, S. DE R.L. DE C.V. REPRESENTED BY MR. PATRICK G. YOUNT HEREIN AFTER REFERRED AS "SUB-LESSEE", WITH THE PRESENCE OF LEVITON MANUFACTURING COMPANY INC. REPRESENTED HEREIN BY MR. HAKKI TANSI HEREIN REFERRED TO AS THE "GUARANTOR" AND HUDSON RESPIRATORY CARE, INC. REPRESENTED BY MR. PATRICK G. YOUNT HEREINAFTER REFERRED TO AS THE "SURETY" PURSUANT TO THE FOLLOWING REPRESENTATIONS AND CLAUSES: REPRESENTATIONS I. SUB-LESSOR REPRESENTS AND WARRANTS: A.- That on March 1, 1998, Levical, S.A. de C.V.and Desarrollos Industriales de Tecate, S.A. de C.V., as the owner, (hereinafter the "LESSOR") executed a lease agreement, attached hereto as Exhibit "A", with regard to the rental premises (land and building) located at Km 129.66 of the Tecate - Mexicali highway, "Rancho El Descanso" Tecate, Baja California (hereinafter referred as the PREMISES), which total area consists of 290,000 square feet, including the industrial building, having the measurements and boundaries described in Public Deed number 70,885, volume 775 dated July 19, 1989, granted before Notary Public number one, Mr. Guillermo Gonzalez Herrera from the city of Tijuana, Baja California; which first testimony has been duly recorded before the Public Registry of Property of the City of Tecate, Baja California, under number 7,751, Volume 53, pages 53, Civil Section., on August 18, 1989. The building is a concrete and cinder block edifice with a metal corrugated roof suspended by it's own steel column and beam structure as described in Exhibit "B". The floor is reinforced concrete slab with a mean thickness of approximately 6". B. That Levical, S.A. de C.V., assigned the rights to the lease agreement contained in Exhibit "A" above, as evidenced by the Assignment of Rights agreement, and the written letter of consent provided by LESSOR, both documents attached hereto as Exhibit "C" C. That the TENTH clause in the lease agreement mentioned in section II-A, authorizes his principal to sub-lease the PREMISES, as long the requisites stated in the same clause are met and that it has obtained LESSOR'S written consent to sublease the PREMISES, as stated in document attached hereto as exhibit "D", in accordance with this agreement. D. That the foregoing PREMISES have been provided with the necessary public utilities infrastructure, (as described in Exhibit "E" attached herewith) which location, Exhibit 10.15 availability and capacity make them adequate to efficiently carry forth industrial activities, and that he is aware that such utilities infrastructure is the fundamental intent of SUB-LESSEE to execute this Sublease Agreement. E. That the PREMISES are free from zoning restrictions and legal impediments, and that all land use permits and licenses have been secured to operate as an industrial manufacturing facility. Copy of such certificate is attached herewith as Exhibit "F". F. That the PREMISES fulfill all legal and administrative requirements necessary to install and establish an industrial facility thereon. G. That the PREMISES are free from any liens or burden of any kind or nature, and that SUB LESSOR or LESSOR, as stated in the lease agreement shall be responsible for an liabilities derived from utilities, taxes or other on the PREMISES, prior to the execution of this agreement. H. That as of the date of execution of this agreement SUB-LESSOR is in full compliance of its obligations in terms of lease agreement, and that it is a Mexican corporation as evidenced in Public Deed number 6,047, dated December 7, 1999, under volume 143 of the protocol of Notary Public number Seven of the city of Tijuana, Baja California, Mexico; which first testimony has been duly recorded before the Commerce Section of the Public Registry of Property and Commerce of the City of Tijuana, under number 5200271, being interested in sub-leasing the PREMISES to the SUB-LESSEE pursuant to the following clauses. (Copy of such Public Deed is attached herewith as Exhibit "G"). I. That Mr. Antonio Rangel has enough authority to bind SUB-LESSOR in terms of this agreement, authority which as of today has not been revoked or limited in any manner whatsoever as evidenced by Public Deed number 6,047, dated December 7, 1999, under volume 143 of the protocol of Notary Public number Seven of the City of Tijuana, Baja California, Mexico; which first testimony has been duly recorded before the Commerce Section of the Public Registry of Property and Commerce of the City of Tijuana, under number 5200271. . (Copy of such Public Deed is attached herewith as Exhibit "H"). II SUB-LESSEE REPRESENTS AND WARRANTS: A. To be a Mexican corporation as evidenced in Public Deed number 45,952, Volume 370 dated March 11, 2002, granted before Notary Public number eight of the city of Tijuana, Baja California, Mr. Ricardo del Monte Nunez; which first testimony is in the process of being recorded before the Public Registry of Property and Commerce of the City of Tecate. (Copy of said Deed is attached herewith as Exhibit "I"). B. That it is interested in sub-leasing the PREMISES, has the necessary financial resources to honor the obligations to be undertaken herein, being SUB-LESSEE'S fundamental Exhibit 10.15 intent to execute this agreement, the public utilities infrastructure represented by SUB-LESSOR under Representation I-D above. C. That Mr. Patrick G. Yount has enough authority to bind SUB-LESSEE in terms of this agreement, authority which as of today has not been revoked or limited in any manner whatsoever as evidenced by the Public Deed referred to in Statement II A) above. III GUARANTOR REPRESENTS AND WARRANTS: A. That LEVITON MANUFACTURING CO. INC. is indeed the parent company of SUB-LESSOR and a corporation duly organized according to the laws of the United States of America. B. That Mr. Hakki Tansi has enough authority to bind GUARANTOR which as of the date of execution of this agreement has not been revoked or limited in any way. IV SURETY REPRESENTS AND WARRANTS: A. That HUDSON Respiratory Care, Inc. is the parent company of the SUB-LESSEE and a corporation duly organized according to the laws of the State of California. B. That Mr. Patrick G. Yount has enough authority to bind SURETY, which as of the date of execution of this agreement has not been revoked or limited in any way. C. That it wishes to guaranty each and every one of the obligations of the SUB-LESSEE hereunder. Pursuant to the above recitals, the parties agree as follows: CLAUSES FIRST.- SUB-LEASE Upon LESSOR'S express consent, pursuant to the TENTH clause of Exhibit "A" of this agreement, which consent is hereby confirmed by Exhibit "D" described in Representation I-C, as of April 01, 2002, the SUB-LESSOR sub-leases the PREMISES to the SUB-LESSEE granting use and enjoyment rights. As of the execution of this agreement, SUB-LESSOR shall allow SUB-LESSEE to begin making modifications and improvements to the PREMISES. Exhibit 10.15 The SUB-LESSEE agrees to return the PREMISES upon the expiration of the lease relationship in the same condition, excluding both normal wear and tear, and other events which damage said PREMISES but are not SUB-LESSEE'S responsibility under the present agreement. SECOND.- ENVIRONMENTAL REGULATIONS. SUB-LESSOR warrants that the PREMISES shall be delivered free and clear of any type of environmental hazard or waste and that is has fully complied with the applicable Mexican environmental regulations during the prior occupation of the PREMISES. To such extent SUB-LESSOR has obtained a certification from the applicable Mexican environmental authorities, which is attached hereto as Exhibit J. SUB-LESSOR further warrants that it will be responsible for any environmental liabilities derived from the PREMISES, prior to the execution of this agreement. The SUB-LESSEE may not install or operate a pollutant industry within the PREMISES. It is agreed by the SUB-LESSEE that industrial engagement in air polluting activities such as manufacturing of paints, varnishes, repair of automobile engines, repair of automobile bodies or any other industry commonly classified as a chemical industry, shall be considered as polluting industries. The SUB-LESSEE assumes all liability arising out of its activities imposed by Mexican Law and regulations on pollution and environmental matters. THIRD.- IMPROVEMENTS. SUB-LESSEE and SUB-LESSOR agree to equally divide the cost of installing lighting in main assembly area, following the specifications mentioned in Exhibit "K". SUB-LESSOR shall be responsible for contracting the installation of such lighting fixtures, which should be completed no later than April 1/st/, 2002. The SUB-LESSEE may build and carry out adjustments, remodeling, and improvements necessary to carry out its activities within the PREMISES. In this regard, LESSOR and SUB-LESSOR shall assist SUB-LESSEE in obtaining all applicable licenses and permits required. In addition the SUB-LESSEE agrees that all adjustments, remodeling and improvements, which may affect the structure of the PREMISES or the building, must be approved previously in writing by LESSOR, which approval shall not be unreasonably withheld or delayed. The SUB-LESSEE shall have the right to remove all adjustments, remodeling and improvements, built at its own expense, upon the expiration of the sub-lease agreement. However, LESSOR shall have the right to request that SUB-LESSEE remove all adjustment, remodeling and improvements not suitable to the PREMISES. The SUB-LESSEE in case of vacancy shall leave the PREMISES ready for immediate occupancy, except for normal wear and tear and other non-liability damages described in this agreement. Exhibit 10.15 FOURTH.-RENT The SUB-LESSEE shall pay $35,000.00 dollars (plus applicable the applicable value added tax) to SUB-LESSOR as monthly rent. The SUB-LESSEE shall pay the monthly rent in advance within the first five days of each month at SUB-LESSOR'S domicile at 20004 BLVD Insurgentes, Tijuana, Baja California, Mexico, upon delivery of SUB-LESSOR'S receipts complying with all legal requirements in terms of applicable Tax provisions. Payment of rent shall commence upon delivery of the PREMISES to SUB-LESSEE. Such delivery shall occur upon the conclusion of the installation of the lighting fixtures referred to in Clause Third herein, as well as general cleaning and upkeep to the PREMISES, referred to in Exhibit "L" hereto. On the delivery date the parties agree that a document will be prepared in writing in which SUB-LESSEE acknowledges receipt of the PREMISES. Should such date occur on a date other than the first of the month, SUB-LESSE shall only be responsible for the proportional payment of rent for such month. As of the thirteenth month of the life of this sublease, and on every subsequent anniversary thereof, the monthly rent shall be increased in an amount equal to the percentage increase from the Base Index Date in the Consumer Price Index for the city of San Diego, California, United States of America, as published by the United States Department of Labor, Bureau of Labor Statistics. FIFTH.- TERM. The SUB-LESSOR subleases the PREMISES for a term of three years, as of April 01, 2002 and through March 31, 2005. SUB-LESSEE at its sole option shall be entitled to three one year options to extend this sublease agreement, by giving at least 6 months prior written notice of its desire to exercise such option. SIXTH.- INSURANCE. The parties agree to insure the PREMISES against damages. The insurance policy shall cover fire, earthquake and liability of third parties, and the insured value shall be for a equal to the maximum replacement value of said PREMISES, agreeing all parties in the replacement value of the PREMISES works performed by SUB-LESSEE, among others those mentioned in Clauses Third and Seventh of this agreement will not be included. Therefore, all parties agree that the replacement value of the PREMISES will be that determined on the date on which SUB-LESSEE takes possession of the PREMISES. The insurance will be renewed annually. Cost of Insurance shall be bourne 50% by SUB-LESSEE and 50% by SUB-LESSOR. Nevertheless, SUB-LESSOR agrees to insure the PREMISES according to the above paragraph Exhibit 10.15 and make the necessary payments to the corresponding insurance company. SUB LESSEE shall reimburse SUB-LESSOR for fifty percent of the cost of such insurance within a ten day period as of the date the corresponding invoice is delivered. SEVENTH.- MAINTENANCE AND REPAIRS. SUB-LESSOR shall make the repairs clearly detailed in exhibit "L" of this agreement prior to SUB-LESSEE taking possession of the PREMISES. The SUB-LESSEE, at its own expense, shall make any and all non-structural repairs to the PREMISES, whenever such repairs are necessary due to SUB-LESSEE'S use of such PREMISES; all other repairs shall be covered by LESSOR, as per the lease agreement attached hereto as Exhibit "A". EIGHTH.- DAMAGES TO PREMISES. The SUB-LESSOR and SUB-LESSEE agree that in case of damage to the PREMISES, both parties shall appraise the extent of the damage and the steps to be taken to repair them. The SUB-LESSOR and SUB-LESSEE shall agree on the necessary percentage of rental reduction, , provided that said damages are not directly attributable to acts or ommisions of SUB-LESSEE, its officers, directors, employees or guests. If said damages are not directly attributable to acts or ommisions of SUB-LESSEE, its officers, directors, employees or guests the rental reduction shall be based on the actual area that remains available to SUB-LESSEE, even if the damages to the PREMISES are caused deriving from acts of God or Force Majeure, In this last scenario SUB-LESSOR shall bear all expenses incurred to restore the damage done to the PREMISES within 60 days, and if fails to do so within such term, then SUB-LESSEE may rescind the Agreement without any liability whatsoever. Likewise, SUB-LESSOR agrees that SUB-LESSEE may offset any further amounts incurred by SUB-LESSEE regarding the PREMISES for which SUB-LESSOR was responsible and hence, should have covered, against the RENT, provided that the parties agree that prior to having SUB-LESSEE offset any amount from rent the parties must agree on the cost and urgency of said expenses, by way of express written consent. NINTH.- PUBLIC UTILITIES. SUB-LESSEE agrees to pay for any and all public utilities currently established, or to be installed within the PREMISES, including but not limited to electrical power, water, telephone, etc. Consequently, SUB-LESSEE agrees to deal directly with the corresponding public service company towards the continuation of the aforestated services, either with respect to initial installation, suspension or cancellation. Exhibit 10.15 TENTH.- RESCISSION. If SUB-LESSEE were to incur in one of the following events of default: a) Usage of PREMISES for purposes other then those agreed herein; b) Should SUB-LESSEE fail to comply with the laws and regulations for the use of the PREMISES as provided by the corresponding Mexican authorities; c) The establishment of leasehold improvements in violation of clause THIRD above; d) Default on two rental payments or more, pursuant to clause FOURTH above; e) Failure to pay insurance policy, expenses and renewals thereto, pursuant to clause SIXTH above; or f) Permitting the use of the PREMISES to a third party without the express written consent of LESSOR and SUB-LESSOR; or by any other means cede the rights granted by this agreement; or by any means cede derived possession of the PREMISES; then SUB-LESSOR may, Immediately rescind this sub-lease agreement and eject SUB-LESSEE from the PREMISES. In case SUB-LESSOR initiates any action to terminate this agreement, the SUB-LESSEE shall reimburse the SUB-LESSOR for reasonable costs related to the SUB-LESSEE'S vacancy of the PREMISES, in the understanding that if the SUB-LESSEE does not vacate the PREMISES, SUB-LESSEE shall pay to SUB-LESSOR, as liquidated damages a monthly amount equal to 2 (two) times the monthly rent in force on the date in which said action may be initiated or that in force prior to the termination of this agreement. The SUB-LESSEE acknowledges that this clause shall not be construed as an authorization to occupy the PREMISES beyond the term set forth herein. Notwithstanding the above, SUBLESSOR agrees that it will allow SUBLESSEE to cure any event of default described herein, within thirty calendar days of written notice of such event of default. The thirty day term shall commence upon receipt of the postal remittance. Once the thirty day term has elapsed without cure of default, SUB-LESSOR shall exercise its right herein agreed. In addition to all other remedies, have the right to declare and collect the entire unpaid balance of rent to the end of the last year of the existing lease term of extension thereof then in effect and also declare all other sums due to SUB-LESSOR, immediately due and payable, plus Exhibit 10.15 interest at the rate of 18% (Eighteen percent) per annum on said sums from the date of such declaration until paid in full. ELEVENTH.- VISITS. The LESSOR and SUB-LESSOR shall have the right to enter the PREMISES during all of SUB-LESSEE'S office hours. And in emergencies at all times. Only after proper written notification of SUB-LESSEE of intent to terminate this agreement, SUB-LESSOR shall have the right to show the PREMISES to any prospective clients. SUB-LESSOR will obligated to identify all visitors. Under no circumstances are agents of SUB-LESSEE'S commercial competition to be allowed on the PREMISES. SUB-LESSOR or LESSOR have to give notice prior to entering the PREMISES, only in cases of emergencies are they exempt from this. TWELFTH. NOTICE. The parties agree that all notices, correspondence or communication to be delivered in accordance with this agreement shall be made by CERTIFIED MAIL, RETURN RECEIPT REQUESTED, acknowledging receipt of the communication by the recipient to the addressees indicated herein below. LESSOR: Attention to: ALEJANDRO DE LA VEGA VALLADOLID Ave. 20 de Noviembre No. 12716 Col 20 de Noviembre Tijuana, Baja California, Mexico C.P. 22430 SUB-LESSOR: Attention to: Lic. Antonio Rangel Blvd. Insurgentes No. 20004 Tijuana, Baja California, Mexico SUB-LESSEE: Attention to: Patrick Yount Hudson Respiratory Care Tecate, S. de R.L. de C.V. Calle Mision San Diego No. 2937-301 Exhibit 10.15 Zona Rio, Tijuana, Baja California, Mexico SURETY: Attention to: Patrick Yount Hudson Respiratory Care, Inc. 27711 Diaz Road, PO Box 9020, Temecula, CA 92589-9020 GUARANTOR: Attention to: Mr. Hakki Tansi Leviton Manufacturing Co. Inc. 59-29 Little Neck Parkway Little Neck, NY, 11362-2591 With a copy to: Lic. Eduardo Bustamante Figueroa Blvd Agua Caliente No. 10535-901 Tijuana, Baja California, Mexico,CP 22420 Any changes of domicile shall be notified to the other parties with at least ten days anticipation as of the date on which such change shall take effect. No change of domicile shall be considered to be effective unless notice of change of domicile is proved and acknowledged in writing. THIRTEENTH. INDEMNITY. The SUB-LESSEE shall reimburse whatever payment is made by SUB-LESSOR or LESSOR arising out of claims of third parties, including court expenses and costs, as a consequence of SUB-LESSEE'S unlawful usage of PREMISES or SUB-LESSEE'S own wrongful conduct. Thus LESSOR or SUB-LESSOR shall provide written notice to the SUB-LESSEE and give the latter the right to handle the particular claim with attorneys of SUB-LESSEE'S own choosing, unless the claim is covered by liability insurance carried by SUB-LESSEE. Reimbursement shall be made ten calendar days upon delivery of the adjudicated claim of final judgment by applicable third party. Exhibit 10.15 In turn SUB-LESSOR or LESSOR shall indemnify SUB-LESSEE with respect to any claims by third parties against SUB-LESSEE for any matters which are SUB-LESSOR'S or LESSOR'S responsibility. FOURTEENTH. TRANSFER OF ASSETS. SUB-LESSOR by way of this agreement transfers a list of assets to SUB-LESSEE, these assets are described in "EXHIBIT "M" of this agreement. These assets are transferred "as is" and SUB-LESSOR shall not be responsible for any issue with regard to such assets as of the execution of this agreement, and their delivery to SUB-LESSEE. FIFTEENTH. GUARANTY. LEVITON MANUFACTURING COMPANY INC. is fully aware of the execution this agreement and guarantees its execution for the LESSOR, just as it is described in the TENTH clause of exhibit "A" of this agreement. HUDSON Respiratory Care, Inc. guarantees to SUB-LESSOR, SUB-LESSEE'S payment of any obligations assumed hereunder, whereupon SURETY shall make prompt payment of any amount due under this agreement or any other documents signed by SUB-LESSEE, provided such amounts are not due as deriving from SUB-LESSOR'S default to its obligations in terms of the agreement attached herewith as Exhibit "A" SUB-LESSOR shall notify the SURETY of any default on part of SUB-LESSEE, in conjunction with notice to SUB-LESSEE, of any obligations hereunder and grant a thirty day term to allow SURETY to cure any such default. The thirty day term shall commence upon receipt of postal remittance. Once the thirty day term has elapsed without cure of default, SUB-LESSOR shall exercise its right herein agreed. SIXTEENTH. DEPOSIT. SUB-LESSOR hereby acknowledges to have received from SUB-LESSEE, as deposit, the amount of $35,000.00 Dollars (Thirty Five Thousand Dollars and 00/100 U.S. Cy.) in order to guarantee its obligations hereunder. Said deposit shall be reimbursed to the SUB-LESSEE, after SUB-LESSOR carries out an inspection of the condition on which the PREMISES are returned. Said inspection shall be carried out within 10 (ten) working days of date of termination and any amount of the deposit to be refunded to the SUB-LESSEE shall be paid within 30 (thirty) days of the inspection. The parties agree that SUB-LESSOR will deposit such amount in an interest bearing account, and that it shall reimburse the agreed amount plus interest. SEVENTEENTH. ABSENCE OF BENEFITS TO THIRD PARTIES. Exhibit 10.15 None of the obligations assumed by any of the parties hereunder is for the benefit of any third party, and therefore no third party shall have any rights against any of the parties to this sub-lease by reason of any of the provisions herein. EIGHTEENTH. ASSIGNMENT. SUBLESSEE shall not be allowed to assign or transfer its rights as per this agreement unless consent is obtained in writing from LESSOR and SUB-LESSOR. Nevertheless, SUBLESSOR hereby gives its consent so that SUB-LESSEE may assign its right to a related company, affiliate or subsidiary of Hudson Respiratory Care, Inc. SUBLESSOR also warrants that it has obtained LESSOR'S consent for such assignment, as stated in Exhibit "O" hereto. NINETEENTH. LANGUAGE The parties agree to execute this agreement in Spanish and English, both versions shall bind the parties, but both of which shall constitute one and the same agreement. TWENTIETH. NO WAIVER OF RIGHTS Both parties agree that the failure to apply any of the penalties referred to herein shall not imply under any circumstance a waiver of rights for future occasions. TWENTY FIRST. SEVERABILITY The judicial resolution or annulment of any provision of this agreement shall not imply the annulment of the other provisions. TWENTY SECOND. UNITY All texts and exhibits of this Agreement shall be considered as an integral part of the same. TWENTY THIRD. CAPTIONS The inclusion of captions in this Agreement is used only for purposes of reference. Therefore such captions shall not establish any obligation with regards hereto, nor shall they govern the construction of the corresponding clauses. TWENTY FOURTH. ENTIRE AGREEMENT Exhibit 10.15 This Agreement includes the entire understanding between the parties with regards to the subject matter hereof, therefore any pact, agreement or covenant, oral or in writing, entered into prior to the date of execution hereof shall have no effect whatsoever. Likewise, any amendment hereto shall be in writing and shall be executed by the representatives of the parties, and the parties shall not argue any agreement, contract or verbal covenant, that amends, extends or renews the term and content of the clauses hereof. TWENTY FIFTH. VENUE AND JURISDICTION. The parties agree to subject the interpretation and enforcement of this agreement to the Laws of the State of Baja California, Mexico, and to bind themselves to the venue of jurisdiction of the competent Courts for the city of Tijuana, Baja California, Mexico, thereby waiving any and all jurisdiction to which they may be entitled by virtue of present or future domiciles, or otherwise. The SUB-LESSOR, SUB-LESSEE, and SURETY having read and agreed to the foregoing, execute this agreement on March 12, 2002 in the city of Tijuana, Baja California; LEASE GUARANTOR'S execution of the same being dated March ___ 2002 at its corporate domicile. SUB-LESSOR: SURETY /s/ Lic, Antonio Rangel /s/ Patrick G. Yount - ---------------------------------- ------------------------------------ Levimex Inmobiliaria, S.A. de C.V. Hudson Respiratory Care, Inc. Represented by: Represented by: Lic. Antonio Rangel Patrick G. Yount GUARANTOR: SUB-LESSEE: /s/ Hakki Tansi /s/ Patrick G. Yount - ---------------------------------- ----------------------------------------------- Leviton Manufacturing, Co. Inc. Hudson Respiratory Care Tecate, S de R.L. de CV Represented by: Represented by: Mr. Hakki Tansi Mr. Patrick G. Yount
EX-10.16 7 dex1016.txt SUPPLEMENT NO 1 TO PLEDGE AGREEMENT Exhibit 10.16 SUPPLEMENT NO. 1 dated as of May ___, 2002, to the PLEDGE AGREEMENT dated as of April 7,1998, among HUDSON RESPIRATORY CARE INC., a California corporation (the "Borrower"), RIVER HOLDINGS CORP., a Delaware corporation ("Holding") and each subsidiary of the Borrower listed on Schedule I hereto (each such subsidiary individually a "Subsidiary Pledgor" and collectively, the "Subsidiary Pledgors"; the Borrower, Holding and Subsidiary Pledgors are referred to collectively herein as the "Pledgors") and BANKERS TRUST COMPANY, a New York banking corporation ("BTCo.% as collateral agent (in such capacity, the "Collateral Agent") for the Secured Parties (as defined in the Credit Agreement referred to below) A. Reference is made to (a) the Credit Agreement dated as of April 7, 1998 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, Holding, the lenders from time to time party thereto (the "Lenders"), BTCo., as administrative agent for the Lenders, Collateral Agent, swingline lender and as issuing bank (in such capacity, the "Issuing Bank") and (b) the Holding Guarantee Agreement dated as of April 7, 1998 (as amended, supplemented or otherwise modified from time to time, the "Holding Guarantee Agreement"), between Holding and the Collateral Agent. B. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. C. The Pledgors have entered into the Pledge Agreement in order to induce the Lenders to make Loans and the Issuing Bank to issue Letters of Credit. Pursuant to Section 5.11 of the Credit Agreement, each Domestic Subsidiary of the Borrower that was not in existence or not a Subsidiary on the date of the Credit Agreement is required to enter into the Pledge Agreement as a Subsidiary Pledgor upon becoming a Subsidiary if such Subsidiary owns or possesses property of a type that would be considered Collateral under the Pledge Agreement. Section 24 of the Pledge Agreement provides that such Subsidiaries may become Subsidiary Pledgors under the Pledge Agreement by execution and delivery of an instrument in the form of this Supplement. The undersigned Subsidiary (the "New Pledgor") is executing this Supplement in accordance with the requirements of the Credit Agreement to become a Subsidiary Pledgor under the Pledge Agreement in order to induce the Lenders to make additional Loans and the Issuing Bank to issue additional Letters of Credit and as consideration for Loans previously made and Letters of Credit previously issued. Accordingly, the Collateral Agent and the New Pledgor agree as follows: SECTION 1. In accordance with Section 24 of the Pledge Agreement, the New Pledgor by its signature below becomes a Pledgor under the Pledge Agreement with the same force and effect as if originally named therein as a Pledgor and the New Pledgor hereby agrees (a) to all the terms and provisions of the Pledge Agreement applicable to it as a Pledgor thereunder and (b) represents and warrants that the representations and warranties made by it as a Pledgor thereunder are true and correct on and as of the date hereof. In furtherance of the foregoing, the New Pledgor, as security for the payment and performance in full of the Obligations (as defined Exhibit 10.16 2 in the Pledge Agreement), does hereby create and grant to the Collateral Agent, its successors and assigns, for the benefit of the Secured Parties, their successors and assigns, a security interest in and lien on all of the New Pledgor's right, title and interest in and to the Collateral (as defined in the Pledge Agreement, except the Collateral as it relates to the New Pledgor shall not include the New Pledgor's interest in the one share of Industrias Hudson held by the New Pledgor) of the New Pledgor. Each reference to a "Subsidiary Pledgor" or a "Pledgor" in the Pledge Agreement shall be deemed to include the New Pledgor. The Pledge Agreement is hereby incorporated herein by reference. SECTION 2. This Supplement may be executed in counterparts, each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Supplement shall become effective when the Collateral Agent shall have received counterparts of this Supplement that, when taken together, bear the signatures of the New Pledgor and the Collateral Agent. Delivery of an executed signature page to this Supplement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Supplement. SECTION 3. The New Pledgor hereby represents and warrants that set forth on Schedule I attached hereto is a true and correct schedule of all its Pledged Securities. SECTION 4. Except as expressly supplemented hereby, the Pledge Agreement shall remain in full force and effect. Section 5. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD FOR PRINCIPLES OF CONFLICTS OF LAWS. SECTION 6. In case any one or more of the provisions contained in this Supplement should be held invalid, illegal or unenforceable in any respect, neither party hereto shall be required to comply with such provision for so long as such provision is held to be invalid, illegal or unenforceable, but the validity, legality and enforceability of the remaining provisions contained herein and in the Pledge Agreement shall not in any way be affected or impaired. The parties hereto shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 7. All communication and notices hereunder shall be in writing and given as provided in Section 15 of the Pledge Agreement. All communications and notices hereunder to the New Pledgor shall be given to it in care of the Borrower. SECTION 8. The New Pledgor agrees to reimburse the Collateral Agent for its reasonable out-of-pocket expenses in connection with this Supplement, including the reasonable fees, other charges and disbursements of counsel for the Collateral Agent. Exhibit 10.16 3 IN WITNESS WHEREOF, the New Pledgor and the Collateral Agent have duly executed this Supplement to the Pledge Agreement as of the day and year first above written. IH HOLDING LLC, By: HUDSON RESPIRATORY CARE INC., its Managing Member By: _______________________________________ Name: Title: Address: Exhibit 10.16 DEUTSCHE BANK TRUST COMPANY AMERICAS (f/k/a Bankers Trust Company), as Collateral Agent, by ________________________________ Name: Title: Exhibit 10.16 Schedule I to Supplement No. to the Pledge Agreement Pledged Securities of the New Pledgor ------------------------------------- CAPITAL STOCK Number of Registered Number and Percentage of Issuer Certificate Owner Class of Shares Shares ------ ----------- ----- --------------- ------ DEBT SECURITIES Issuer Principal Amount Date of Note Maturity Date ------ ---------------- ------------ ------------- EX-10.17 8 dex1017.txt MASTER ASSIGNMENT AND EXCHANGE AGREEMENT Exhibit 10.17 MASTER ASSIGNMENT AND EXCHANGE AGREEMENT This Master Assignment and Exchange Agreement (this "Agreement") is dated as of May 14, 2002 and entered into by and among River Holding Corp., a Delaware corporation ("Holdings"), Hudson Respiratory Care Inc., a California corporation ("Borrower"), the financial institutions listed on the signature pages hereof ("Lenders"), Deutsche Bank Trust Company Americas (formerly named Bankers Trust Company), as administrative agent for the Lenders (in such capacity, the "Administrative Agent") and FS Equity Partners IV, L.P., a Delaware limited partnership ("FSEP IV"), and relates to that certain Credit Agreement dated as of April 7, 1998 (as amended, supplemented, restated or otherwise modified to the date hereof (the "Original Credit Agreement") and to be amended and restated on the date hereof by an Amended and Restated Credit Agreement dated as of May 14, 2002 (the "Credit Agreement"), among the Borrower, Holdings, the Lenders and Administrative Agent, Collateral Agent, Swingline Lender and Issuing Bank. Terms defined in the Credit Agreement are used herein with the same meanings. WHEREAS, each Lender (in such capacity, an "Assignor") desires to assign such portion of the Term Loans held by such Assignor as is set forth on Schedule I hereto (the "Purchased Term Loans") to FSEP IV and FSEP IV (in such capacity, the "Assignee") desires to purchase such Purchased Term Loans from Assignors; and WHEREAS, immediately upon the effectiveness of the assignment of the Purchased Term Loans to Assignee, Assignee desires to exchange such Purchased Term Loans for a like principal amount of Borrower's senior unsecured promissory notes in the form attached hereto as Exhibit A ("Senior Notes") and, upon such exchange, such Purchased Term Loans shall be cancelled and terminated and shall no longer constitute Indebtedness outstanding under the Credit Agreement. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows: SECTION 1. Assignment of Purchased Term Loans by Assignors and Purchase of Purchased Term Loans by FSEP IV. A. Each Assignor hereby sells and assigns, without recourse, representation or warranty (except as expressly set forth herein) to the Assignee, and the Assignee hereby purchases and assumes, without recourse, from such Assignor, effective as of the Effective Date set forth below, the Purchased Term Loans together with all of such Assignor's rights and obligations under the Credit Agreement and other Credit Documents with respect to such Purchased Term Loans. Each Assignor represents and warrants that (i) it is the legal and beneficial owner of the Term Loans being assigned by it hereby free and clear of any adverse claim and (ii) it is legally authorized to enter into this Agreement and to carry out the transaction contemplated hereby. Assignee represents and warrants that it is legally authorized to enter into this Agreement and to carry out the transactions contemplated hereby. From and after the Effective Date, except as specifically provided in clause 1(B) below, each Assignor shall, to the extent of Exhibit 10.17 the interests assigned by this Agreement, relinquish its rights and be released from its obligations under the Credit Agreement. B. In consideration of the assignments described above in Section 1A, Assignee hereby agrees to pay to the Administrative Agent for the benefit of the Assignors in accordance with their assigned interests set forth on Schedule I hereto in immediately available funds, on the Effective Date, the total face amount of the Purchased Term Loans. Accrued interest on the Purchased Term Loans is being paid to each Assignor on the Effective Date pursuant to Section 4.02(h) of the Credit Agreement. Borrower acknowledges that Borrower remains liable to each Lender with respect to any amounts owing under Section 2.16 of the Credit Agreement to the extent that the transactions provided for herein result in the payment of any Eurodollar Loan prior to the last day of the Interest Period related thereto. C. Notwithstanding anything to the contrary set forth in the Credit Agreement, including without limitation any requirement of Section 9.04 as to the minimum amount of such assignment, assignments to be comprised of the same percentage of Revolving Credit Commitment and Term Loans, execution of an Assignment and Acceptance Agreement, recordation of such assignment in the Register, notice to Lenders or the payment of any processing and recordation fee to Administrative Agent, all of which are hereby waived by each of the parties hereto, the parties hereto agree that upon the prior or concurrent satisfaction of the conditions set forth in Section 2 hereof, the assignment and assumptions provided for herein shall become effective in accordance with the terms of this Agreement for all purposes of this Agreement and of the Credit Agreement. SECTION 2. Conditions to Effectiveness of Assignment and Purchase of Purchased Term Loans. This Agreement shall become effective upon the prior or concurrent satisfaction of the following conditions (the date upon which such conditions are first satisfied is referred to as the "Effective Date"): A. The execution and delivery of this Agreement by each of the parties hereto; B. The prior or concurrent satisfaction of the conditions to effectiveness of the Credit Agreement as set forth in Section 4.02 thereof; C. The receipt by the Administrative Agent on or before 12:00 noon New York City time on the Effective Date, for the account of the Assignors, from FSEP IV of an amount equal to the aggregate principal amount of all Purchased Term Loans in immediately available funds; and D. The exchange of the Purchased Term Loans for a like principal amount of Senior Notes and cancellation for all purposes under the Credit Agreement and other Credit Documents of such Purchased Term Loans pursuant to Section 3 hereof. 2 Exhibit 10.17 SECTION 3. Exchange and Cancellation. Concurrently with the effectiveness of this Agreement, Assignee and Borrower agree that Assignee will exchange the Purchased Term Loans for $12,000,000 in principal amount of Senior Notes issued by Borrower, and Borrower agrees to issue $12,000,000 in aggregate principal amount of Senior Notes, dated the Effective Date and accruing interest at the rate per annum provided for in such Senior Notes. Upon the issuance of such Senior Notes, the Purchased Term Loans shall be cancelled and the Indebtedness represented by such Purchased Term Loans shall be deemed paid and no longer outstanding under the Credit Agreement for any purpose whatsoever. Each of the parties hereto agrees that notwithstanding anything to the contrary in the Credit Agreement, that such cancellation and payment of the Indebtedness represented by the Purchased Term Loans shall be applied under the Original Credit Agreement as follows: first, to the payment of the $2,000,000 principal installment on the Term Loans due on March 31, 2002; second, of the remaining $10,000,000 in Purchased Term Loans, $5,000,000 in the aggregate shall be applied to prepay one-half of each of the $2,500,000 principal installments due on the Term Loans under the Original Credit Agreement on June 30, 2002, September 30, 2002, December 31, 2002 and March 31, 2003; and third, the remaining $5,000,000 shall be applied to prepay $5,000,000 of the $10,000,000 principal installment due on the Term Loans under the Original Credit Agreement on June 30, 2003. Assignee will have no rights under any of the Credit Documents with respect to the Senior Notes. SECTION 4. Miscellaneous. A. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. B. Each party to this Agreement hereby agrees from time to time, upon the request of the other parties hereto, to take such additional actions and to execute and deliver such additional documents and instruments as such other party may reasonably request to effect the transactions contemplated by, and to carry out the intent of this Agreement. C. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated, except by an instrument in writing signed by the party against whom enforcement of such change, waiver, discharge or termination is sought. D. All communications and notices hereunder shall be in writing and given as provided in Section 9.01 of the Credit Agreement. All communications and notices hereunder to FSEP IV shall be given to it at the address for notices set forth below: FS Equity Partners IV, L.P. C/o Freeman Spogli & Co. LLC 11100 Santa Monica Boulevard Los Angeles, California 90025 Attn: Jon D. Ralph Telecopy: (310) 444-1870 E. 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 3 Exhibit 10.17 remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. F. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns. G. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original but all of which when taken together shall constitute a single contract. Delivery of an executed signature page to this Agreement by telecopy transmission shall be as effective as delivery of a manually signed counterpart of this Agreement. [remainder of page intentionally left blank] 4 Exhibit 10.17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written by their respective duly authorized officers. RIVER HOLDING CORP. By:___________________________ Title: HUDSON RESPIRATORY CARE INC. By:___________________________ Title: FS EQUITY PARTNERS IV, L.P., as Assignee By: FS Capital Partners, LLC Its: General Partner By:___________________________ Title: S-1 Exhibit 10.17 DEUTSCHE BANK TRUST COMPANY AMERICAS, as Administrative Agent and Assignor By:___________________________ Title: S-2 Exhibit 10.17 ASSIGNORS: DEUTSCHE BANK TRUST COMPANY AMERICAS By: __________________________________ Name: Title: BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC. By: __________________________________ Name: Title: By: __________________________________ Name: Title: S-3 Exhibit 10.17 BANK OF AMERICA, N.A. By: __________________________________ Name: Title: S-4 Exhibit 10.17 BANK OF TOKYO-MITSUBISHI TRUST COMPANY By: __________________________________ Name: Title: S-5 Exhibit 10.17 PB CAPITAL CORPORATION By: ______________________________ Name: Title: By: ______________________________ Name: Title: S-6 Exhibit 10.17 CITICORP USA, INC. By: ________________________ Name: Title: S-7 Exhibit 10.17 IMPERIAL BANK By: _________________________ Name: Title: S-8 Exhibit 10.17 ROYAL BANK OF CANADA By: ____________________________ Name: Title: S-9 Exhibit 10.17 SOCIETE GENERALE By: _________________________ Name: Title: S-10 Exhibit 10.17 WELLS FARGO BANK, N.A. By: _______________________ Name: Title: S-11 Exhibit 10.17 SCHEDULE I
Principal Amount Percentage of Term of Aggregate Term Assignor Loans Assigned Loans Assigned - -------- -------------- -------------- Deutsche Bank Trust Company Americas (f/k/a Bankers Trust Company) $ 887,755.11 4.04% Bank of America, N.A. 2,400,000.00 10.91 Bank Austria Creditanstalt Corporate Finance, Inc. 1,200,000.00 5.45 Bank of Tokyo-Mitsubishi Trust Company 1,200,000.00 5.45 Citicorp USA, Inc. 1,500,000.00 6.82 Imperial Bank 612,244.89 2.78 PB Capital Corporation 900,000.00 4.09 Royal Bank of Canada 900,000.00 4.09 Societe Generale 1,200,000.00 5.45 Wells Fargo Bank, N.A. 1,200,000.00 5.45 ============== ========= TOTAL: $12,000,000.00 54.55%*
*Total may not foot due to rounding. Schedule-1 Exhibit 10.17 EXHIBIT A [Attach Senior Note] Annex-1 EX-10.18 9 dex1018.txt LETTER AGREEMENT Exhibit 10.18 Freeman Spogli & Co. August 17, 2001 Mr. Charles A French 6400 8. Fiddler's Green Circle, Suite 150 Englewood, CO 80111 Dear Chuck: On behalf of Hudson Respiratory Care, Inc., I am pleased to offer you the position of President and Chief Executive Officer. I look forward to both a mutually productive and enjoyable relationship. As reviewed, here are the details of the offer we are extending to you: [_] You are joining Hudson Respiratory Care, Inc. as President and Chief Executive Officer and will serve as a Director on the Company's Board. [_] Your base salary will be $16,666.67 per month ($200,000,00 annualized). [_] Hudson Respiratory Care, Inc. will reimburse you for all reasonable business expenses including a $4,500 per month housing allowance. What is presented in this letter is only a summary. If anything here is inconsistent with any federal, state, or local laws, Hudson Respiratory Care, Inc. will comply with its obligations under such laws. It is of course understood, however, that you are an employee-at-will and that neither you nor Hudson Respiratory Care, Inc. is obligated to continue in our employment relationship if either of us does not wish to do so. Kindly indicate your acknowledgement and acceptance of the terms of this letter by signing the enclosed copy in the space provided. Please keep one copy for your records and return the signed copy to this office, Sincerely yours, FREEMAN SPOGLI & CO LLC /s/ Charles P. Rullman - ------------------------------------------------ Charles P. Rullman Vice President /s/ Charles A. French 8/17/01 - ------------------------------------------------ ------------------ Charles A. French Date 2 EX-10.19 10 dex1019.txt FORM OF STOCK OPTION PLAN Exhibit 10.19 RIVER HOLDING CORP. 2001 Stock Option Plan Section 1. Description of Plan. This is the 2001 Stock Option Plan (the "Plan"), of River Holding Corp., a Delaware corporation (the "Company"). Under this Plan, directors, officers, employees and consultants of the Company or of any present and future subsidiaries of the Company to be selected as below set forth may be granted options ("Options") to purchase shares of the common stock of the Company ("Common Stock"). For purposes of the Plan, the term "subsidiary" means any corporation 50% or more of the voting stock of which is owned by the Company or by a subsidiary of the Company. It is intended that the Options under the Plan either will qualify for treatment as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and be designated "Incentive Stock Options," or not qualify for such treatment and be designated "Nonqualified Stock Options." Section 2. Purpose of Plan. The purpose of the Plan and of granting Options to specified employees is to further the growth, development and financial success of the Company and its subsidiaries by providing additional incentives to certain officers, employees, consultants and members of the Board of Directors of the Company or any of its subsidiaries by providing the opportunity to acquire shares of Common Stock and to benefit from the Company's growth, development and financial success. Section 3. Shares Subject to the Plan. The aggregate number of shares of Common Stock which may be purchased pursuant to the exercise of Options (whether Incentive Stock Options or Nonqualified Stock Options) shall not exceed 2,000,000 shares, subject to adjustment as set forth in Section 11 hereof. Upon the expiration or termination for any reason of an outstanding Option which shall not have been exercised in full or upon the repurchase by the Company of shares of Common Stock issued pursuant to rights of repurchase, any shares of Common Stock then remaining unissued which shall have been reserved for issuance upon such exercise of an Option or which shall have been repurchased, shall again become available for the granting of additional Options under the Plan. Section 4. Eligibility. The persons who shall be eligible to receive grants of Options under the Plan shall be the directors, officers, employees and consultants of the Company or any of its subsidiaries. Consultants are not eligible to receive Incentive Stock Options. A person who holds an Option is herein referred to as a "Participant." More than one Option grant may be granted to any one Participant; however no Participant may be granted Options to purchase an aggregate of more than 1,000,000 shares of Common Stock pursuant to the Plan upon the exercise of Options granted hereunder. For Incentive Stock Options, the aggregate fair market value (determined at the time the Option is granted) of the Common Stock with respect to which all incentive stock options (under all Exhibit 10.19 grants to a Participant) are exercisable for the first time during any calendar year shall not exceed $100,000. Section 5. Administration. The Plan shall be administered by a committee (the "Option Committee") to be composed of at least two members of the Board of Directors of the Company (the "Board"). Members of the Option Committee shall be appointed, both initially and as vacancies occur, by the Board, to serve at the pleasure of the Board. The entire Board may serve as the Option Committee. The Option Committee shall meet at such times and places as it determines and may meet through a telephone conference call. A majority of its members shall constitute a quorum, and the decision of a majority of those present at any meeting at which a quorum is present shall constitute the decision of the Option Committee. A memorandum signed by all of its members shall constitute the decision of the Option Committee without necessity, in such event, for holding an actual meeting. The Option Committee is authorized and empowered to grant Options and to administer the Plan and, subject to the Plan, including the provisions of Section 19, (i) to select the Participants, to specify the number of shares of Common Stock with respect to which Options are to be granted to each Participant; (ii) to determine the dates upon which Options shall be granted and the terms and conditions thereof (including, in particular, the terms and conditions relating to when Options become exercisable as set forth in Section 7) in a manner consistent with this Plan, which terms and conditions need not be identical as to the various Options; (iii) to determine, subject to the limits of Section 4 hereof, whether Options will be Incentive Stock Options or Nonqualified Stock Options; (iv) to accelerate the time during which an Option may be exercised, notwithstanding the provisions of the Option Agreement (as defined in Section 13) stating the time during which it may be exercised; (v) to determine the rights and obligations of participants under the Plan; (vi) to interpret the Plan; (vii) to prescribe, amend and rescind rules relating to the Plan; and (viii) to make all other determinations necessary for the administration of the Plan. The interpretation and construction by the Option Committee of any provision of the Plan or of any Option granted under it shall be final. No member of the Option Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under it. Section 6. Option Price. Except as provided in Section 12, the purchase price per share (the "Option Price") of the shares of Common Stock underlying each Incentive Stock Option shall be not less than the fair market value and for each Nonqualified Stock Option, not less than 85% of the fair market value, of such shares on the date of granting of the Option. Such fair market value shall be determined by the Option Committee on the basis of the most relevant and reliable evidence available. Any holder of 10% or more of the total combined voting power of all classes of stock of the Company who is granted an Incentive Stock Option shall receive only Options that have an Option Price of not less than 110% of the fair market value of the Common Stock underlying such Option as of the date of grant. Section 7. Restrictions on Grants; Vesting of Options. Notwithstanding any other provisions set forth herein or in any Option Agreement, no Options may be granted subsequent to 10 2 Exhibit 10.19 years from the date hereof. The vesting of Options may be based on the passage of time, achievement of targeted goals and/or other schedules established by the Option Committee. The Option Committee shall determine the vesting schedule, including performance criteria and the performance measurement period(s), applicable to each Option or group of Options in a schedule, a copy of which shall be filed with the records of the Option Committee and attached to each Option Agreement to which the same applies. The vesting schedule, including performance criteria and the performance measurement period(s), need not be identical for all Options granted hereunder. Following the conclusion of each applicable performance measurement period, the Option Committee shall determine, in its sole good faith judgment, the extent, if at all, that each Option subject thereto shall have become exercisable based upon the applicable performance criteria and the schedule of exercisability. To the extent an Option shall remain unexercisable following the final performance measurement period because the applicable performance criteria have not been met, it shall (unless it may also vest on the passage of time), to that extent, automatically terminate and cease to be exercisable to such extent notwithstanding the stated term during which it otherwise may have been exercised. The Option Committee shall periodically review the performance criteria applicable to any Option or Options and, in its sole good faith judgment, shall adjust the same to reflect significant events involving the Company or any subsidiary, such as mergers, acquisitions or asset sales. Section 8. Exercise of Options. Subject to all other provisions of the Plan, each Option shall be exercisable for the full number of shares of Common Stock subject thereto, or any part thereof, in such installments and at such intervals as the Option Committee may determine in granting such Option. Once vested, and prior to its termination date, the Option shall be exercised by the Participant by giving written notice to the Company specifying the number of shares to be purchased and accompanied by payment of the full purchase price therefor in cash, by check or in such other form of lawful consideration as the Option Committee may approve from time to time, including, without limitation and in the sole discretion of the Option Committee, by a "cashless" or net exercise procedure or the transfer by the Participant to the Company of shares of the Company's Common Stock theretofore held by the Participant. Section 9. Issuance of Common Stock. The Company's obligation to issue shares of its Common Stock upon exercise of an Option granted is expressly conditioned upon the completion by the Company of any registration or other qualification of such shares under any state and/or federal law or rulings or regulations satisfaction of the requirements of an exemption from any such registration or other qualification of such shares which the Company in its sole discretion shall deem necessary or advisable. In this regard, the Company may require a Participant to make representations and undertakings that such Participant (or his or her legal representative, heir or legatee): (i) is purchasing such shares for investment and not with any present intention of selling or otherwise disposing thereof; (ii) agrees that, during the period of duration (not to exceed 180 days) specified by the Company and an underwriter of Common Stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the Securities Act of 1933, as amended, he shall not, to the extent requested by the Company and such underwriter, sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any securities of the 3 Exhibit 10.19 Company held by him at any time during such period, except Common Stock included in such registration; and (iii) agrees to have a legend placed upon the face and reverse of any certificates evidencing such shares (or, if applicable, an appropriate data entry made in the ownership records of the Company) setting forth (a) any representations and undertakings which such Participant has given to the Company or a reference thereof, and (b) that, prior to effecting any sale or other disposition of any such shares, the Participant must furnish to the Company an opinion of counsel, satisfactory to the Company, to the effect that such sale or disposition will not violate the applicable requirements of state and federal laws and regulatory agencies. The inability of the Company to obtain, from any regulatory body having jurisdiction or authority, or the unavailability of any exemption from any registration or qualification obligation, deemed by the Company's counsel to be necessary for the lawful issuance of any shares of Common Stock hereunder shall relieve the Company of any liability in respect of the non-issuance or sale of such shares of Common Stock as to which such requisite authority or exemption shall not have been obtained. In no event shall the Company be required to register or qualify the sale of any shares hereunder under any state or federal securities statute in order to permit the exercise of any Option in the absence of an available exemption. In the event that exercisability of an Option is suspended as provided in this section, the term thereof shall be extended until the thirtieth (30th) day after the Company shall have given notice to the Participant that such Option may be exercised in accordance with the provisions hereof. Any shares of Common Stock issued by the Company upon exercise of an Option may be subject to (w) a right of first refusal of the Company (or its designee) with respect to all shares of Common Stock proposed to be transferred by Participant, (x) certain drag-along rights, (y) a right of repurchase by the Company (or its designee) in the event that Participant's employment or other relationship with the Company and all of the subsidiaries terminates, and (z) certain other restrictions set forth in each particular Option Agreement. Section 10. Nontransferability. No Option shall be assignable or transferable, except by will or by the laws of descent and distribution. During the lifetime of a Participant, any Option granted to him or her shall be exercisable only by him or her. After the death of a Participant, the Option granted to him or her (if so transferable) may be exercised, prior to its termination, only by his or her legal representative, his or her legatee or a person who acquired the right to exercise the Option by reason of the death of the Participant. Section 11. Recapitalization, Reorganization; Merger or Consolidation. (a) Subject to Section 11(b) hereof, if the outstanding shares of Common Stock of the Company are changed into or exchanged for a different number or kind of securities of the Company through a capital reorganization or reclassification or if the number of outstanding shares is changed through a stock split, reverse stock split or stock dividend, an appropriate adjustment shall be made by the Option Committee (i) in the number or kind of shares as to which Options may be granted under the Plan, as provided in Section 3 hereof, and (ii) in the number, exercise price, or kind of securities subject to any outstanding Option. In making such adjustments, or in determining that no such adjustments are necessary, the Option Committee may rely upon the advice of counsel and accountants to the Company, and the good faith determination of the Option Committee shall be final, 4 Exhibit 10.19 conclusive and binding. No fractional shares of stock shall be issued or issuable under any Option on account of any such adjustment. (b) Subject to Section 16 hereof, (i) upon the dissolution, liquidation or sale of all or substantially all of the business, properties and assets of the Company or Hudson Respiratory Care, Inc. ("Hudson RCI"), (ii) upon any reorganization, merger, consolidation, sale or exchange of securities in which the Company or Hudson RCI does not survive, (iii) upon any reorganization, merger, consolidation, sale or exchange of securities in which the Company or Hudson RCI does survive and any of the Company's or Hudson RCI's stockholders have the opportunity to receive cash, securities of another entity and/or other property in exchange for their shares of common stock of the Company or Hudson RCI or (iv) upon any acquisition by any person or group (as defined in Section 13d of the Exchange Act) of beneficial ownership of more than 50% of the Company's or Hudson RCI's then outstanding shares of common stock (each of the events described in clauses (i), (ii), (iii) or (iv) is referred to herein as an "Extraordinary Event"), the Plan and each outstanding Option shall terminate unless the Surviving Entity (as defined below) elects to have any Option survive the Extraordinary Event pursuant to the following paragraph; provided, that such termination shall not occur if the "Extraordinary Event" is due to (A) the merger of Hudson RCI into the Company, (B) the merger of the Company into Hudson RCI or (C) the dissolution or liquidation of the Company, in each case in connection with Hudson RCI's initial public offering. In such event, notwithstanding any provision of any applicable Option Agreement, the Company shall provide each Participant with written notice of the Extraordinary Event at least ten (10) days prior to the effective date of the Extraordinary Event, and each Participant shall have the right until one (1) day before the effective date of such Extraordinary Event to exercise, in whole or in part, any unexpired Option or Options issued to the Participant, to the extent that said Option is then vested and exercisable pursuant to the provisions of said Option or Options. In its sole and absolute discretion, the surviving entity (which may be the Company or Hudson RCI) or the entity that has acquired all or substantially all of the Company's or Hudson RCI's assets (the "Surviving Entity") may, but shall not be so obligated, permit any Option to survive an Extraordinary Event or tender to any Participant an option or options to purchase shares or equity interests in such Surviving Entity, and such continuing new option or options shall contain such terms and provisions as shall be required to substantially preserve the rights and benefits of any Option then outstanding under the Plan with any reasonable changes to take into account the circumstances of the Surviving Entity. (c) The grant of an Option shall not affect in any way the right or power of the Company or Hudson RCI to make adjustments, reclassifications or changes in its capital or business structures or to merge, consolidate, dissolve, or liquidate or to sell or transfer all or any part of its business or assets or undertake any other permitted corporate action. Section 12. Substitute Options. If the Company at any time should succeed to the business of another corporation through a merger or consolidation, or through the acquisition of stock or assets 5 Exhibit 10.19 of such corporation, Options may be granted under the Plan to those employees of such corporation or its subsidiaries who, in connection with such succession, become employees of the Company or its subsidiaries, in substitution for options to purchase stock of such corporation held by them at the time of succession. The Option Committee shall in its sole and absolute discretion determine the extent to which such substitute Options shall be granted (if at all), the person or persons to receive such substitute Options (who need not be all optionees of such corporation), the number of Options to be received by each such person, the Option Price of such Option (which may be determined without regard to Section 6) and the terms and conditions of such substitute options; provided, however, that the Option Price of each such substituted Option shall be an amount such that, in the sole and absolute judgment of the Option Committee and in compliance with Section 424(a) of the Code, the economic benefit provided by such Option is not greater than the economic benefit represented by the option in the acquired corporation as of the date of the Company's acquisition of such corporation. Section 13. Option Agreement. Each Option granted under the Plan shall be evidenced by a written stock option agreement executed by the Company and accepted by the Participant, which (a) shall contain each of the provisions and agreements herein specifically required to be contained therein, (b) shall contain terms and conditions permitting such Option to qualify for treatment as an incentive stock option under Section 422 of the Code if the Option is designated an Incentive Stock Option, (c) may contain provisions which give the Company (or its designee) a right of first refusal to purchase any shares of Common Stock issued pursuant to the exercise of Options which a Participant proposes to sell; (d) may contain "drag-along" rights; (e) may contain a right of repurchase in favor of the Company (or its designee) in the event that Participant's employment or other relationship with the Company or its subsidiaries terminates; and (f) may contain such other terms and conditions as the Option Committee deems desirable and which are not inconsistent with the Plan. Section 14. Rights as a Stockholder. A Participant holding an Option, or a transferee of an Option, shall have no rights as a stockholder with respect to any shares covered by the Option until exercise thereof. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the exercise date, except as expressly provided in Section 11. Section 15. Termination of Options. Each Option shall set forth a termination date thereof, as the Option Committee may determine in granting such Option, in addition to the termination of the Option pursuant to Section 11 of the Plan, which, with respect to an Incentive Stock Option, shall be no more than three (3) months from the date of a Participant's termination of employment (other than by reason of death), except that if a Participant is then disabled (within the meaning of Section 22(e)(3) of the Code), shall be no more than twelve (12) months from the date of such Participant's termination of employment. The termination of employment of a Participant by death or otherwise shall not accelerate or otherwise affect the number of shares with respect to which an Option may be exercised and such 6 Exhibit 10.19 Option may only be exercised with respect to that number of shares which could have been purchased under the Option had the Option been exercised by the Participant on the date of such termination. Section 16. Acceleration of Options. Notwithstanding any provisions herein or in a particular Option Agreement to the contrary, the Option Committee, in its sole discretion, at any time, or from time to time, may elect to accelerate the vesting of all or any portion of any Option then outstanding. The decision by the Option Committee to accelerate an Option or to decline to accelerate an Option shall be final, conclusive and binding. In the event of the acceleration of the exercisability of Options as the result of a decision by the Option Committee pursuant to this Section 16, each outstanding Option so accelerated shall be exercisable for a period from and after the date of such acceleration and upon such other terms and conditions as the Option Committee may determine in its sole discretion; provided that such terms and conditions (other than terms and conditions relating solely to the acceleration of exercisability and the related termination of an Option) may not adversely affect the rights of any Participant without the consent of the Participant so adversely affected. Any outstanding Option which has not been exercised by the holder at the end of such stated period shall terminate automatically and become null and void. Section 17. Withholding of Taxes. The Company [or its subsidiaries, as appropriate,] may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company or its subsidiaries to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of any Option or the sale of Common Stock issued to the Participant upon exercise of the Option, all as may be required from time to time under any federal or state tax laws and regulations. This withholding of tax shall be made from the Company's or its subsidiary's concurrent or next payment of wages, salary, bonus or other income to the Participant or by payment to the Company or its subsidiary by the Participant of required withholding tax, as the Option Committee may determine; provided, however, that, in the sole discretion of the Option Committee, the Participant may pay such tax by (i) reducing the number of shares of Common Stock issued upon exercise of an Option or (ii) surrendering shares of Common Stock previously acquired by the Participant (for which purpose such shares of Common Stock shall be valued at fair market value as determined in good faith by the Option Committee, which determination shall be final, conclusive and binding). Section 18. Effectiveness and Termination of Plan. The Plan shall be effective on the date on which it is adopted by the Board and approved by the stockholders of the Company. The Plan shall terminate, in addition to the other termination events set forth in the Plan, on the tenth anniversary of the effective date of the Plan or, if earlier, when all Options either have been fully exercised or have expired and all shares of Common Stock which may be purchased pursuant to the exercise of such Options have been so purchased; provided, however, that the Board may in its absolute discretion terminate the Plan at any time. No such termination, other than as provided for in Section 11 hereof, shall in any way affect any Option then outstanding. 7 Exhibit 10.19 Section 19. Amendment of Plan. The Board may make such amendments to the Plan and, with the consent of each Participant affected, make such changes in the terms and conditions of granted Options as it shall deem advisable. Such amendments and changes shall include, but not be limited to, acceleration of the time at which an Option may be exercised. Section 20. Transfers and Leaves of Absence. For purposes of the Plan, (a) a transfer of a Participant's employment or consulting relationship, without an intervening period, between the Company or a subsidiary (or vice versa) or between subsidiaries of the Company shall not be deemed a termination of employment or a termination of a consulting relationship and (b) a Participant who is granted in writing a leave of absence shall be deemed to have remained in the employ of, or in a consulting relationship with, the Company (or a subsidiary, whichever is applicable) during such leave of absence. Section 21. Indemnification. In addition to such other rights of indemnification as they may have as directors, the members of the Board or Option Committee shall be indemnified by the Company to the fullest extent permitted by law against the reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted thereunder, and against all amounts paid by them in satisfaction of a judgment in any such action, suit or proceeding except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Board or Option Committee member is not entitled to indemnification under applicable law; provided that within 60 days after institution of any such action, suit or proceeding such Board or Option Committee member shall in writing offer the Company the opportunity, at the Company's expense, to handle and defend the same, and such Board or Option Committee member shall cooperate with and assist the Company in the defense of any such action, suit or proceeding. The Company shall not be obligated to indemnify any Board or Option Committee member with regard to any settlement of any action, suit or proceeding of which the Company did not consent to in writing prior to such settlement. Section 22. Not an Employment or Consulting Agreement. Nothing contained in the Plan or in any Option Agreement shall confer, intend to confer or imply any rights of employment or any rights to a consulting relationship or rights to continued employment by, or rights to a continued consulting relationship with, the Company or any subsidiary in favor of any Participant or limit the ability of the Company or any subsidiary to terminate, with or without cause, in its sole and absolute discretion, the employment of, or consulting relationship with, any Participant, subject to the terms of any written employment or consulting agreement to which a Participant is a party. In addition, nothing contained in the Plan or in any Option Agreement shall preclude any lawful action by the Company or any subsidiary or the Board of Directors thereof. 8 EX-10.20 11 dex1020.txt FORM OF STOCK OPTION AGREEMENT Exhibit 10.20 RIVER HOLDING CORP. STOCK OPTION AGREEMENT THIS STOCK OPTION AGREEMENT (this "Agreement") is made and entered into as of ______ ___, _____, by and between River Holding Corp., a Delaware corporation (the "Company"), and ____________ ("Optionee") pursuant to the Company's 2001 Stock Option Plan (the "Plan"). All capitalized terms not otherwise defined herein shall have the meanings set forth in the Plan. In consideration of the covenants hereinafter set forth, and pursuant to the authority granted to the Option Committee (as defined in the Plan) by the Board of Directors of the Company, the parties agree as follows: 1. Option; Number of Shares; Price. The Company hereby grants to Optionee the right (the "Option") to purchase up to a maximum of _______ shares (the "Shares") of the common stock of the Company ("Common Stock"), at a purchase price of $_____ per share (the "Option Price"), to be paid in accordance with Section 6 hereof. The Option and the right to purchase all or any portion of the Shares is subject to the terms and conditions stated in this Agreement and in the Plan, including, without limitation, the provisions of Sections 4 and 11 of the Plan under which the Option shall be subject to modification and Sections 11(b), 15 and 16 of the Plan and Sections 3 and 4 hereof pursuant to which the Option is subject to acceleration and/or termination. It is intended that the Option [WILL/WILL NOT] qualify for treatment as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Exercisability. Subject to Section 3 below, the Shares covered by the Option shall become exercisable as provided on Schedule A. 3. Term of Agreement. Optionee's right to exercise the Option shall terminate on the first of the following: (a) termination pursuant to Section 2 hereof or to Section 11, Section 15 or Section 16 of the Plan; (b) April 8, 2006; (c) 45 days after the date of termination of Optionee's employment or other relationship with the Company and all of the Subsidiaries, unless such termination results from Optionee's death or disability (within the meaning of Section 22(e)(3) of the Code) or Optionee dies within 30 days after the date of termination (other than for Cause) of Optionee's employment or other relationship with the Company and all of the Subsidiaries; Exhibit 10.20 (d) 180 days after the date of termination of Optionee's employment or other relationship with the Company and all of the Subsidiaries, if such termination results from Optionee's death or disability (within the meaning of Section 22(e)(3) of the Code) or Optionee dies within 30 days after the date of termination (other than for Cause) of Optionee's employment or other relationship with the Company and all of the Subsidiaries; or (e) on the date of termination of Optionee's employment or other relationship with the Company and all of the Subsidiaries, if such termination was for Cause. As used herein, "Cause" shall mean (i) Optionee's conviction of, or the entry of a pleading of guilty or nolo contendre by Optionee to, a felony or a crime involving moral turpitude, (ii) Optionee's material failure to perform his duties required under his employment or other relationship, material failure to comply with the Company's and/or a direct or indirect subsidiary's (a "Subsidiary's") standard policies and procedures generally applicable to employees, or failure to comply with any provision of any employment agreement after having received written notice from the Company and/or a Subsidiary identifying such failure and after having received an opportunity of at least ten (10) days in which to cure the failure so identified by the Company and/or a Subsidiary if such failure is susceptible to cure, (iii) a willful act by Optionee as a result of which he receives an improper personal benefit at the expense of the Company and/or a Subsidiary, (iv) an act of fraud or dishonesty committed by Optionee against the Company and/or a Subsidiary, or (v) any other misconduct by Optionee that is materially injurious to the business or reputation of the Company and/or a Subsidiary. 4. Termination of Employment or Other Relationship. The termination for any reason of Optionee's employment or other relationship with the Company and all of the Subsidiaries shall not accelerate the time at which the Option shall become exercisable or affect the number of Shares with respect to which the Option may be exercised. The Option may only be exercised with respect to that number of Shares which could have been purchased under the Option had the Option been exercised by Optionee on the date of such termination. 5. Death of Optionee; No Assignment. The rights of Optionee under this Agreement may not be assigned or transferred except by will or by the laws of descent or distribution, and may be exercised during the lifetime of Optionee only by such Optionee; provided, however, that in the event of disability (within the meaning of Section 22(e)(3) of the Code) of Optionee, a designee of Optionee, or if Optionee has not designated anyone, his or her legal representative, may exercise the Option on behalf of Optionee (provided the Option would have been exercisable by Optionee) until the right to exercise the Option expires pursuant to Section 3 hereof. If Optionee should die while engaged in an employment or other relationship with the Company and/or any Subsidiary or within 30 days of the termination of such relationship, and provided the Option shall have become exercisable, in whole or in part, pursuant to Section 2 hereof, Optionee's designee, legal representative, legatee, or the person who acquired the right to exercise the Option by reason of the death of Optionee (individually, a "Successor") shall succeed to Optionee's rights under this Agreement. After the death of Optionee, only a Successor may exercise the Option. Any attempt to 2 Exhibit 10.20 sell, pledge, assign, hypothecate, transfer or otherwise dispose of the Option or any rights in respect thereof in contravention of this Agreement or the Plan shall be void. 6. Exercise of Option. On or after the times at which, and to the extent that, the Option has become exercisable in accordance with Section 2 hereof and until termination of the Option in accordance with Section 3 hereof, the Option may be exercised by Optionee (or such other person specified in Section 5 hereof) upon delivery of the following to the Company at its principal executive offices: (a) a written notice of exercise in the form attached hereto as Exhibit A which identifies this Agreement and states the whole number of Shares (which may not be less than 100, or all of the Shares if less than 100 Shares then remain covered by the Option) then being purchased; (b) a check, cash or any combination thereof in the amount of the aggregate Option Price for the number of Shares specified in the notice of exercise (or payment of the aggregate Option Price in such other form of lawful consideration as the Option Committee may approve from time to time under the provisions of Section 8 of the Plan including the surrender of Shares on a cashless exercise involving a broker); (c) a check or cash in the amount reasonably requested by the Company to satisfy the Company's withholding obligations under federal, state or other applicable tax laws with respect to the taxable income, if any, recognized by Optionee in connection with the exercise, in whole or in part, of the Option (unless the Company and Optionee shall have made other arrangements for deductions or withholding from Optionee's wages, bonus or other income paid to Optionee by the Company or any Subsidiary, provided any arrangement set forth in this parenthetical shall satisfy the requirements of applicable tax laws); and (d) a written representation and undertaking in such form and substance as the Company may require, setting forth the investment intent of Optionee, or a Successor, as the case may be, and such other agreements, representations and undertakings as described in the Plan including an acknowledgment that Optionee has reviewed the memorandum regarding Section 83(b) of the Internal Revenue Code of 1986, as amended, attached hereto as Exhibit B. 7. Restriction on Transfer of Shares Acquired Upon Exercise of Option. (a) Except as otherwise provided in paragraph (b) below and subject to Section 8, Optionee may not sell, transfer, assign, pledge, hypothecate or otherwise dispose of (collectively, "Transfer") any of the Shares acquired upon exercise of the Option prior to the earlier of April 8, 2003 or an Initial Public Offering (as defined below). In connection with any public offering Optionee agrees to execute a lock up agreement (for up to 180 days) covering the Shares in the form required by the Company. Any purported Transfer or Transfers (including involuntary Transfers initiated by operation of legal process), of any of the Shares or any right, title or interest therein, except in strict compliance with the terms and conditions of this Agreement, shall be null and void. 3 Exhibit 10.20 The term "Initial Public Offering" shall mean an underwritten public offering which results in gross proceeds to the Company in excess of $25 million from the sale of Common Stock. (b) Optionee may, at any time, Transfer any or all of the Shares: (i) inter vivos to Optionee's spouse or issue, or to a trust for their or Optionee's benefit, or (ii) upon Optionee's death, to any person in accordance with the laws of descent and/or testamentary distribution (such persons are collectively referred to herein as "Permitted Transferees"). Notwithstanding the foregoing in this Section 7(b), Shares shall not be Transferred pursuant to this Section 7(b) until the Permitted Transferee executes a valid undertaking, in form and substance satisfactory to the Company and the FS Entities (as defined below) to the effect that the Permitted Transferee and the Shares so Transferred shall thereafter remain subject to all of the provisions of this Agreement (including the Repurchase Option (as defined in Section 10 hereof)), as though the Permitted Transferee were a party to this Agreement, bound in every respect in the same way as Optionee. 8. Right of First Refusal. At any time on or after April 8, 2003, Optionee may Transfer for cash any or all of the Shares to any third party subject to the provisions of this Section 8 and Section 14(b). Prior to any such proposed Transfer, Optionee shall first give written notice (the "Notice") to the Company specifying (i) Optionee's bona fide intention to sell such Shares; (ii) the name(s) and address(es) of the proposed Transferees; (iii) the number of Shares Optionee proposes to Transfer (the "Offered Shares"); (iv) the price for which Optionee proposes to Transfer the Offered Shares (the "First Refusal Price"); and (v) all other material terms and conditions of the proposed Transfer. Within 15 days of receipt of the Notice, the Company (or its nominee(s) or assignee(s)) may elect to purchase any or all of the Offered Shares at the price and on the terms and conditions set forth in the Notice by delivery of written notice of such election to Optionee, specifying a day, which shall not be more than 30 days after such notice is delivered, on or before which Optionee shall surrender (if Optionee has not already done so) the certificate or certificates representing the Offered Shares (with a stock assignment or stock assignments duly endorsed in blank for Transfer) at the principal office of the Company. Within 30 days after delivery of such notice to Optionee, the Company (or its nominee(s) or assignee(s)) shall deliver to Optionee a check, payable to Optionee, in the amount of the purchase price of the Offered Shares. If Optionee fails to so surrender such certificate or certificates on or before such date, from and after such date the Offered Shares shall be deemed to be no longer outstanding, and Optionee shall cease to be a stockholder with respect to such Shares and shall have no rights with respect thereto except only the right to receive payment of the First Refusal Price, without interest, upon surrender of the certificate or certificates therefor (duly endorsed in blank for Transfer). If the Company or its nominee(s) or assignee(s) do not elect to purchase all of the Offered Shares, Optionee shall be entitled to Transfer the remaining portion of the Offered Shares to the Transferee(s) named in the Notice at the price specified in the Notice or at a higher price and on the terms and conditions set forth in the Notice; provided, however, that such Transfer must be consummated within 90 days from the date of the Notice. Any proposed Transfer after such 90-day period may be made only by again complying with the procedures set forth in this Section 8. The right of first refusal provided for in this Section 8 shall terminate upon an Initial Public Offering. 4 Exhibit 10.20 9. Drag Along Right. If FS Equity Partners III, L.P., a Delaware limited partnership, FS Equity Partners International, L.P., a Delaware limited partnership, and FS Equity Partners IV, L.P., a Delaware limited partnership (collectively, the "FS Entities"), find a third party buyer for all the Shares of Common Stock of the Company held by it (whether such sale is by way of purchase, exchange, merger or other form of transaction), then at the request of the Company or the FS Entities, Optionee shall sell all of his or her Options and/or Shares on the same terms and conditions as apply to the sale by the FS Entities of the Common Stock (in the case of Options, deducting the Option Price from the consideration to be received for shares of Common Stock; if the Option Price is greater than the consideration to be received, then such Options shall be canceled without any payment to Optionee); provided however, that if such buyer is a party other than a corporation whose common stock is publicly-traded, Optionee shall not be required to accept consideration other than cash. 10. Repurchase Option. (a) In the event that Optionee's employment or other relationship with the Company and all of its Subsidiaries terminates for any reason (including, without limitation, by reason of Optionee's death, disability, retirement, voluntary resignation or dismissal by the Company or any of its Subsidiaries, with or without Cause), the Company shall have the option (the "Repurchase Option") to purchase from Optionee all or any portion of the Shares acquired by Optionee upon exercise of the Option for a period of six (6) months after the effective date of such termination (the "Termination Date"); provided that such period shall be extended to the six-month anniversary of the date on which Optionee purchased any Shares pursuant to the Option after the Termination Date. The Repurchase Option shall be exercised by the Company by delivery to Optionee, within the period specified above, of a written notice specifying (a) the number of Shares to be purchased and (b) a day, which shall not be more than 30 days after the date such notice is delivered, on or before which Optionee shall surrender the certificate or certificates representing the Shares to be purchased pursuant to the Repurchase Option (duly endorsed in blank for Transfer) at the principal office of the Company in exchange for a check, payable to Optionee in the amount equal to check in the amount of the Repurchase Price, calculated as provided in this Section 10, for all Shares to be purchased. If Optionee fails to surrender the certificate or certificates evidencing the Shares on or before such date, from and after such date the Shares which the Company elected to repurchase shall be deemed to be no longer outstanding, and Optionee shall cease to be a stockholder with respect to such Shares and shall have no rights with respect thereto except only the right to receive payment of the Repurchase Price, without interest, upon surrender of the certificate or certificates therefor (with a stock assignment or stock assignments duly endorsed in blank for Transfer). The Repurchase Option provided for in this Section 10 shall terminate upon an Initial Public Offering. (b) The purchase price (the "Repurchase Price") for each Share to be purchased pursuant to the Repurchase Option shall be equal to (i) the Fair Market Value (as defined below), in 5 Exhibit 10.20 the event Optionee's employment or other relationship with the Company and all of its Subsidiaries terminates by reason of Optionee's death or disability, (ii) the greater of the Option Price or the Fair Market Value, in the event such employment or other relationship is terminated by the Company or any of its Subsidiaries without Cause or by Optionee in the event of a Qualifying Resignation (as defined below), (iii) in the event such employment or other relationship is terminated by Optionee's resignation, other than a Qualifying Resignation, the greater of the Option Price or 50% of the Fair Market Value, or (iv) in the event such employment or other relationship is terminated for Cause, the greater of the Option Price or Book Value. As used herein, (i) the "Fair Market Value" shall be the fair market value of a Share as of the date of repurchase by the Company, (ii) the "Book Value" shall be equal to the Option Price (subject to adjustment as set forth below) plus the net income or minus the net loss per Share for all shares of Common Stock from the date of this Agreement to the end of the fiscal quarter immediately preceding the Termination Date, in each case, as determined by the Board of Directors of the Company, acting in good faith, which determination shall be final and binding, and (iii) "Qualifying Resignation" shall mean a resignation by Optionee within 60 days after any of the following: (A) a change of Optionee's duties and responsibilities which cause Optionee's position to be one of materially lesser responsibility and scope; or (B) a reduction in Optionee's base salary. (c) If between the Termination Date and the date on which a repurchase pursuant the Repurchase Option is made there is any distribution of stock or other securities of the Company or any successor or assign of the Company which is made in respect of, in exchange for or in substitution of the Shares by reason of any split, reverse split, combination, recapitalization, reclassification, merger, consolidation or otherwise, then (i) all of the Shares to be purchased pursuant to the Repurchase Option shall participate in such transaction and (ii) the Repurchase Price for the Shares to be purchased pursuant to the Repurchase Option shall be adjusted appropriately to reflect the transaction. 11. Certain Reorganizations. In addition to the obligations of Optionee to sell the Shares and/or Options pursuant to Section 9 above, Optionee hereby agrees to exchange or otherwise transfer his Shares and/or Options, in the same manner as the FS Entities transfer Common Stock in transactions contemplated by Section 7.4 of that certain Shareholders Agreement dated April 7, 1998 among the Company, Hudson Respiratory Care, Inc. ("Hudson RCI") and certain other signatories thereto (the "Shareholders Agreement"). Optionee hereby consents to any sale, transfer, reorganization, exchange, merger, combination, liquidation or dissolution or other form of transaction described in Section 9 or as contemplated by Section 7.4 of the Shareholders Agreement and agrees to execute such agreements, powers of attorney, voting proxies or other documents and instruments as may be necessary or desirable to consummate such sale, transfer, reorganization, exchange, merger, combination or other form of transaction. Optionee further agrees to timely take such other actions as the Company or the FS Entities may reasonably request in connection with the approval of the consummation of such sale, transfer, reorganization, exchange, merger, combination or other form of transaction, including voting as a stockholder to approve any such sale, transfer, 6 Exhibit 10.20 reorganization, exchange, merger, combination or other form of transaction and waiving any appraisal rights that Optionee may have in connection therewith. 12. Binding on Transferees. The obligations of Optionee pursuant to Sections 8, 9, 10 and 11 hereof shall be binding on any transferee of any of the Options or the Shares (except a transferee of Shares in a Public Market Sale (as defined below)) and any transfer of any of the Options or Shares shall be void unless a written commitment to be bound by such provisions from such transferee is delivered to the Company and the FS Entities prior to any transfer. The obligations of Optionee pursuant to Sections 8, 9, 10 and 11 hereof shall apply to any securities received in substitution or exchange for the Options or the Shares, including (without limitation) pursuant to Section 11 of the Plan. A "Public Market Sale" shall mean any sale of shares of Common Stock into the public market after an Initial Public Offering, which is made pursuant to Rule 144 promulgated under the Act or pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission and shall not include a negotiated private sale transaction or other disposition of shares of Common Stock. 13. Tag Along Right. If the FS Entities find a third-party buyer, other than a permitted transferee of the FS Entities (as defined in the Shareholders Agreement), for all or part of the Common Stock held by the FS Entities (whether such sale is by way of purchase, exchange, merger or other form of transaction), Optionee shall have the right to sell, on the terms set forth in a written notice (the "Offering Notice") delivered by the FS Entities to Optionee describing the terms of the proposed sale (including the minimum sale price for the shares that the FS Entities plan to sell), that amount of his or her Shares which constitute the same percentage of his or her Shares as the proportionate percentage of Common Stock sold by the FS Entities. Such right shall be exercisable by delivering written notice to the FS Entities within 15 days after receipt of the Offering Notice. Failure to exercise such right within such 15-day period shall be regarded as a waiver of such right. The obligations of the FS Entities under this Section 13 shall terminate upon an Initial Public Offering. The transactions contemplated by Section 7.4 of the Shareholders Agreement shall not give rise to any rights of Optionee under this Section 13. 14. Representations and Warranties of Optionee. (a) Optionee represents and warrants that the Shares to be purchased pursuant to the Option will be acquired by Optionee for Optionee's personal account, for investment purposes only, and not with a view to the distribution, resale or other disposition thereof. Optionee represents that he or she has a preexisting personal or business relationship with the Company or one or more of its officers or directors, or by reason of Optionee's business or financial experience Optionee has the capacity to protect his or her own interests in connection with the grant of the Option and the purchase of the Shares. (b) Optionee acknowledges that the Company may issue Shares upon the exercise of the Option without registering such Common Stock under the Securities Act on the basis of 7 Exhibit 10.20 certain exemptions from such registration requirement. Accordingly, Optionee agrees that Optionee's exercise of the Option may be expressly conditioned upon Optionee's delivery to the Company of such representations and undertakings as the Company may reasonably require in order to secure the availability of such exemptions, including a representation that Optionee is acquiring the Shares for investment and not with a present intention of selling or otherwise disposing of such Shares. Optionee acknowledges that, because Shares received upon exercise of an Option may be unregistered, Optionee may be required to hold the Shares indefinitely unless they are subsequently registered for resale under the Securities Act or an exemption from such registration is available. (c) Optionee acknowledges receipt of this Agreement granting the Option, and the Plan, and understands that all rights and liabilities connected with the Option are set forth herein and in the Plan. 15. No Rights as Stockholder. Optionee shall have no rights as a stockholder of any shares of Common Stock covered by the Option until the date an entry evidencing such ownership is made in the stock transfer books of the Company (the "Exercise Date"). Except as may be provided under Section 11 of the Plan, the Company will make no adjustment for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the Exercise Date. 16. Limitation of Company's Liability for Nonissuance. The inability of the Company to obtain, from any regulatory body having jurisdiction, registration, qualification or other necessary authorization, or the unavailability of an exemption from registration or qualification obligation deemed by the Company's counsel to be necessary for the lawful issuance and sale of any shares of its Common Stock hereunder and under the Plan shall suspend the Company's obligation to permit the exercise of any affected Option or to issue any Shares thereupon and shall relieve the Company of any liability in respect of the nonissuance or sale of such Shares as to which such requisite authority or exemption shall not have been obtained. In no event shall the Company be required to register or qualify the sale of any shares hereunder under any state or federal securities statute in order to permit the exercise of the Option in the absence of an available exemption. In the event that exercisability of the Option is suspended as provided in this section, the term thereof shall be extended until the thirtieth (30th) day after the Company shall have given notice to Optionee that the Option may be exercised in accordance with the provisions hereof. 17. This Agreement Subject to Plan. This Agreement is made under the provisions of the Plan and shall be interpreted in a manner consistent with it. To the extent that any provision in this Agreement is inconsistent with the Plan, the provisions of the Plan shall control. A copy of the Plan is available to Optionee at the Company's principal executive offices upon request and without charge. The good faith interpretation of the Committee of any provision of the Plan, the Option or this Agreement, and any determination with respect thereto or hereto by the Option Committee, shall be final, conclusive and binding on all parties. 8 Exhibit 10.20 18. Restrictive Legends. Optionee hereby acknowledges that federal securities laws and the securities laws of the state in which Optionee resides or is employed may require the placement of certain restrictive legends upon the Shares issued upon exercise of the Option, and Optionee hereby consents to the placing of any such legends upon certificates evidencing the Shares as the Company, or its counsel, may reasonably deem necessary; provided, however, that any such legend shall be removed when no longer applicable. Any and all certificates now or hereafter issued evidencing the Shares shall have endorsed upon them legends substantially as follows: THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS UPON TRANSFER AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THAT CERTAIN OPTION AGREEMENT BY AND BETWEEN RIVER HOLDING CORP. AND THE ORIGINAL PURCHASER HEREOF, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY. 19. Notices. All notices, requests and other communications hereunder shall be in writing and, if given by telegram, telecopy or telex, shall be deemed to have been validly served, given or delivered when sent, if given by personal delivery, shall be deemed to have been validly served, given or delivered upon actual delivery and, if mailed, shall be deemed to have been validly served, given or delivered three business days after deposit in the United States mails, as registered or certified mail, with proper postage prepaid and addressed to the party or parties to be notified, at the following addresses (or such other address(es) as a party may designate for itself by like notice): If to the Company: River Holding Corp. 27711 Diaz Road P.O. Box 9020 Temecula, California 92589 Attention: President 9 Exhibit 10.20 If to the FS Entities: c/o Freeman Spogli & Co. LLC 11100 Santa Monica Boulevard, Suite 1900 Los Angeles, California 90025 If to Optionee, at the address appearing on the signature page hereof. 20. Not an Employment or Other Agreement. Nothing contained in this Agreement shall confer, intend to confer or imply any rights to an employment or other relationship or rights to a continued employment by, or rights to any other relationship with, the Company and/or any Subsidiary in favor of Optionee or limit the ability of the Company and/or any Subsidiary to terminate, with or without cause, in its sole and absolute discretion, the employment of, or other relationship with, Optionee, subject to the terms of any written employment or other agreement to which Optionee is a party. 21. Governing Law. This Agreement shall be construed under and governed by the laws of the State of California without regard to the conflict of law provisions thereof. 22. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and both of which together shall be deemed one Agreement. 23. Amendments; Further Assurances. This Agreement may be amended only by a written agreement executed by both of the parties hereto and the FS Entities. Each party hereto agrees to perform any further acts and execute and deliver any documents which may be reasonably necessary to carry out the intent of this Agreement. 24. Recapitalizations or Exchanges Affecting the Company's Capital. The provisions of this Agreement shall apply to any and all stock or other securities of the Company or any successor or assign of the Company, which may be issued in respect of, in exchange for or in substitution of, the Shares by reason of any split, reverse split, recapitalization, reclassification, combination, merger, consolidation or otherwise, including as contemplated by Section 7.4 of the Shareholders Agreement, and such Shares or other securities shall be encompassed within the term "Shares" for purposes of this Agreement. 25. Disclosure. The Company shall have no duty or obligation to affirmatively disclose to Optionee, and Optionee shall have no right to be advised of, any material information regarding the Company or any Subsidiaries at any time prior to, upon or in connection with the Company's purchase of the Shares under this Agreement. 26. Successors and Assigns. The Company may assign with absolute discretion any or all of its rights and/or obligations and/or delegate any of its duties under this Agreement to any of its 10 Exhibit 10.20 affiliates, successors and/or assigns and this Agreement shall inure to the benefit of, and be binding upon, such respective affiliates, successors and/or assigns of the Company in the same manner and to the same extent as if such affiliates, successors and/or assigns were original parties hereto. Without limiting the foregoing, the Company may assign the Repurchase Option and/or the right of first refusal provided for in Sections 8 and 10 of this Agreement, respectively, to any nominee, affiliate, successor and/or assign. The FS Entities may assign their rights under Sections 9, 11 and 13 to any of their respective permitted transferees (as defined in the Shareholders Agreement) or to a purchaser of shares of Common Stock then owned by the FS Entities. Optionee may not assign any or all of his or her rights and/or obligations and/or delegate any or all of his or her duties under this Agreement without the prior written consent of the Company and the FS Entities. 11 Exhibit 10.20 IN WITNESS WHEREOF, the Company and Optionee have executed this Agreement as of the date first above written. THE COMPANY: RIVER HOLDING CORP. By: ______________________________ Name: _______________________ Title: _______________________ OPTIONEE: ADDRESS: 12 Exhibit 10.20 Schedule A SCHEDULE OF EXERCISABILITY _________ Shares of Common Stock subject to the Option shall become exercisable as follows: % of Option Exercisable Date Exercisable 13 Exhibit 10.20 EXHIBIT A RIVER HOLDING CORP. NOTICE OF OPTION EXERCISE _____________, 200__ RIVER HOLDING CORP. Attention: Corporate Secretary 9. Exercise of Option. Effective as of today, I hereby elect to purchase __________ shares of Common Stock (the "Shares") of River Holding Corp. (the "Company") pursuant to the stock option (the "Option") granted to me by the Stock Option Agreement dated for reference purposes ___________________________, and pursuant to the Company's 2001 Stock Option Plan (the "Plan"). The exercise price of the Option is $____________ per share and, accordingly, I have delivered to the Company my check in the amount of $_____________________ representing the aggregate exercise price for the Shares. 10. Investment Representations. I am aware of the Company's business affairs and financial condition and I have acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Shares. I am acquiring the Shares for investment for my own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). I acknowledge and understand that the Shares constitute "restricted securities" under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of my investment intent as expressed herein. I further understand that the Shares must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. I further acknowledge and understand that the Company is under no obligation to register the Shares. 11. Other. I acknowledge that I have received, read and understand the Stock Option Agreement and the Plan and I agree to abide by and be bound by the terms and conditions of both the Stock Option Agreement and the Plan. I understand and agree that the Company shall cause restrictive legends to be placed upon the certificates(s) evidencing ownership of the Shares as may be required by the Company or by state or federal securities laws. ____________________________________ (Signature of Exercising Optionee) EX-10.21 12 dex1021.txt RECEIVABLES PURCHASE AGREEMENT Exhibit 10.21 RECEIVABLES PURCHASE AGREEMENT This Receivables Purchase Agreement (this "Agreement") is made as of the 14th day of May, 2002 (the "Effective Date") by and between Hudson Respiratory Care Inc., a California corporation ("Seller"), and HRC Holding Inc., a Delaware corporation ("Purchaser"). R E C I T A L S A. Seller has an interest in certain intercompany receivables identified on Schedule A hereto in the aggregate face amount of $8,000,000 (the "Receivables"). B. Seller desires to sell the Receivables to Purchaser, and Purchaser desires to purchase such Receivables, on the terms and subject to the conditions of this Agreement. A G R E E M E N T In consideration of the foregoing recitals and the respective covenants and agreements contained herein, the parties agree as follows: ARTICLE 1 PURCHASE AND SALE 1.1 Sale and Purchase of the Receivables. Seller hereby sells, conveys, transfers, assigns and delivers to Purchaser without recourse, representation or warranty by Seller, and Purchaser hereby purchases from Seller, all of Seller's right, title and interest in and to the Receivables, free and clear of any lien, pledge, charge, easement, security interest, deed of trust, mortgage, right-of-way, encroachment or encumbrance. 1.2 Consideration. The consideration for the sale and transfer of the Receivables (the "Purchase Price"), shall be $8,000,000, which consideration is being paid to Seller by Purchaser concurrently herewith. ARTICLE 2 COVENANTS AND AGREEMENTS 2.1 Further Assurances. Seller agrees and covenants to execute, acknowledge and deliver any further deeds, assignments, conveyances and other assurances, documents and instruments of transfer, reasonably requested by Purchaser, and will take any other action consistent with the terms of this Agreement that may reasonably be requested by Purchaser, for the purpose of assigning, transferring, granting, conveying and confirming to Purchaser, or reducing to possession, the Receivables pursuant to this Agreement. Seller further agrees that it shall transfer to Purchaser any funds received by Seller in connection with such Receivables. Exhibit 10.21 2.2 Expenses; Transfer Taxes. Each of the parties shall pay all costs and expenses incurred by it or on its behalf in connection with this Agreement and the transactions contemplated hereby. Seller shall pay any transfer or stamp taxes, charges, fees, levies or other assessments imposed by reason of the transactions contemplated hereby. ARTICLE 3 MISCELLANEOUS PROVISIONS 3.1 Entire Agreement. This Agreement constitutes the full and entire agreement and understanding between the parties with regard to the subject matter of this Agreement. All prior and contemporaneous agreements, covenants, representations and warranties, express or implied, oral and written, of the parties with regard to the subject matter of this Agreement are superseded by this Agreement. 3.2 Governing Law. The validity, construction, and performance of this Agreement, and any action, claim, suit, litigation, proceeding, arbitration or mediation arising out of or relating to this Agreement shall be governed by the Laws of the State of California, without regard to the Laws of the State of California as to choice or conflict of Laws. 3.3 Successors and Assigns. Each of the terms, provisions, and obligations of this Agreement shall be binding upon, shall inure to the benefit of, and shall be enforceable by the parties and their respective legal representatives, successors and permitted assigns. 3.4 Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been given or made if in writing and delivered personally or sent by registered or express mail (postage prepaid) or by telecopier to the parties at the following addresses and facsimile numbers: if to Purchaser to: HRC Holding Inc. 27111 Diaz Road P.O. Box 9020 Temecula, California 92589-9020 Facsimile: (909) 676-1578 if to Seller to: Hudson Respiratory Care Inc. 27111 Diaz Road P.O. Box 9020 Temecula, CA 92589-9020 Facsimile: (909) 676-1578 Exhibit 10.21 IN WITNESS WHEREOF, each of the parties has executed this Agreement as of the date first set forth above. SELLER: PURCHASER: HUDSON RESPIRATORY CARE INC., HRC HOLDING INC., a California corporation a Delaware corporation By:_____________________________ By:__________________________________ Name: Name: Title: Title: ACKNOWLEDGEMENT OF ASSIGNMENT Pursuant to that certain Receivables Purchase Agreement, dated as of May 14, 2002 (the "Purchase Agreement"), by and between Hudson Respiratory Care Inc., a California corporation ("Hudson") and HRC Holding Inc., a Delaware corporation ("HRC"), the undersigned each acknowledge and agree to the assignment of the Receivables (as defined in the Purchase Agreement) to HRC as provided in the Purchase Agreement. Each of the undersigned hereby agree to make only to HRC or a party designated by HRC all future payments on such Receivables. ACKNOWLEDGED AND AGREED: Hudson RCI AB By: _____________________________ Name: Its: Hudson RCI GmbH By: _____________________________ Name: Its: Kiewclass (M) Sdn. Bhd By: _____________________________ Name: Its: Hudson RCI (UK) Holdings Limited By: _____________________________ Name: Its: Gibeck, Inc. By: _____________________________ Name: Its: Schedule A List of intercompany receivables purchased: Accounts Receivable from: Hudson AB account # 2634 $4,148,613.24 Hudson AB account # 2896 $ 266,904.14 Hudson Germany account #813 $1,682,954.26 Hudson UK account # 100257 $ 603,004.27 Hudson AB Kiewclass account # 4550 $ 93,499.09 Other receivables: Hudson Germany GL 121050 $ 225,000.00 Hudson Germany GL 141050 $ 461,523.00 Gibeck, Inc. $ 518,502.00 Total $8,000,000.00 EX-21.1 13 dex211.txt SUBSIDIARIES OF HUDSON RCI Exhibit 21.1 SUBSIDIARIES OF HUDSON RESPIRATORY CARE INC. Name of Entity Jurisdiction - -------------- ------------ Industrias Hudson Mexico Hudson Respiratory Care Tecate S. de R.L. de C.V. Mexico HRC Holding Inc. Delaware (HRC Holding Inc. is a holding company for 6 foreign corporations that collectively operate the Registrant's Swedish operations) -----END PRIVACY-ENHANCED MESSAGE-----