-----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, KL1BO6626lCD8GLxqQ3qwDE3pZzDcmVdEDYH1YNlVd/lIMfbycE24FpTfH9pC4wQ FXPH2h9hAjjcP6yMyUM1uA== 0000898430-98-002223.txt : 19980608 0000898430-98-002223.hdr.sgml : 19980608 ACCESSION NUMBER: 0000898430-98-002223 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 28 FILED AS OF DATE: 19980605 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUDSON RESPIRATORY CARE INC CENTRAL INDEX KEY: 0001061893 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 951867330 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-56097 FILM NUMBER: 98642744 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 S-4 1 FORM S-4 As filed with the Securities and Exchange Commission on June 5, 1998 Registration No. 333-__________ ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM S-4 REGISTRATION STATEMENT Under The Securities Act of 1933 ----------------- HUDSON RESPIRATORY CARE INC. (Exact name of registrant as specified in its charter) California 3841 95-1867330 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
27711 Diaz Road P.O. Box 9020 Temecula, California 92589 (909) 676-5611 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ----------------- Jay R. Ogram Chief Financial Officer and Secretary 27711 Diaz Road P.O. Box 9020 Temecula, California 92589 (909) 676-5611 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------------- COPIES TO: Cynthia M. Dunnett, Esq. Riordan & McKinzie 300 South Grand Avenue 29th Floor Los Angeles, California 90071 ----------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]
CALCULATION OF REGISTRATION FEE =============================================================================================================== TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) OFFERING PRICE AGGREGATE REGISTRATION PER UNIT(1) OFFERING PRICE(1) FEE - --------------------------------------------------------------------------------------------------------------- 9 1/8% Senior Subordinated Notes $115,000,000 100.0% $115,000,000 $33,925 due 2008 ===============================================================================================================
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 of the Securities Act of 1933, as amended. ----------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ ******************************************************************************* INFORMATION CONTAINED HEREIN IS SUBJECT TO CHANGE, COMPLETION OR AMENDMENT WITHOUT NOTICE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED BEFORE THIS PROSPECTUS IS DELIVERED IN FINAL FORM. ******************************************************************************* SUBJECT TO COMPLETION, DATED JUNE 5, 1998 PROSPECTUS Hudson Respiratory Care Inc. Offer to Exchange its 9 1/8% Senior Subordinated Notes due 2008, which have been registered under the Securities Act, for any and all of its outstanding 9 1/8% Senior Subordinated Notes due 2008 The Exchange Offer will expire at 5:00 P.M., New York City time, on __________, 1998, unless extended. ---------------- Hudson Respiratory Care Inc. (the "Company") hereby offers, upon the terms and subject to the conditions set forth in this Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the "Letter of Transmittal" and together with this Prospectus, the "Exchange Offer"), to exchange $1,000 principal amount of its 9 1/8% Senior Subordinated Notes due 2008 (the "Exchange Notes") which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a registration statement (the "Registration Statement") of which this Prospectus is a part, for each $1,000 principal amount of its outstanding 9 1/8% Senior Subordinated Notes due 2008 (the "Notes"), of which $115,000,000 principal amount is outstanding as of the date hereof. The Company will accept for exchange any and all validly tendered Notes prior to 5:00 P.M., New York City time, on __________, 1998, unless extended (the "Expiration Date"). Notes may be tendered only in integral multiples of $1,000. Tenders of Notes may be withdrawn at any time prior to 5:00 P.M., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Notes being tendered for exchange. However, the Exchange Offer is subject to certain customary conditions. In the event the Company terminates the Exchange Offer and does not accept for exchange any Notes, the Company will promptly return the Notes to the holders thereof. The Company will not receive any proceeds from the Exchange Offer. See "The Exchange Offer." The Exchange Notes will be obligations of the Company evidencing the same debt as the Notes, and will be entitled to the benefits of the same indenture (the "Indenture"). See "Description of Exchange Notes". The form and terms of the Exchange Notes are the same as the form and terms of the Notes in all material respects except that the Exchange Notes have been registered under the Securities Act and hence do not include certain rights to registration thereunder and do not contain transfer restrictions or terms with respect to the special interest payments applicable to the Notes. The Notes were issued on April 7, 1998 pursuant to an offering exempt from registration under the Securities Act. See "The Exchange Offer". (Continued on following page) THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO HOLDERS OF THE NOTES ON _________, 1998. SEE "RISK FACTORS" ON PAGE 11 FOR INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH THIS EXCHANGE OFFER. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------- THE DATE OF THIS PROSPECTUS IS _________, 1998. (Continuation of cover page) The Exchange Notes are being offered hereunder in order to satisfy certain obligations of the Company under the Registration Agreement, dated as of April 7, 1998 (the "Exchange Offer Registration Agreement"), by and among the Company, the Guarantors (as defined) and the Initial Purchasers (as defined herein), a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The Exchange Offer is intended to satisfy the Company's obligations under the Exchange Offer Registration Agreement to register the Notes under the Securities Act. Once the Exchange Offer is consummated, the Company will have no further obligations to register any of the Notes not tendered by the holders of the Notes (the "Holders") for exchange. See "Risk Factors--Consequences to Non-Tendering Holders of Notes". Based on interpretations by the staff of the Securities and Exchange Commission (the "Commission") set forth in several no-action letters to third parties, the Company believes that the Exchange Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered for resale, resold and otherwise transferred by holders thereof without compliance with the registration and prospectus delivery provisions of the Securities Act. However, any Holder who is an "affiliate" of the Company or who intended to participate in the Exchange Offer for the purpose of distributing the Exchange Notes (i) cannot rely on the interpretation by the staff of the Commission set forth in the above referenced no-action letters, (ii) cannot tender its Notes in the Exchange Offer, and (iii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the Notes, unless such sale or transfer is made pursuant to an exemption from such requirements. See "Risk Factors--Consequences to Non- Tendering Holders of Notes". In addition, each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities and not acquired directly from the Company. The Company has agreed that for a period of 180 days after the Expiration Date, it will make this Prospectus available to any broker- dealer for use in connection with any such resale. See "Plan of Distribution." EXCEPT AS DESCRIBED IN THIS PARAGRAPH, THIS PROSPECTUS MAY NOT BE USED FOR AN OFFER TO RESELL, RESALE OR OTHER TRANSFER OF EXCHANGE NOTES. Notes were initially represented by one Global Note (as defined herein) in fully registered form, registered in the name of a nominee of The Depository Trust Company ("DTC"), as depository. The Exchange Notes exchanged for Notes represented by the Global Note may be initially represented by one or more global securities ("Global Exchange Note") in fully registered form, each registered in the name of the nominee of DTC. The Global Exchange Note will be exchangeable for Exchange Notes in registered form, in denominations of $1,000 and integral multiples thereof as described herein. The Exchange Notes in global form will trade in The Depository Trust Company's Same-Day Funds Settlement System, and secondary market trading activity in such Exchange Notes will therefore settle in immediately available funds. See "Description of Exchange Notes--Form, Denomination and Book-Entry Procedures". The Exchange Notes will bear interest at a rate equal to 9 1/8% per annum from their date of issuance. Interest on the Exchange Notes is payable semi- annually on April 15 and October 15 of each year, commencing October 15, 1998. Holders whose Notes are accepted for exchange will receive, in cash, accrued interest thereon to, but not including, the date of issuance of the Exchange Notes. Such interest will be paid with the first interest payment on the Exchange Notes. Interest on the Notes accepted for exchange will cease to accrue interest upon cancellation of the Notes and issuance of the Exchange Notes. (Continued on following page) i (Continuation of cover page) The Exchange Notes will be redeemable at the option of the Company, in whole or in part, on or after April 15, 2003 at the redemption prices set forth herein, plus accrued and unpaid interest thereon to the date of redemption. In addition, prior to April 15, 2001, up to 35% of the aggregate principal amount of the Exchange Notes originally issued may be redeemed at the option of the Company, in whole or in part, at any time and from time to time, at 109 1/8% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, with the net proceeds of one or more Public Equity Offerings (as defined herein), provided that at least 65% of the aggregate principal amount of the Exchange Notes originally issued remains outstanding immediately after such redemption. In the event of a Change of Control (as defined herein), the Company will be required to make an offer to repurchase all or any part of each holder's Exchange Notes at a cash purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. See "Description of the Exchange Notes." The Exchange Notes will be general unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Debt (as defined herein) of the Company. The Exchange Notes will rank pari passu with any future Senior Subordinated Debt (as defined herein) of the Company and senior to any future Subordinated Obligations (as defined herein) of the Company. The Exchange Notes will also be effectively subordinated in right of payment to all existing and future secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness, including the Company's obligations under the Company's New Credit Facility (as defined herein) which are secured by substantially all of the assets of the Company and a pledge of 65% of the stock of Industrias Hudson, S.A. de C.V., the Company's principal subsidiary ("Industrias Hudson"). The Exchange Notes will also be effectively subordinated in right of payment to all obligations of subsidiaries of the Company which do not guarantee the Exchange Notes, including Industrias Hudson. The New Credit Facility is unconditionally guaranteed by Holding (as defined below), as well as any future domestic and, to the extent no negative tax consequences would result, foreign, subsidiaries of the Company. The Exchange Notes will be guaranteed on a senior subordinated basis by any of the Company's subsidiaries which guarantees the New Credit Facility. As of March 27, 1998, after giving effect to the Recapitalization, the Company would have had $40.0 million of Senior Debt, all of which would have represented secured indebtedness under the New Credit Facility. The Company would also have had $60.0 million of undrawn commitments available under the New Credit Facility, which when drawn would constitute Senior Debt. The Company would not have had any outstanding Pari Passu Indebtedness or Subordinated Obligations. Prior to this offering, there has been no public market for the Notes. Following completion of the Exchange Offer, the Company does not intend to list the Exchange Notes on a national securities exchange or to seek approval for quotation through the Nasdaq National Market. The Initial Purchasers have informed the Company that they currently intend to make a market in the Exchange Notes. However, the Initial Purchasers are not obligated to do so and any such market making may be discontinued at any time without notice. Therefore, no assurance can be given as to whether an active trading market will develop or be maintained for the Exchange Notes. As the Notes were issued and the Exchange Notes are being issued to a limited number of institutions who typically hold similar securities for investment, the Company does not expect that an active public market for the Exchange Notes will develop. In addition, resales by certain holders of the Notes or the Exchange Notes of a substantial percentage of the aggregate principal amount of such notes could constrain the ability of any market maker to develop or maintain a market for the Exchange Notes. To the extent that a market for the Exchange Notes should develop, the market value of the Exchange Notes will depend on prevailing interest rates, the market for similar securities and other factors, including the financial condition, performance and prospects of the Company. Such factors might cause the Exchange Notes to trade at a discount from face value. See "Risk Factors--Lack of Public Market for the Exchange Notes". The Company has agreed to pay the expenses of the Exchange Offer. THIS PROSPECTUS DESCRIBES CERTAIN DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM JAY R. OGRAM, CHIEF FINANCIAL OFFICER AND SECRETARY, HUDSON RESPIRATORY CARE INC., 27711 DIAZ ROAD, P.O. BOX 9020, TEMECULA, CALIFORNIA 92589, TELEPHONE NUMBER (909) 676-5611. (Continued on following page) ii (Continuation of cover page) AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-4 (together with all amendments thereto, the "Registration Statement") under the Securities Act for the registration of the Exchange Notes offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Exchange Notes offered hereby, reference is made to the Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus concerning the contents of any contract or other document are not necessarily complete. With respect to each such contract or other document filed with the Commission as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. Upon consummation of the Exchange Offer, the Company will be subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "Exchange Act") for a period following the effectiveness of the Registration Statement. The Registration Statement, the exhibits and schedules forming a part thereof and the reports and other information filed by the Company with the Commission in accordance with the Exchange Act may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for inspection and copying at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be obtained upon written request from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission also maintains a World Wide Web site (http://www.sec.gov) that contains reports, proxy and other information regarding registrants that file electronically with the SEC. While any Notes remain outstanding, the Company will make available, upon request, to any holder and any prospective purchaser of the Notes the information required by Rule 144A(d)(4) under the Securities Act during any period in which the Company is not subject to Section 13 or 15(d) of the Exchange Act. Any such request should be mailed to Hudson Respiratory Care Inc., 27711 Diaz Road, P.O. Box 9020, Temecula, California 92589. Telephone requests may be directed to the Corporate Secretary at (909) 676-5611. The Indenture provides that, whether or not this Registration Statement is effective, the Company will file with the Commission the periodic reports and such other information, documents and other reports as are specified in Section 13 or Section 15(d) of the Exchange Act, whether or not the Company is subject to Section 13 or 15(d) of the Exchange Act. The Company will also, upon request, provide the Trustee and the holders of the Exchange Notes with such information, documents and other reports. If filing such information, documents or other reports with the Commission is not permitted by the Exchange Act, the Company will not be so obligated to file such information, documents or other reports. iii SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information and financial statements, including the notes thereto, contained elsewhere in this Prospectus. As used herein and unless the context requires otherwise, "Hudson RCI" or the "Company" means Hudson Respiratory Care Inc. and its consolidated subsidiaries. All references to a fiscal year of the Company refer to a year ending on the last Friday in December for a stated year (e.g. "fiscal 1997" or "1997" refers to the year ended December 26, 1997). Unless otherwise indicated, all references to non- financial data are as of March 27, 1998. THE COMPANY 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 2,500 distributors and alternate site service providers throughout the United States and in more than 75 countries worldwide. For fiscal 1997, the Company had net sales of $99.5 million and pro forma EBITDA before provision for the Company's Equity Participation Plan ("EBITDA before EPP") of $26.3 million. From 1993 to 1997, the Company's net sales and EBITDA before EPP increased at compound annual rates of approximately 5.9% and 13.3%, respectively. The Company has supplied the disposable respiratory care market for over 50 years and enjoys strong brand name recognition and leading market positions. The Company believes that in 1996 it held a share of approximately 25% of the domestic hospital market for the disposable respiratory care products that the Company markets and held number one or two market share positions in 10 product categories representing approximately 75% of the Company's 1997 net sales. See "Business--General" and "--Industry Overview." In recent years the Company has pursued a number of growth initiatives, including the expansion of its international and alternate site sales efforts and entry into the anesthesia market. The Company established separate sales forces dedicated to the international and alternate site markets in 1993 and 1994, respectively. In 1995, the Company entered the anesthesia market to further leverage its manufacturing platform, distribution channels and strong brand name recognition. In 1997, anesthesia sales represented approximately 6.5% of the Company's total net sales and international and alternate site sales represented 19.1% and 14.7%, of the Company's total net sales, respectively. The Company manufactures and markets over 1,000 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 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 two manufacturing facilities and two distribution facilities in the United States and an assembly operation in Mexico. The Company has reduced its manufacturing and assembly costs through cost reduction programs, process improvement, equipment automation and upgrades and increased utilization of its Ensenada, Mexico facility for labor-intensive operations. Over the past five years the Company has spent $22.4 million to upgrade its manufacturing operations. During this period, the Company's gross margins have improved from 41.3% to 48.0%, reflecting management's ongoing commitment to cost reduction. 1 BUSINESS STRATEGY The Company's senior management team has increased net sales and EBITDA before EPP by 5.9% and 13.3%, respectively, from 1993 to 1997 compounded annually, despite facing significant pricing pressure as a result of cost containment trends affecting the health care industry generally. These results are largely attributable to management's expertise within the Company's markets and ability to grow the Company's business and improve profitability margins within a dynamic health care environment. On average, members of the senior management team have over 18 years of experience in the health care industry. The senior management team intends to continue to expand the Company's market position, increase cash flows and capitalize on favorable demographic trends by pursuing the following strategies: ENHANCE MARKET POSITION IN DOMESTIC HOSPITAL MARKET. The Company employs a proactive, consultative sales approach in which the Company works with hospitals to increase efficiency and address their cost containment needs. The Company believes that this approach, combined with high levels of customer service and training, enhances its value as a supplier. The Company has entered into preferred supplier arrangements with 12 national GPOs and seeks both to increase sales of disposable respiratory care products to its existing GPO network and to establish new relationships with additional GPOs. INCREASE PENETRATION OF ANESTHESIA MARKET. The Company plans to continue to build its anesthesia product customer base and improve product margins. Since its entry into the anesthesia market in 1995, the Company has built a sales base by leveraging its established distribution network and strong brand name recognition. To minimize start-up costs, the Company initially outsourced much of the manufacturing of its anesthesia product line. Having validated its market and product strategy, the Company is internalizing the manufacturing of its anesthesia products in order to enhance quality and margins. The Company is also hiring sales personnel with experience in anesthesia and has established a sales commission structure that emphasizes growth in this market segment. EXPAND INTERNATIONALLY. The Company intends to further pursue the large and growing international market for disposable respiratory care and anesthesia products and believes that the Company, as a high-quality, low cost manufacturer with a comprehensive product line, is well-positioned to compete in the international market. The Company has established and is currently expanding its international sales force to further its penetration of this market. The Company's manufacturing facilities have received ISO 9000 certification and the Company anticipates being in full compliance with European CE and Medical Device Directive laws by the June 1998 deadline. The Company has entered into a strategic alliance with a major international health care supplier to facilitate the sales, marketing and distribution of its products in Europe. INCREASE PRESENCE IN ALTERNATE SITE MARKET. The Company has targeted the alternate site market as a key growth market due to cost containment and other health care industry trends. The Company provides a broad product line to patients across multiple care settings through its national distribution network. In 1994, the Company established a sales force dedicated to the alternate site market and intends to continue to increase this sales force. In addition, the Company focuses on areas with favorable demographics, such as Florida, Arizona and southern California, where aging populations are large recipients of alternate site care. DEVELOP NEW PRODUCTS. The Company seeks to improve its current market positions and enter new markets through a continuation of its aggressive new product development program. The Company's product development effort targets specific markets in which the Company believes it can favorably compete. As a result of this targeted approach, products introduced since 1992 accounted for approximately 18% of the Company's 1997 net sales. In 1995, the Company entered the disposable anesthesia products market, capitalizing on the Company's manufacturing expertise, similar process technologies, complementary product designs and distribution synergies with the existing respiratory care product line. The Company has also developed new products aimed specifically at the alternate site market, such as more comfortable cannulae that can be worn for longer periods of time. PURSUE STRATEGIC ACQUISITIONS. The Company intends to pursue strategic acquisitions, both domestically and internationally, to expand its product line, improve its market share positions and increase cash flows. 2 Management believes that the Company business, with its efficient operations, leading distribution network, well-recognized brand name and experienced management team, provides an excellent platform to facilitate the Company's expansion strategy, particularly in the anesthesia and international markets. THE RECAPITALIZATION On April 7, 1998, Hudson RCI consummated its recapitalization pursuant to an Agreement and Plan of Merger (the "Recapitalization Agreement") pursuant to which River Acquisition Corp., a wholly-owned subsidiary of Holding ("Holding") merged with and into Hudson RCI, with Hudson RCI surviving as a majority-owned subsidiary of Holding (the "Merger"). Pursuant to the Recapitalization, Holding contributed approximately $93.0 million in equity capital into Hudson RCI (the "Holding Equity Investment") and a shareholder of Hudson RCI (the "Continuing Shareholder") retained common stock of Hudson RCI with a value of approximately $15.0 million (the "Rollover Equity"), based on the valuation of Hudson RCI used in the Recapitalization. In the Merger, a portion of the Hudson RCI common stock was converted into the right to receive approximately $131.1 million in cash. In addition, management received $68.3 million pursuant to the Company's Equity Participation Plan. The Holding Equity Investment was comprised of $63.0 million of common equity (the "Common Stock Investment") and $30.0 million of preferred equity (the "Preferred Stock Investment"). Following the Holding Equity Investment, Holding owned 80.8% of the outstanding common stock of Hudson RCI and the Continuing Shareholder owned 19.2% of the outstanding common stock of Hudson RCI. Affiliates of Freeman Spogli & Co. Incorporated ("FS&Co.") invested $55.0 million and management of Hudson RCI invested $8.0 million of cash in common stock of Holding, the proceeds of which were used to fund the common equity portion of the Holding Equity Investment. The proceeds from the sale of 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010 (the "Holding Preferred Stock") with an aggregate liquidation preference of $30.0 million offered by Holding (the "Preferred Stock Offering") were used to fund the preferred equity portion of the Holding Equity Investment. Immediately following consummation of the Recapitalization, FS&Co. beneficially owned approximately 87.3% of the outstanding common stock of Holding and management owned the remaining 12.7%. In connection with the Recapitalization and concurrently with the Preferred Stock Offering, Hudson RCI offered $115.0 million aggregate principal amount of 9 1/8% Senior Subordinated Notes due 2008 (the "Subordinated Notes")(the "Subordinated Notes Offering," and together with the Preferred Stock Offering, the "Offerings"). On April 7, 1998, Hudson RCI entered into an agreement (the "New Credit Facility") providing for a $40.0 million secured term loan facility (the "Term Loan Facility"), which was funded in connection with the consummation of the Recapitalization, and a $60.0 million revolving loan facility (the "Revolving Loan Facility") which will be available for Hudson RCI's future capital requirements and to finance acquisitions. See "Description of New Credit Facility." The Offerings and the application of the net proceeds therefrom, repayment of existing Hudson RCI debt payments to the Continuing Shareholder under the Recapitalization Agreement and to management, the Holding Equity Investment and the related borrowings under the New Credit Facility are collectively referred to herein as the "Recapitalization." RISK FACTORS Holders of the Exchange Notes should consider carefully the information set forth under the caption "Risk Factors" and all other information set forth in this Prospectus in evaluating an investment in the Exchange Notes. 3 THE EXCHANGE NOTES OFFERING Issuer................ Hudson Respiratory Care Inc. Securities Offered.... $115,000,000 principal amount of 9 1/8% Senior Subordinated Exchange Notes due 2008 (the "Exchange Notes"). Maturity Date......... April 15, 2008. Interest Rate......... The Exchange Notes will bear interest at the rate of 9 1/8% per annum. Interest Payment Dates................. Interest will accrue on the Exchange Notes from the date of issuance (the "Issue Date") and will be payable semi-annually on each April 15 and October 15, commencing October 15, 1998. Ranking............... The Exchange Notes will be general unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Debt of the Company. The Exchange Notes will rank pari passu with any future Senior Subordinated Debt of the Company and senior to any future Subordinated Obligations of the Company. The Exchange Notes will also be effectively subordinated in right of payment to all existing and future secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness, including the Company's obligations under the Company's New Credit Facility which constitute Senior Debt and which also will be secured by substantially all of the assets of the Company (subject to certain exceptions), including a pledge of 65% of the stock of Industrias Hudson. The New Credit Facility will be unconditionally guaranteed by Holding, as well as any future domestic and, to the extent no negative tax consequences would result, foreign subsidiaries of the Company. The Exchange Notes will be guaranteed on a senior subordinated basis by any of the Company's subsidiaries which guarantees the New Credit Facility. The Exchange Notes will also be effectively subordinated in right of payment to all obligations constituting Senior Debt of subsidiaries of the Company that guaranty the Exchange Notes and to all obligations of subsidiaries of the Company which do not guarantee the Exchange Notes, including Industrias Hudson. As of March 27, 1998, after giving effect to the Recapitalization, the Company would have had $40.0 million of Senior Debt, all of which would have represented secured indebtedness under the New Credit Facility. The Company would also have had $60.0 million of undrawn commitments available under the New Credit Facility, which if drawn would constitute Senior Debt. The Company would not have had any outstanding Pari Passu Indebtedness or Subordinated Obligations. As of March 27, 1998, after giving effect to the Recapitalization, the Company's principal subsidiary, Industrias Hudson, S.A. de C.V. ("Industrias Hudson"), would have had total balance sheet liabilities of $0.1 million. Redemption............ The Exchange Notes will be redeemable at the option of the Company, in whole or in part, on or after April 15, 2003 at the redemption prices set forth herein, plus accrued and unpaid interest thereon to the date of redemption. In addition, prior to April 15, 2001, up to 35% of the aggregate principal amount of the Exchange Notes originally issued may 4 be redeemed at the option of the Company at 109 1/8% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, with the net proceeds of one or more Public Equity Offerings, provided that at least 65% of the original aggregate principal amount of the Exchange Notes remains outstanding. Change of Control..... In the event of a Change of Control, the Company will be required to make an offer to repurchase all or any part of each holder's Exchange Notes at a cash purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. The New Credit Facility prohibits the Company from purchasing any Exchange Notes, and also provides that the occurrence of certain of the events that would constitute a Change of Control would constitute a default under such existing debt. Certain Covenants..... The Indenture for the Exchange Notes will contain 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 (the foregoing capitalized terms are defined in "Description of the Exchange Notes--Certain Definitions"). All of these limitations will be subject to a number of important qualifications. See "Description of the Exchange Notes--Certain Covenants." Exchange Offer; Registration Rights... Holders of Exchange Notes are not entitled to any exchange rights with respect to the Exchange Notes. Holders of Notes are entitled to certain exchange rights pursuant to the Exchange Offer Registration Agreement. Under the Exchange Offer Registration Agreement, the Company is required to offer to exchange the Notes for the Exchange Notes having substantially identical terms which have been registered under the Securities Act. This Exchange Offer is intended to satisfy such obligation. The form and terms of the Exchange Notes are the same as the form and terms of the Notes in all material respects except that the Exchange Notes have been registered under the Securities Act and hence do not include certain rights to registration thereunder and do not contain transfer restrictions or terms with respect to the special interest payments applicable to the Notes. Once the Exchange Offer is consummated, the Company will have no further obligations to register any of the Notes not tendered by the Holders for exchange. See "Risk Factors--Consequences to Non-Tendering Holders of Notes". Use of Proceeds...... The Company will not receive any proceeds from the Exchange Offer. 5 THE EXCHANGE OFFER The Exchange Offer.... $1,000 principal amount of Exchange Notes in exchange for each $1,000 principal amount of Notes. As of the date hereof, $115.0 million in aggregate principal amount of Notes were outstanding. The Company will issue the Exchange Notes to Holders on or promptly after the Expiration Date. Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that Exchange Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered for resale, resold and otherwise transferred by Holders thereof without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such Exchange Notes are acquired in the ordinary course of such holders' business and such holders have no arrangement with any person to participate in the distribution of such Exchange Notes. However, the Company does not intend to request the Commission to consider, and the Commission has not considered, the Exchange Offer in a no-action letter and there can be no assurance that the Commission would make a similar determination with respect to the Exchange Offer. However, any Holder who is an "affiliate" of the Company or who intends to participate in the Exchange Offer for the purpose of distributing the Exchange Notes (i) cannot rely on the interpretation by the staff of the Commission set forth in the above referenced no-action letters, (ii) cannot tender its Notes in the Exchange Offer, and (iii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the Notes, unless such sale or transfer is made pursuant to an exemption from such requirements. See "Risk Factors--Consequences to Non-Tendering Holders of Notes". Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities and not acquired directly from the Company. The Company has agreed that for a period of 180 days after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." Expiration Date...... 5:00 p.m., New York City time, on _________, 1998, unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. 6 Interest on the Exchange Notes; Accrued Interest on the Notes....... The Exchange Notes will bear interest from their issuance date. Holders whose Notes are accepted for exchange will receive, in cash, accrued interest thereon to, but excluding, the issuance date of the Exchange Notes. Such interest will be paid with the first interest payment on the Exchange Notes. Interest on the Notes accepted for exchange will cease to accrue upon cancellation of the Notes and issuance of the Exchange Notes. Holders of Notes whose Notes are not exchanged will receive the accrued interest payable on October 15, 1998 on such date in accordance with the terms of the Indenture. Condition to the Exchange Notes.... The Exchange Offer is subject to certain customary conditions. The conditions are limited and relate in general to proceedings which have been instituted or laws which have been adopted that might impair the ability of the Company to proceed with the Exchange Offer. As of ______, 1998, none of these events had occurred, and the Company believes their occurrence to be unlikely. If any such conditions do exist prior to the Expiration Date, the Company may (i) refuse to accept any Notes and return all previously tendered Notes, (ii) extend the Exchange Offer or (iii) waive such conditions. See "The Exchange Offer--Conditions." Procedures for Tendering Notes...... Each Holder of Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with such Notes to be exchanged and any other required documentation to United States Trust Company of New York, as Exchange Agent, at the address set forth herein and therein or effect a tender of such Notes pursuant to the procedures for book-entry transfer as provided for herein. By executing the Letter of Transmittal, each Holder will represent to the Company that, among other things, the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such Exchange Notes, whether or not such person is the Holder, that neither the Holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such Exchange Notes and that neither the Holder nor any such person is an "affiliate," as defined in Rule 405 under the Securities Act, of the Company. Each broker-dealer that receives Exchange Notes for its own account in exchange for Notes, where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities and not acquired directly from the Company, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "The Exchange Offer--Procedures for Tendering" and "Plan of Distribution." Special Procedures for Beneficial Owners.... Any beneficial owner whose Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender such Notes in the Exchange Offer should contact such registered Holder promptly and instruct such registered Holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and 7 executing the Letter of Transmittal and delivering its Notes, either make appropriate arrangements to register ownership of the Notes in such owner's name or obtain a properly completed bond power from the registered Holder. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the Expiration Date. See "The Exchange Offer-- Procedures for Tendering." Guaranteed Delivery Procedures.......... Holders of Notes who wish to tender their Notes and whose Notes are not immediately available or who cannot deliver their Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to United States Trust Company of New York, as Exchange Agent, or cannot complete the procedure for book-entry transfer, prior to the Expiration Date must tender their Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures." Withdrawal Rights.... Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Acceptance of Notes and Delivery of Exchange Notes..... The Company will accept for exchange any and all Notes which are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. Any Notes not accepted for exchange will be returned without expense to the tendering Holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. See "The Exchange Offer--Terms of the Exchange Offer." Certain Tax Considerations....... The exchange pursuant to the Exchange Offer will not be a taxable event for Federal income tax purposes. See "Certain U.S. Federal Income Tax Considerations." Exchange Agent....... United States Trust Company of New York is serving as Exchange Agent in connection with the Exchange Offer. GENERAL The Company's principal executive offices are located at 27711 Diaz Road, Temecula, California 92589 and its telephone number is (909) 676-5611. ADDITIONAL INFORMATION For additional information regarding the Exchange Notes, see "Description of Exchange Notes" and "Certain U.S. Federal Income Tax Consequences." 8 ________________________________________________________________________________ SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION OF HUDSON RESPIRATORY CARE INC. The following summary fiscal year end historical financial data has been derived from the audited financial statements of the Company. The summary pro forma financial data has been derived from the pro forma financial information included elsewhere in this Prospectus and gives effect to the Recapitalization as if it had occurred at the beginning of the period presented with respect to the operating and other financial data, and as of March 27, 1998 with respect to balance sheet data. The financial data for the quarters ended March 28, 1997 and March 27, 1998 and as of March 27, 1998 has been derived from unaudited financial statements included elsewhere in this Prospectus. The summary pro forma financial data does not necessarily represent what the Company's financial position and results of operations would have been if these transactions had actually been completed as of the dates indicated, and is not intended to project the Company's financial position or results of operations for any future period. Fiscal 1993 was a 53 week year and fiscal years 1994, 1995, 1996 and 1997 were 52 week years. The information contained in this table should be read in conjunction with the Company's audited consolidated financial statements and notes thereto at December 27, 1996 and December 26, 1997 and for each of the three years in the period ended December 26, 1997, unaudited financial statements and notes thereto for the quarters ended March 28, 1997 and March 27, 1998 and as of March 27, 1998, and the pro forma consolidated financial statements and notes thereto, included elsewhere in this Prospectus.
FISCAL YEAR ------------------------------------------------------------------ PRO FORMA 1993 1994 1995 1996 1997 1997 -------- -------- -------- -------- -------- -------- OPERATING DATA: (DOLLARS IN THOUSANDS) Net sales.............................. $ 79,111 $ 82,772 $ 86,825 $ 93,842 $ 99,509 $ 99,509 Cost of sales.......................... 46,476 47,631 47,582 49,405 51,732 51,732 -------- -------- -------- -------- -------- -------- Gross profit........................... 32,635 35,141 39,243 44,437 47,777 47,777 Operating expenses: Selling expenses...................... 7,070 7,499 8,283 8,961 9,643 9,643 Distribution expenses................. 4,743 4,543 4,595 4,829 5,240 5,240 General and administrative expenses............................. 9,732 10,426 9,769 11,277 11,456 10,617(b) Research and development expenses....... 2,880 1,983 2,064 2,253 1,845 1,845 -------- -------- -------- -------- -------- -------- Total operating expenses excluding provision for equity participation plan................... 24,425 24,451 24,711 27,320 28,184 27,345 -------- -------- -------- -------- -------- -------- Operating Income before EPP(d).......... $ 8,210 $ 10,690 $ 14,532 $ 17,117 $ 19,593 $ 20,432 ======== ======== ======== ======== ======== ======== OTHER FINANCIAL DATA: EBITDA before EPP(e)................... $ 15,422 $ 17,354 $ 21,205 $ 23,194 $ 25,440 $ 26,279 EBITDA before EPP margin(f)............ 19.5% 21.0% 24.4% 24.7% 25.6% 26.4% Operating margin before EPP(g)......... 10.4% 12.9% 16.7% 18.2% 19.7% 20.5% Depreciation & amortization(h)......... $ 7,630 $ 7,033 $ 6,820 $ 6,133 $ 5,847 $ 7,190(i) Capital expenditures................... $ 9,112 $ 4,898 $ 5,850 $ 6,395 $ 4,659 $ 4,659 Ratio of EBITDA before EPP to cash interest expense(j)............ 6.8x 7.5x 8.7x 10.7x 13.9x 1.9x Ratio of total debt to EBITDA before EPP.......................... 2.3x 1.8x 1.2x 1.2x 0.8x 5.9x Ratio of earnings to fixed charges(k).. 2.7x 3.6x 1.0x 3.7x 6.0x 1.3x BALANCE SHEET DATA: Working capital(l)..................... $20,423 $ 20,588 $ 22,461 $ 26,768 $ 29,960 Total assets........................... 66,870 66,576 64,387 76,910 77,554 Total debt............................. 35,167 31,607 25,364 28,146 20,250 Shareholders' equity (deficit)......... 23,693 25,269 19,112 19,872 22,515 QUARTER ENDED (UNAUDITED) ---------------------------------- PRO FORMA MARCH MARCH MARCH 28, 27, 27, 1997 1998 1998 -------- -------- --------- OPERATING DATA: Net sales.............................. $ 23,987 $ 24,265 $ 24,265 Cost of sales.......................... 11,970 13,026(a) 13,026 -------- -------- --------- Gross profit........................... 12,017 11,239 11,239 Operating expenses: Selling expenses.................... 2,331 2,317 2,317 Distribution expenses............... 1,261 1,449 1,449 General and administrative expenses............................ 2,946 3,077(c) 2,905(b) Research and development expenses...... 418 474 474 -------- -------- --------- Total operating expenses excluding provision for equity participation plan.................. 6,956 7,317 7,145 -------- -------- --------- Operating Income before EPP(d)......... $ 5,061 $ 3,922 $ 4,094 ======== ======== ========= OTHER FINANCIAL DATA: EBITDA before EPP(e)................... $ 6,489 $ 5,419 $ 5,591 EBITDA before EPP margin(f)............ 27.1% 22.3% 23.0% Operating margin before EPP(g)......... 21.1% 16.2% 16.9% Depreciation & amortization(h)......... $ 1,444 $ 1,497 2,878(i) Capital expenditures................... $ 112 $ 701 $ 701 Ratio of EBITDA before EPP to cash interest expense(j)............ Ratio of total debt to EBITDA before EPP.......................... Ratio of earnings to fixed charges(k).. 6.3x 3.8x 1.1x BALANCE SHEET DATA: Working capital(l)..................... $ 28,123 $ 25,363 Total assets........................... 73,602 165,178 Total debt............................. 35,000 155,000 Shareholders' equity (deficit)......... 23,824 (30,216)
footnotes on following page ________________________________________________________________________________ 9 (a) For a discussion of the change in cost of goods sold, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Results of Operations--Three Months Ended March 27, 1998 Compared to Three Months Ended March 28, 1997." (b) Adjustments reflect the elimination of results for OxyAir LLC ("OxyAir"), the entity that held the Company's corporate aircraft and elimination of Continuing Shareholder's compensation expense due to the Recapitalization. See Pro Forma Consolidated Financial Statements. (c) Includes $0.3 million of legal fees related to patent litigation in which the Company was granted favorable summary judgment during the quarter ended March 27, 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Three Months Ended March 27, 1998 Compared to Three Months Ended March 28, 1997." (d) Excludes provisions for amounts payable under the Equity Participation Plan ("EPP") for 1995, 1996 and 1997 of $11.4 million, $8.2 million and $7.0 million, respectively, and $2.0 million for each of the quarters ended March 28, 1997 and March 27, 1998. See "Management--Equity Participation Plan" and Note 7(c) to Consolidated Financial Statements. For purposes of compliance with the Indenture, the Company's Consolidated Net Income and EBITDA will not be reduced by the amount of any contingent payments made by the Company to former participants in the Equity Participation Plan. See "Summary--The Recapitalization" and "Certain Transactions." (e) EBITDA before EPP represents income before depreciation and amortization, interest expense, income tax expense and charges related to the Company's Equity Participation Plan, which will be terminated upon consummation of the Recapitalization. EBITDA before EPP is not a measure of performance under generally accepted accounting principles, 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 generally accepted accounting principles, or as a measure of profitability or liquidity. The Company has included information concerning EBITDA before EPP as one measure of an issuer's historical ability to service debt. EBITDA before EPP should not be considered as an alternative to, or more meaningful than, income from operations or cash flow as an indication of the Company's operating performance. For purposes of compliance with the Indenture, the Company's Consolidated Net Income and EBITDA will not be reduced by the amount of any contingent payments made by the Company to former participants in the Equity Participation Plan. See "Summary--The Recapitalization" and "Certain Transactions." (f) Represents ratio of EBITDA before EPP to net sales. (g) Represents ratio of operating income before EPP to net sales. (h) Includes amortization of deferred financing fees of $0.4 million in 1993, $0.4 million in 1994, $0.1 million in 1995 and $0.1 million in 1996, which should be excluded from depreciation and amortization in calculating EBITDA before EPP since such fees are reflected below the operating income line. (i) Actual 1997 amortization of deferred financing fees has been replaced with pro forma non-cash amortization of deferred financing fees of approximately $1.4 million associated with the Recapitalization. Actual amortization for the quarter ended March 27, 1998 has been replaced by pro forma amortization of $0.4 million associated with the Recapitalization. (j) Excludes approximately $1.4 million of non-cash amortization expense for 1997, relating to deferred debt financing costs relating to the Recapitalization. This amount is also excluded from the calculation of the Company's Consolidated Interest Coverage Ratio under the Indenture. (k) 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. (l) Represents current assets, excluding cash, less current liabilities, excluding the current portion of long-term debt. Actual 1997 current liabilities excludes the management bonus liability of $20.0 million. See Note 7(c) to Consolidated Financial Statements. 10 RISK FACTORS This Prospectus includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical facts included in this Prospectus, including without limitation, certain statements under the sections "Summary", "Selected Historical and Pro Forma Consolidated Financial Information", "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Business" and Pro Forma Consolidated Financial Statements and the notes thereto located elsewhere herein regarding the Company's financial position, business strategy, prospects and other related matters, may constitute such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Actual results could differ materially from the Company's expectations as a result of a number of factors, including without limitation those set forth below and those located elsewhere in this Prospectus. In evaluating the Exchange Offer, Holders of the Notes should carefully consider the following factors in addition to the other information contained in this Prospectus. SUBSTANTIAL LEVERAGE; SHAREHOLDERS' DEFICIT As of March 27, 1998, after giving effect to the Recapitalization, the Company would have had $155.0 million of outstanding indebtedness and a shareholders' deficit of approximately $30.2 million. See "Capitalization." 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 New Credit Facility and 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." The New 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 Exchange Preferred Stock. See "Description of Other Securities--Exchange Preferred Stock." The Company's high degree of leverage may have important 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 governing the Exchange Notes (the "Indenture") and the New 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 New 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 effecting the operations of the Company, many of which are beyond its control. The terms of the Company's indebtedness, including the New Credit Facility and the Indenture, also may prohibit the Company from taking such actions. SUBORDINATION OF NOTES, EXCHANGE NOTES AND SUBSIDIARY GUARANTIES The Notes are, and the Exchange Notes will be, general unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Debt of the Company, including the New Credit Facility. The Notes rank, and the Exchange Notes will rank, pari passu with any future Senior Subordinated Debt 11 of the Company and senior to any future Subordinated Obligations of the Company. The Notes are, and the Exchange Notes will also be, effectively subordinated in right of payment to all existing and future secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness, including the Company's obligations under the New Credit Facility which are secured by a first priority lien on substantially all of the assets of the Company and its domestic subsidiaries now owned or hereafter acquired, as well as a pledge of 65% of the stock of Industrias Hudson. The Notes are, and the Exchange Notes will also be, effectively subordinated in right of payment to all obligations of subsidiaries of the Company which do not guarantee the Notes, including Industrias Hudson. Any Subsidiary Guaranties (as defined herein) of any future domestic subsidiaries of the Company could also be effectively subordinated to all the obligations of such subsidiaries under certain circumstances. The New Credit Facility is unconditionally guaranteed by Holding and any future domestic and, to the extent no negative tax consequences would result, foreign, subsidiaries of the Company. As of March 27, 1998, after giving effect to the Recapitalization, the Company would have had $40.0 million of Senior Debt, all of which would have represented secured indebtedness under the New Credit Facility. The Company would also have had $60.0 million of undrawn commitments available under the New Credit Facility, which when drawn will constitute Senior Debt. As of March 27, 1998, after giving effect to the Recapitalization, Industrias Hudson, the Company's principal subsidiary, would have had total balance sheet liabilities of $0.1 million. The Company would not have had any outstanding Pari Passu Indebtedness or Subordinated Indebtedness. The Indenture permits the Company and the Subsidiary Guarantors to incur significant additional indebtedness, all of which may be Senior Debt, under certain circumstances. In the event of a bankruptcy, liquidation or reorganization of the Company, the assets of the Company will be available to pay obligations on the Notes or Exchange Notes only after all Senior Debt has been paid in full, and there may not be sufficient assets remaining to pay all or any amounts due on the Notes or Exchange Notes then outstanding. The Company may not pay principal or premium, if any, or interest on the Notes or Exchange Notes if Senior Debt is not paid when due or any other default on such Senior Debt occurs and the maturity of such Senior Debt is accelerated in accordance with its terms unless, in either case, such amount has been paid in full or the default has been cured or waived and such acceleration has been rescinded. In addition, if any default occurs with respect to certain Senior Debt, including indebtedness under the New Credit Facility, and certain other conditions are satisfied, the Company may not make any payments on the Notes or Exchange Notes for a designated period of time. See "--Fraudulent Conveyance and Distribution Limitation Considerations" and "Description of the Exchange Notes-- Subordination." FRAUDULENT CONVEYANCE AND DISTRIBUTION LIMITATION CONSIDERATIONS The payments made in connection with the Recapitalization to shareholders of the Company, the repayment of the Company's existing indebtedness and the related incurrence by the Company of indebtedness (including indebtedness under the Notes and the New Credit Facility) may be subject to review under relevant state and federal fraudulent conveyance laws, as well as other similar laws regarding creditors rights generally. Under these laws, if a court were to find that, after giving effect to the Recapitalization, either (a) the Company incurred such indebtedness with the intent of hindering, delaying or defrauding creditors or (b) the Company received less than reasonably equivalent value or consideration for incurring such indebtedness and (i) was insolvent or rendered insolvent by reason of such transaction, (ii) was engaged in a business or transaction for which the assets remaining with the Company constituted unreasonably small capital or (iii) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, such court may subordinate the Exchange Notes to presently existing and future creditors of the Company, avoid the issuance of the Exchange Notes and direct the repayment of any amounts paid thereunder to the Company's creditors or take other action detrimental to the holders of the Exchange Notes. To the extent that proceeds from the sale of the Notes are used to repay indebtedness, or to make a distribution to a stockholder on account of the ownership of capital stock, a court may find that the Company did not receive fair consideration or reasonably equivalent value for the incurrence of the indebtedness represented by the Exchange Notes. The issuance of a Subsidiary Guaranty by any future subsidiary of the Company would be subject to similar analysis. See "Description of the Exchange Notes--Certain Covenants--Limitation on Non-Guarantor Subsidiary Debt." The payments made in connection with the Recapitalization to the current shareholders of the Company may be subject to review under provisions of the California corporations code limiting dividends and distributions to shareholders. See "Summary--The Recapitalization" and "Certain Transactions." If a court were to find that payments made to such shareholders in connection with the Recapitalization were subject to these provisions, such payments would exceed the applicable statutory limitations 12 and, to the extent that the Company's obligations to its creditors at the time of such payments were not satisfied, such court could take actions with respect to the Exchange Notes of the type described above. The measure of insolvency for purposes of determining whether a transfer is avoidable as a fraudulent transfer varies depending upon the law of the jurisdiction which is being applied. Generally, however, a debtor would be considered insolvent if the sum of all its liabilities, including contingent liabilities, were greater than the value of all its property at a fair valuation, or if the present fair saleable value of the debtor's assets were less than the amount required to repay its probable liabilities on its debts, including contingent liabilities, as they become absolute and matured. Based upon financial and other information currently available to it, management of the Company believes that the indebtedness retired with the proceeds of the Notes Offering was, and the Notes were and the Exchange Notes will be, incurred for proper purposes and in good faith and that at the time it incurred the indebtedness to be retired with the proceeds of the Notes Offering the Company was, at the time the Notes were issued the Company was, and at the time the Exchange Notes are issued the Company will be (i) neither insolvent nor rendered insolvent thereby, (ii) in possession of sufficient capital to run its business effectively and (iii) incurring debts within its ability to pay as the same mature or become due. See "Management's Discussions and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In reaching these conclusions, the Company relied upon various valuations and estimates of future cash flow that necessarily involve a number of assumptions and choices of methodology. No assurance can be given, however, that the assumptions and methodologies chosen by the Company would be adopted by a court or that a court would concur with the Company's conclusions. There can be no assurance that a court would not determine, regardless of whether the Company was solvent on the date the Notes were issued, that the payments constituted fraudulent transfers. 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 payors 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. See "Business--Industry Overview." 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 payers, including Medicare, Medicaid and private insurance programs. As a result, the demand for the Company's products in any specific care setting is dependent in part on the reimbursement policies of the various payers in that setting. In order to be reimbursed, the products generally must be found to be reasonable and necessary for the treatment of medical 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 payers. 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. 13 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 1997, the Company's ten largest group purchasing arrangements accounted for approximately 34% of the Company's total net sales, and management believes that such arrangements accounted for a similar percentage of net sales for fiscal 1997. Distributors have also consolidated in response to cost containment. For fiscal 1997, approximately 30% of the Company's net sales were to a single distributor, Owens & Minor Inc. ("Owens & Minor"). The loss of the Company's relationship with this distributor would have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION 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. 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 "FDC 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 FDC Act and similar foreign laws, the Company, as a marketer, distributor and manufacturer of health care products, is required to obtain the 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 the FDA's "Quality System Regulations for Medical Devices" implementing "Good Manufacturing Practices" ("GMP/QSR Regulations"), 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 local, 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 sterilizer 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 14 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, which it has not done to date. 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 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. See "Business--Government Regulation and Environmental Matters." RISKS RELATED TO INTERNATIONAL SALES; FOREIGN OPERATIONS Sales made outside the United States represented approximately 19.1% of the Company's 1997 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. Sales of the Company's products are denominated in U.S. dollars. The destabilization of the economies of several Asian countries in 1997 caused a decrease in demand for the Company's products throughout Southeast Asia, and future sales in that region are uncertain. In addition, adverse economic conditions in Asia could result in "dumping" of products similar to those produced by the Company by other manufacturers, both in Asian and other markets. The Company also maintains a manufacturing and assembly facility in Ensenada, Mexico and, as a result, is subject to operational risks such as changing labor trends and civil unrest in that country. In the event the Company were required to transfer its Ensenada operations to the United States or were otherwise unable to benefit from its lower cost Mexican operation, 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. 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. While the Company has employment agreements with it senior management team, these agreements may be terminated by either party, with or without cause. 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 15 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. See "Business--Competition." 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 New Credit Facility and the Indenture contain certain restrictions regarding 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. See "Business--Business Strategy," "Description of New Credit Facility" and "Description of the Exchange Notes." 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 18 patents in the U.S. and two patents pending. Many of the U.S. patents have corresponding patents issued in Canada, Europe and various Asian countries. The Company is currently preparing several patent applications covering intellectual property associated with the closed suction catheter product and advanced humidification devices. 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. CONTROL OF COMPANY; AFFILIATE TRANSACTIONS FS&Co. indirectly controls approximately 80.8% of the voting common stock of the Company and 100.0% of the preferred stock of the Company, which is entitled to 1/2 vote per share. As a result, FS&Co. has the ability to control the Company's management, policies and financing decisions and to elect a majority of the Company's Board of Directors. There can be no assurance that any decisions taken by FS&Co. will be in the interests of 16 holders of the Exchange Notes. See "Security Ownership of Certain Beneficial Owners." There are currently no independent members of the Company's Board of Directors. Under the Indenture, the Board of Directors of the Company has discretion to approve certain transactions involving the Company and the Restricted Subsidiaries, including transactions with affiliates and certain asset sales. In particular, the Indenture permits the Board of Directors to approve transactions of up to $2.5 million between the Company or any Restricted Subsidiary, on the one hand, and any affiliate thereof (including members of the Board of Directors), on the other hand ("Affiliate Transactions"). This limit will apply to individual transactions only, and there will be no limit on the aggregate value of such affiliate transactions that may be approved by the Board of Directors. The Indenture requires the Company to obtain a fairness opinion with respect to Affiliate Transactions in excess of $5.0 million. PAYMENT UPON A CHANGE OF CONTROL Upon the occurrence of a Change of Control, each holder of the Exchange Notes may require the Company to purchase all or a portion of such holder's Exchange Notes at 101% of the principal amount of the Exchange Notes, together with accrued and unpaid interest, if any, to the date of purchase. Prior to any such repurchase of the Exchange Notes, the Company may be required to (i) repay all or a portion of indebtedness under the New Credit Facility or other indebtedness of the Company or (ii) obtain certain consents to permit the repurchase, including consents under the New Credit Facility. If the Company is unable to repay all of such indebtedness or is unable to obtain the necessary consents, the Company would be unable to offer to repurchase the Exchange Notes, which would constitute an Event of Default under the Indenture. There can be no assurance that the Company will have sufficient funds available at the time of any Change of Control to make any debt payment (including repurchases of Notes) as described above. See "Description of the Exchange Notes--Repurchase at the Option of Holders Upon a Change of Control." The events that constitute a Change of Control under the Indenture may also be events of default under the New Credit Facility or other indebtedness of the Company. Such events may permit the lenders under such debt instruments to accelerate the debt and, if the debt is not paid, to enforce security interests in, or to commence litigation that could ultimately result in a sale of, substantially all the assets of the Company, thereby limiting the Company's ability to raise cash to repurchase the Exchange Notes. In such circumstances, the subordination provisions in the Indenture would likely prohibit payments to holders of the Exchange Notes. LACK OF PUBLIC MARKET FOR THE EXCHANGE NOTES The Exchange Notes are being offered to the Holders of the Notes. Prior to this Exchange Offer, there has been no public market for the Notes. The Company does not intend to apply for listing of the Exchange Notes on any securities exchange or for quotation through the Nasdaq National Market. The Initial Purchasers have informed the Company that they currently intend to make a market in the Exchange Notes. However, the Initial Purchasers are not obligated to do so and any such market making may be discontinued at any time without notice. Therefore, no assurance can be given as to whether an active trading market will develop or be maintained for the Exchange Notes. As the Notes were issued and the Exchange Notes are being issued to a limited number of institutions who typically hold similar securities for investment, the Company does not expect that an active public market for the Exchange Notes will develop. In addition, resales by certain holders of the Notes or the Exchange Notes of a substantial percentage of the aggregate principal amount of such notes could constrain the ability of any market maker to develop or maintain a market for the Exchange Notes. To the extent that a market for the Exchange Notes should develop, the market value of the Exchange Notes will depend on prevailing interest rates, the market for similar securities and other factors, including the financial condition, performance and prospects of the Company. Such factors might cause the Exchange Notes to trade at a discount from face value. S CORPORATION STATUS The Company elected to be treated as an S corporation for federal and state income tax purposes for its taxable years beginning on or after January 1, 1987. Unlike a C corporation, an S corporation is generally not subject to income tax at the corporate level; instead, the S corporation's income is taxed on the personal income tax returns of its shareholders. The Company's status as an S corporation terminated upon consummation of the Recapitalization. If S corporation status were denied for any periods prior to such termination by reason of a failure 17 to satisfy the S corporation election or eligibility requirements of the Internal Revenue Code of 1986, as amended, the Company would be subject to tax on its income as if it were a C corporation for these periods. Such an occurrence would have a material adverse effect on the Company's results. YEAR 2000 COMPLIANCE The Company has upgraded its information system capabilities such that it does not believe that its systems will encounter any material "year 2000" problems. The issue surrounding the year 2000 is whether computer systems will properly recognize date sensitive information when the year changes to 2000, or "00." Systems that misinterpret the two-digit date "00" as the year 1900 instead of the year 2000 could generate erroneous data or fail. The Company's products are not subject to year 2000 problems. The Company also relies, directly and indirectly on the external systems of various independent business enterprises, such as its customers, suppliers, creditors, financial organizations, and of governments, both domestically and internationally, for the accurate exchange of data and related information. The Company could be affected as a result of any disruption in the operation of the various third- party enterprises with which the Company interacts. The Company has not assessed the status of such third-party enterprises' information systems. CONSEQUENCES TO NON-TENDERING HOLDERS OF NOTES AND REQUIREMENTS FOR TRANSFER OF EXCHANGE NOTES Upon consummation of the Exchange Offer, the Company will have no further obligation to register the Notes. Thereafter, any Holder of Notes who does not tender its Notes in the Exchange Offer, including any Holder which is an "affiliate" (as that term is defined in Rule 405 of the Securities Act) of the Company which cannot tender its Notes in the Exchange Offer, will continue to hold restricted securities which may not be offered, sold or otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and Rule 144A under the Securities Act or pursuant to any other exemption from registration under the Securities Act relating to the disposition of securities, provided that an opinion of counsel is furnished to the Company that such an exemption is available. 18 USE OF PROCEEDS This Exchange Offer is intended to satisfy certain of the Company's obligations under the Exchange Offer Registration Agreement. The Company will not receive any cash proceeds from the issuance of the Exchange Notes offered in the Exchange Offer. In consideration for issuing the Exchange Notes as contemplated in this Prospectus, the Company will receive in exchange Notes in like principal amount, the form and terms of which are the same in all material respects as the form and terms of the Exchange Notes except that the Exchange Notes have been registered under the Securities Act and do not contain transfer restrictions or terms with respect to the special interest payments applicable to the Notes. The Notes surrendered in exchange for Exchange Notes will be retired and canceled and cannot be reissued. Accordingly, issuance of the Exchange Notes will not result in any increase in the indebtedness of the Company. Net proceeds from the Notes Offering were $115.0 million. Such proceeds, together with the proceeds of the Holding Equity Investment and borrowings under the New Credit Facility, were used (i) to finance the Recapitalization, (ii) to pay outstanding debt under the Company's existing credit agreement and (iii) to pay related fees and expenses. Indebtedness that was repaid from the net proceeds of the sale of Notes consisted of $34.2 million of borrowings and accrued interest outstanding under the Company's credit agreement with a maturity of March 31, 2000 that includes term loans that bore interest at a base rate plus 0.5% or a eurodollar rate plus 2% and a revolving line of credit that bore interest at a base rate plus 0.25% or a eurodollar rate plus 1.75%. This amount includes $20.0 million of indebtedness incurred on March 11, 1998 in connection with payments made to certain employees pursuant to the Company's Equity Participation Plan. See "Summary--The Recapitalization." 19 CAPITALIZATION The following table sets forth the capitalization of the Company on an actual basis and on an as adjusted basis to give effect to the Recapitalization as if it had occurred on March 27, 1998. This table should be read in conjunction with "Pro Forma Financial Statements" and the notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and the notes thereto included elsewhere in this Prospectus.
ACTUAL AS ADJUSTED MARCH 27, 1998 ADJUSTMENTS(A) MARCH 27, 1998 ---------------- ------------------- -------------- (DOLLARS IN THOUSANDS) Current maturities of long-term debt................................ $ 4,000 $ (4,000)(b) $ -- ------- --------- -------- Long-term debt: Notes payable to Bank............................................... 31,000 (31,000)(b) -- New Credit Facility................................................. -- 40,000 (c) 40,000 Notes............................................................... -- 115,000 (d) 115,000 ------- --------- -------- Total long-term debt............................................... 31,000 124,000 155,000 ------- --------- -------- Mandatorily redeemable PIK preferred stock, $.01 par value, no shares authorized, issued and outstanding, actual; 2,000,000 shares authorized, 300,000 shares issued and outstanding, as adjusted(e)............................. -- 30,000 (f) 30,000 ------- --------- -------- Shareholders' equity (deficit): Common stock, $.01 par value, 15,000,000 shares authorized, 14,468,720 shares issued and outstanding, actual; 15,000,000 shares authorized, 7,800,000 shares issued and outstanding, as adjusted (h)........................... 3,789 59,621 (g) 63,410 Cumulative translation adjustment................................... (464) -- (464) Retained earnings (deficit)......................................... 20,499 (113,661)(g) (93,162) ------- --------- -------- Total shareholders' equity (deficit)............................... 23,824 (54,040) (30,216) ------- --------- -------- Total capitalization........................................... $58,824 $ 95,960 $154,784 ======= ========= ========
_______________ (a) Does not give effect to the obligation of the Company to pay the Continuing Shareholder and former participants in the Equity Participation Plan an aggregate of $5.7 million upon achievement by the Company of certain operating performance targets in fiscal 1998. See "Certain Transactions." (b) Reflects the repayment of Hudson RCI debt in connection with the Recapitalization. (c) Reflects the proceeds from the New Credit Facility. (d) Reflects the proceeds from the issuance of the Notes. (e) The mandatorily redeemable preferred stock provides that, until April 15, 2003, dividends on such preferred stock may be paid, at the election of the Company, in additional shares of such preferred stock, and thereafter must be paid in cash. (f) Reflects the proceeds from the issuance of Preferred Stock Investment. (g) Reflects the following:
RETAINED EARNINGS COMMON STOCK (DEFICIT) ---------------- ----------------- Proceeds related to the Common Stock Investment....................... $63,000 $ -- Reclassification of par value of the redeemed portion of Continuing Shareholder's common stock........................................... (3,379) 3,379 Consideration paid for a portion of Continuing Shareholder's common stock......................................................... -- (131,685) Deferred tax asset.................................................... -- 80,350 Provision for Equity Participation Plan cost in 1998.................. -- (61,013) Elimination of OxyAir................................................. -- (354) Other................................................................. -- (4,338) ------- --------- Total adjustments to shareholders' equity............................. $59,621 $(113,661) ======= =========
(h) Reflects an increase in the authorized number of common shares and a stock split of 245:1 effected prior to the Recapitalization. 20 THE EXCHANGE OFFER PURPOSES OF THE EXCHANGE OFFER The Notes were issued and sold by the Company on April 7, 1998 to Salomon Brothers Inc and BT Alex. Brown Incorporated (collectively, the "Initial Purchasers"), who subsequently resold the Notes to (a) "qualified institutional buyers" (in reliance on Rule 144A under the Securities Act). In connection with the issuance and sale of the Notes, the Company and the Initial Purchasers entered into the Exchange Offer Registration Agreement pursuant to which the Company agreed to use its best efforts to cause a registration statement with respect to the Exchange Offer to become effective within 150 days of April 7, 1998, the date of issuance of the Notes. However, in the event that (a) any changes in the law or the applicable interpretations of the staff of the Commission do not permit the Company to effect the Exchange Offer, (b) for any other reason the Exchange Offer Registration Statement is not declared effective within 150 days after the date of the original issuance of the Notes or the Exchange Offer is not consummated within 180 days after the date of the original issuance of the Notes, (c) under certain circumstances the Initial Purchasers so request or (d) under certain circumstances if certain holders of the Notes are not permitted to participate in the Exchange Offer or are not able to receive freely tradeable Exchange Notes pursuant to the Exchange Offer, the Company will file a shelf registration statement with respect to the resale of the Notes (the "Shelf Registration Statement") and keep such Shelf Registration Statement effective until two years after the Issue Date (or until one year after such date if such Shelf Registration Statement is filed at the request of an Initial Purchaser). The Exchange Offer is being made by Hudson RCI to satisfy its obligations pursuant to the Exchange Offer Registration Agreement. The form and terms of the Exchange Notes are the same as the form and terms of the Notes in all material respects except that the Exchange Notes have been registered under the Securities Act and hence do not include certain rights to registration thereunder and do not contain transfer restrictions or terms with respect to the special interest payments applicable to the Notes. Once the Exchange Offer is consummated, Hudson RCI will have no further obligations to register any of the Notes not tendered by the Holders for exchange. See "Risk Factors--Consequences to Non-Tendering Holders of Notes". A copy of the Exchange Offer Registration Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. Based on interpretations by the staff of the Commission set forth in several no-action letters issued to third parties, the Company believes that Exchange Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered for resale, resold and otherwise transferred by holders thereof without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holders' business and such holders have no such arrangement with any person to participate in the distribution of such Exchange Notes. However, the Company does not intend to request the Commission to consider, and the Commission has not considered, the Exchange Offer in a no- action letter and there can be no assurance that the Commission would make a similar determination with respect to the Exchange Offer. However, any Holder who is an "affiliate" of the Company or who intends to participate in the Exchange Offer for the purpose of distributing the Exchange Notes (i) cannot rely on the interpretation by the staff of the Commission set forth in the above referenced no-action letters, (ii) cannot tender its Notes in the Exchange Offer, and (iii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the Notes, unless such sale or transfer is made pursuant to an exemption from such requirements. See "Risk Factors--Consequences to Non-Tendering Holders of Notes". In addition, each broker-dealer that receives Exchange Notes for its own account in exchange for Notes, where such Notes were acquired by such broker- dealer as a result of market-making activities or other trading activities and not acquired directly from the Company, must acknowledge that it will deliver a copy of this Prospectus in connection with any resale of such Exchange Notes. See "Plan of Distribution". Except as aforesaid, this Prospectus may not be used for an offer to resell, resale or other transfer of Exchange Notes. 21 TERMS OF THE EXCHANGE OFFER General Upon the terms and subject to the conditions of the Exchange Offer set forth in this Prospectus and in the Letter of Transmittal, the Company will accept any and all Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. The Company will issue $1,000 principal amount of Exchange Notes in exchange for each $1,000 principal outstanding Notes accepted in the Exchange Offer. Holders may tender some or all of their Notes pursuant to the Exchange Offer. However, Exchange Notes may be tendered only in integral multiples of $1,000. As of April 7, 1998, there was $115.0 million aggregate principal amount of the Notes outstanding and one registered Holder of Notes. This Prospectus, together with the Letter of Transmittal, is being sent to such registered Holder as of _________, 1998. In connection with the issuance of the Notes, the Company arranged for the Notes to be issued and transferable in book-entry form through the facilities of DTC, acting as depository. The Exchange Notes also will be issued and transferable in book-entry form through DTC. See "Description of Exchange Notes--Form, Denomination and Book-Entry Procedures." The Company shall be deemed to have accepted validly tendered Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering Holders of Notes for the purpose of receiving the Exchange Notes from the Company. If any tendered Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, certificates for any such unaccepted Notes will be returned, without expense, to the tendering Holder thereof as promptly as practicable after the Expiration Date. Holders of Notes who tender in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Notes pursuant to the Exchange Offer. The Company will pay the expenses, other than certain applicable taxes, of the Exchange Offer. See "--Fees and Expenses." Expiration Date; Extensions; Amendments The term "Expiration Date" shall mean ___________, 1998, unless the Company in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date to which the Exchange Offer is extended. In order to extend the Expiration Date, the Company will notify the Exchange Agent and the record Holders of Notes of any extension by oral or written notice, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. Such notice may state that the Company is extending the Exchange Offer for a specified period of time or on a daily basis until 5:00 p.m., New York City time, on the date on which a specified percentage of Notes are tendered. The Company reserves the right to delay accepting any Notes, to extend the Exchange Offer, to amend the Exchange Offer or to terminate the Exchange Offer and not accept Notes not previously accepted if any of the conditions set forth herein under "--Conditions" shall have occurred and shall not have been waived by the Company by giving oral or written notice of such delay, extension, amendment or termination to the Exchange Agent. Any such delay in acceptance, extension, amendment or termination will be followed as promptly as practicable by oral or written notice thereof. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment in a manner reasonably calculated to inform the Holders of such amendment and the Company will extend the Exchange Offer for a period of five to 10 business days, depending upon the significance of the amendment and the manner of 22 disclosure to Holders of the Notes, if the Exchange Offer would otherwise expire during such five to 10 business day period. Without limiting the manner in which the Company may choose to make public announcement of any extension, amendment or termination of the Exchange Offer, the Company shall have no obligation to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release to the Dow Jones News Service. ACCRUED INTEREST ON THE EXCHANGE NOTES AND THE NOTES The Exchange Notes will bear interest at a rate equal to 9 1/8% per annum from their date of issuance. Interest on the Exchange Notes is payable semi- annually on April 15 and October 15 of each year, commencing on October 15, 1998. Holders whose Notes are accepted for exchange will receive, in cash, accrued interest thereon to, but excluding, the date of issuance of the Exchange Notes. Such interest will be paid with the first interest payment on the Exchange Notes. Interest on the Notes accepted for exchange will cease to accrue upon cancellation of the Notes and issuance of the Exchange Notes. Holders of Notes whose Notes are not exchanged will receive the accrued interest payable on October 15, 1998. PROCEDURES FOR TENDERING To tender in the Exchange Offer, a Holder must complete, sign and date the Letter of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if required by Instruction 4 of the Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal or such facsimile, together with the Notes and any other required documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. Any financial institution that is a participant in DTC's Book-Entry Transfer Facility system may make book-entry delivery of the Notes by causing DTC to transfer such Notes into the Exchange Agent's account in accordance with DTC's procedure for such transfer. Although delivery of Notes may be effected through book-entry transfer into the Exchange Agent's account at DTC, the Letter of Transmittal (or facsimile thereof), with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received or confirmed by the Exchange Agent at its address set forth in "-- Exchange Agent" below prior to 5:00 p.m., New York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. The tender by a Holder will constitute an agreement between such Holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. Delivery of all documents must be made to the Exchange Agent at its address set forth below. Holders may also request their respective brokers, dealers, commercial banks, trust companies or nominees to effect the above transactions for such Holders. The method of delivery of Notes and the Letter of Transmittal and all other required documents to the Exchange Agent is at the election and risk of the Holders. Instead of delivery by mail, it is recommended that Holders use an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure timely delivery. No Letter of Transmittal or Notes should be sent to the Company. Only a Holder of Notes may tender such Notes in the Exchange Offer. The term "Holder" with respect to the Exchange Offer means any person in whose name Notes are registered on the books of the Company or any other person who has obtained a properly completed bond power from the registered Holder. ANY BENEFICIAL HOLDER WHOSE NOTES ARE REGISTERED IN THE NAME OF ITS BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE AND WHO WISHES TO TENDER SHOULD CONTACT SUCH REGISTERED HOLDER PROMPTLY AND INSTRUCT SUCH REGISTERED HOLDER TO CONSENT AND/OR TENDER ON ITS BEHALF. IF SUCH BENEFICIAL HOLDER WISHES TO TENDER ON ITS OWN BEHALF, SUCH BENEFICIAL HOLDER MUST, PRIOR TO COMPLETING AND EXECUTING THE LETTER OF TRANSMITTAL AND DELIVERING ITS NOTES, EITHER MAKE APPROPRIATE ARRANGEMENTS TO REGISTER OWNERSHIP OF THE NOTES 23 IN SUCH HOLDER'S NAME OR OBTAIN A PROPERLY COMPLETED BOND POWER FROM THE REGISTERED HOLDER. THE TRANSFER OF RECORD OWNERSHIP MAY TAKE CONSIDERABLE TIME. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution (as defined below) unless the Notes tendered pursuant thereto are tendered (i) by a registered Holder who has not completed the box entitled "Special Payment Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by an "Eligible Guarantor Institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, which is a member of one of the following recognized signature guarantee programs: (i) the Securities Transfer Agents Medallion Program (STAMP), (ii) the New York Stock Exchange Medallion Signature Program (MSP) or (iii) the Stock Exchange Medallion Program (SEMP) (an "Eligible Institution"). If the Letter of Transmittal is signed by a person other than the registered Holder of any Notes listed therein, such Notes must be endorsed or accompanied by appropriate bond powers signed as the name of the registered Holder or Holders appears on the Notes. If the Letter of Transmittal or any Notes or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Company, evidence satisfactory to the Company of their authority to so act must be submitted with the Letter of Transmittal. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of tendered Notes and withdrawal of tendered Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Notes not properly tendered or any Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any defects, irregularities or conditions of tender as to particular Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Notes must be cured within such time as the Company shall determine. Neither the Company, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Notes will not be deemed to have been made until such irregularities have been cured or waived. Any Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering Holders of Notes, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. In addition, the Company reserves the right in its sole discretion to purchase or make offers for any Notes that remain outstanding subsequent to the Expiration Date or, as set forth under "--Conditions," to terminate the Exchange Offer and, to the extent permitted by applicable law, purchase Notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers could differ from the terms of the Exchange Offer. By tendering, each Holder will represent to the Company that, among other things, the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of such Holder's business, that such Holder has no arrangement with any person to participate in the distribution of such Exchange Notes, and that such Holder is not an "affiliate", as defined under Rule 405 of the Securities Act, of the Company. If the Holder is a broker- dealer that will receive Exchange Notes for its own account in exchange for Notes that were acquired as a result of market-making activities or other trading activities and not acquired directly from the Company, such Holder by tendering will acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "Plan of Distribution." 24 GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Notes and (i) whose Notes are not immediately available, or (ii) who cannot deliver their Notes, the Letter of Transmittal or any other required documents to the Exchange Agent prior to the Expiration Date, may effect a tender if: (a) The tender is made through an Eligible Institution; (b) Prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder of the Notes, the certificate number or numbers of such Notes and the principal amount of Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or facsimile thereof) together with the certificate(s) representing the Notes to be tendered in proper form for transfer (or a confirmation of a book-entry transfer into the Exchange Agent's account at DTC of Notes delivered electronically) and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent; and (c) Such properly completed and executed Letter of Transmittal (or facsimile thereof), as well as the certificate(s) representing all tendered Notes in proper form for transfer (or confirmation of a book-entry transfer into the Exchange Agent's account at DTC of Notes delivered electronically) and all other documents required by the Letter of Transmittal are received by the Exchange Agent within five New York Stock Exchange trading days after the Expiration Date. Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to tender their Notes according to the guaranteed delivery procedures set forth above. WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To withdraw a tender of Notes in the Exchange Offer, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Notes to be withdrawn (the "Depositor"), (ii) identify the Notes to be withdrawn (including the certificate number or numbers and principal amount of such Notes), (iii) be signed by the Holder in the same manner as the original signature on the Letter of Transmittal by which such Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee with respect to the Notes register the transfer of such Notes into the name of the person withdrawing the tender, and (iv) specify the name in which any such Notes are to be registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no Exchange Notes will be issued with respect thereto unless the Notes so withdrawn are validly retendered. Any Notes which have been tendered but which are not accepted for payment will be returned to the Holder thereof without cost to such Holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Notes may be retendered by following one of the procedures described above under "--Procedures for Tendering" at any time prior to the Expiration Date. CONDITIONS Notwithstanding any other term of the Exchange Offer, the Company will not be required to accept for exchange, or exchange Exchange Notes for, any Notes not theretofore accepted for exchange, and may terminate 25 or amend the Exchange Offer as provided herein before the acceptance of such Notes, if any of the following conditions exist: (a) the Exchange Offer, or the making of any exchange by a Holder, violates applicable law or any applicable interpretation of the Commission; or (b) any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer which, in the sole judgment of the Company, might impair the ability of the Company to proceed with the Exchange Offer; or (c) there shall have been adopted or enacted any law, statute, rule or regulation which, in the sole judgment of the Company, might materially impair the ability of the Company to proceed with the Exchange Offer. If any such conditions exist, the Company may (i) refuse to accept any Notes and return all tendered Notes to exchanging Holders, (ii) extend the Exchange Offer and retain all Notes tendered prior to the expiration of the Exchange Offer, subject, however, to the rights of Holders to withdraw such Notes (see "--Withdrawal of Tenders") or (iii) waive certain of such conditions with respect to the Exchange Offer and accept all properly tendered Notes which have not been withdrawn or revoked. If such waiver constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver in a manner reasonably calculated to inform Holders of Notes of such waiver. The foregoing conditions are for the sole benefit of the Company and may be asserted by the Company regardless of the circumstances giving rise to any such condition or may be waived by the Company in whole or in part at any time and from time to time in its sole discretion. The failure by the Company at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. In addition to the foregoing conditions, if, because of any change in applicable law or applicable interpretations thereof by the Commission, the Company is not permitted to complete the Exchange Offer, then the Company shall file a Shelf Registration Statement. Thereafter, the Company's obligation to consummate the Exchange Offer shall be terminated. EXCHANGE AGENT United States Trust Company of New York has been appointed as Exchange Agent for the Exchange Offer. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal and requests for Notices of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: By Registered or Certified Mail: By Overnight Courier and By Hand after 4:30 p.m.: United States Trust Company of New York United States Trust Company of New York P.O. Box 844 Cooper Station 770 Broadway, 13th Floor New York, New York 10276 New York, New York 10003 Attention: Corporate Trust Services By Hand before 4:30 p.m.: By Facsimile: United States Trust Company of New York (212) 780-0592 111 Broadway Attention: Customer Service New York, New York 10006 Attention: Lower Level Confirm by telephone: Corporate Trust Window (800) 548-6565
26 FEES AND EXPENSES The expenses of soliciting tenders will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone or in person by officers and regular employees of the Company and its affiliates. The Company will not make any payments to brokers, dealers or others soliciting acceptances of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The Company may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of the Prospectus and related documents to the beneficial owners of the Notes, and in handling or forwarding tenders for exchange. The cash expenses to be incurred in connection with the Exchange Offer will be paid by the Company, are estimated in the aggregate to be approximately $200,000, and include fees and expenses of the Exchange Agent and Trustee under the Indenture and accounting and legal fees. The Company will pay all transfer taxes, if any, applicable to the exchange of Notes pursuant to the Exchange Offer. If, however, certificates representing Exchange Notes or Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered Holder of the Notes tendered, or if tendered Notes are registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering Holder. ACCOUNTING TREATMENT The Exchange Notes will be recorded at the same carrying value as the Notes, which is face value as reflected in the Company's accounting records on the date of the exchange. Accordingly, no gain or loss for accounting purposes will be recognized upon consummation of the Exchange Offer. The issuance costs incurred in connection with the Exchange Offer will be expensed. 27 SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The selected fiscal year end historical financial data has been derived from the audited financial statements of the Company. The selected pro forma financial data has been derived from the pro forma financial statements included elsewhere in this Prospectus and gives effect to the Recapitalization as if it had occurred at the beginning of the period presented with respect to the operating and other financial data, and as of March 27, 1998 with respect to balance sheet data. The financial data for the quarters ended March 28, 1997 and March 27, 1998 and as of March 27, 1998 has been derived from unaudited financial statements included elsewhere in this Prospectus. The selected pro forma financial data does not necessarily represent what the Company's financial position and results of operations would have been if these transactions had actually been completed as of the dates indicated, and is not intended to project the Company's financial position or results of operations for any future period. Fiscal year 1993 was a 53 week year and fiscal years 1994, 1995, 1996 and 1997 were 52 week years. The information contained in this table should be read in conjunction with the Company's audited consolidated financial statements and notes thereto at December 27, 1996 and December 26, 1997 and for each of the three years in the period ended December 26, 1997, unaudited financial statements and notes thereto for the quarters ended March 28, 1997 and March 27, 1998 and as of March 27, 1998 and the pro forma consolidated financial statements and notes thereto, included elsewhere in this Prospectus.
FISCAL YEAR -------------------------------------------------------------------------------- PRO FORMA 1993 1994 1995 1996 1997 1997 ---------- ---------- ---------- ---------- --------- ------ (DOLLARS IN THOUSANDS) OPERATING DATA: Net sales................. $79,111 $82,772 $86,825 $93,842 $99,509 $99,509 Cost of sales............. 46,476 47,631 47,582 49,405 51,732 51,732 ------- ------- ------- ------- ------- ------- Gross profit.............. 32,635 35,141 39,243 44,437 47,777 47,777 Operating expenses: Selling expenses.......... 7,070 7,499 8,283 8,961 9,643 9,643 Distribution expenses..... 4,743 4,543 4,595 4,829 5,240 5,240 General and administrative expenses................. 9,732 10,426 9,769 11,277 11,456 10,617(b) Research and development expenses................. 2,880 1,983 2,064 2,253 1,845 1,845 ------- ------- ------- ------- ------- ------- Total operating expenses before provision for equity participation plan 24,425 24,451 24,711 27,320 28,184 27,345 ------- ------- ------- ------- ------- ------- Operating income before EPP...................... 8,210 10,690 14,532 17,117 19,593 20,432 Provision for equity participation plan....... -- -- 11,415 8,249 6,954 --(d) ------- ------- ------- ------- ------- ------- Operating income... 8,210 10,690 3,117 8,868 12,639 20,432 OTHER (INCOME) AND EXPENSES: Interest expense... 2,253 2,299 2,424 2,177 1,834 15,099(e) Other (income)/expense.... 600 546 811 (463) (638) --(f) ------- ------- ------- ------- ------- ------- Total other (income) and expenses................. 2,853 2,845 3,235 1,714 1,196 15,099 ------- ------- ------- ------- ------- ------- Income (loss) before provision for income taxes.................... 5,357 7,845 (118) 7,154 11,443 5,333 Provision for income taxes 181 175 280 73 150 2,133(g) ------- ------- ------- ------- ------- ------- Net income (loss)......... $ 5,176 $ 7,670 $ (398) $ 7,081 $11,293 $ 3,200(h) ======= ======= ======= ======= ======= ======= OTHER FINANCIAL DATA: EBITDA before EPP(i)...... $15,422 $17,354 $21,205 $23,194 $25,440 $26,279 EBITDA before EPP margin(j) 19.5% 21.0% 24.4% 24.7% 25.6% 26.4% Operating margin before EPP(k)................... 10.4% 12.9% 16.7% 18.2% 19.7% 20.5% Depreciation & amortization(l).......... $ 7,630 $ 7,033 $ 6,820 $ 6,133 $ 5,847 $ 7,190(m) Capital expenditures...... $ 9,112 $ 4,898 $ 5,850 $ 6,395 $ 4,659 $ 4,659 Ratio of EBITDA before EPP to cash interest expense(n)............... 6.8x 7.5x 8.7x 10.7x 13.9x 1.9x Ratio of total debt to EBITDA before EPP........ 2.3x 1.8x 1.2x 1.2x 0.8x 5.9x Ratio of earnings to fixed charges(o)......... 2.7x 3.6x 1.0x 3.7x 6.0x 1.3x BALANCE SHEET DATA: Working capital(p)........ $20,423 $20,588 $22,461 $26,768 $29,960 Total assets.............. 66,870 66,576 64,387 76,910 77,754 Total debt................ 35,167 31,607 25,364 28,146 20,250 Shareholders' equity (deficit)................ 23,693 25,269 19,112 19,872 22,515 QUARTER ENDED (UNAUDITED) -------------------------------------- PRO FORMA MARCH MARCH MARCH 28, 27, 27, 1997 1998 1998 ------ ------ ------ OPERATING DATA: Net sales................. $23,987 $24,265 $ 24,265 Cost of sales............. 11,970 13,026(a) 13,026 ------- ------- -------- Gross profit.............. 12,017 11,239 11,239 Operating expenses: Selling expenses.......... 2,331 2,317 2,317 Distribution expenses..... 1,261 1,449 1,449 General and administrative expenses................. 2,946 3,077(c) 2,905(b) Research and development expenses................. 418 474 474 ------- ------- -------- Total operating expenses before provision for equity participation plan 6,956 7,317 7,145 ------- ------- -------- Operating income before EPP...................... 5,061 3,922 4,094 Provision for equity participation plan....... 1,966 1,974 --(d) ------- ------- -------- Operating income... 3,095 1,948 4,094 OTHER (INCOME) AND EXPENSES: Interest expense... (505) (419) (3,774)(e) Other (income)/expense.... 650 (8) (8) ------- ------- -------- Total other (income) and expenses................. 145 (427) (3,782) ------- ------- -------- Income (loss) before provision for income taxes.................... 3,240 1,521 312 Provision for income taxes 45 23 125(g) ------- ------- -------- Net income (loss)......... $ 3,195 $ 1,498 $ 187(h) ======= ======= ======== OTHER FINANCIAL DATA: EBITDA before EPP(i)...... $ 6,489 $ 5,419 $ 5,591 EBITDA before EPP margin(j) 27.1% 22.3% 23.0% Operating margin before EPP(k)................... 21.1% 16.2% 16.9% Depreciation & amortization(l).......... $ 1,444 $ 1,497 $ 2,878(m) Capital expenditures...... $ 112 $ 701 $ 701 Ratio of EBITDA before EPP to cash interest expense(n)............... Ratio of total debt to EBITDA before EPP........ Ratio of earnings to fixed charges(o)......... 6.3x 3.8x 1.1x BALANCE SHEET DATA: Working capital(p)........ $28,123 $ 25,363 Total assets.............. 73,602 165,178 Total debt................ 35,000 155,000 Shareholders' equity (deficit)................ 23,824 (30,216)
footnotes on following page 28 ______________________ (a) For a discussion of the change in cost of goods sold, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Results of Operations--Three Months Ended March 27, 1998 Compared to Three Months Ended March 28, 1997." (b) The pro forma general and administrative expense reflects the following (amounts in thousands):
December 26, March 27, 1997 1998 ---------------------------- Actual general and administrative expense.................................... $11,456 $3,077 Elimination of Continuing Shareholder salary, bonus and fringe benefits(1)... (455) (87) Elimination of expenses related to OxyAir(2)................................. (384) (85) ------- ------ Total........................................................................ $10,617 $2,905 ======= ======
______________ (1) The Company will not continue to pay Continuing Shareholder salary, bonus and related fringe benefits. The adjustment is to eliminate such expenses. (2) Reflects the elimination of expense related to OxyAir since OxyAir was transferred to the Continuing Shareholder. (c) Includes $0.3 million of legal fees related to patent litigation in which the Company was granted favorable summary judgment during the quarter ended March 27, 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Three Months Ended March 27, 1998 Compared to Three Months Ended March 28, 1997." (d) Reflects the elimination of the Equity Participation Plan. See "Management- -Equity Participation Plan." For purposes of compliance with the Indenture, the Company's Consolidated Net Income and EBITDA will not be reduced by the amount of any contingent payments made by the Company to former participants in the Equity Participation Plan. See "Summary--The Recapitalization" and "Certain Transactions." (e) Pro forma interest expense, including amortization of deferred financing fees related to the Recapitalization, consists of the following (amounts in thousands):
December 26, March 27, 1997 1998 ----------------------------- Interest expense on bank facility at an assumed composite interest rate of 8.00%... $ 3,200 $ 800 Interest expense on Senior Subordinated Notes at an interest rate of 9.125%........ 10,494 2,623 Amortization of deferred finance fees(1)........................................... 1,405 351 ------- ------ Total.............................................................................. $15,099 $3,774 ======= ======
______________ (1) Amortization of deferred debt financing costs relating to the Recapitalization are excluded from the calculation of the Company's Consolidated Interest Coverage Ratio under the Indenture. (f) The pro forma adjustments to Other (income)/expense reflect the elimination of the non-recurring gain on sale of the Company's Orange Park, Florida facility. (g) Reflects the income tax effect of the net changes described above, using an effective tax rate of 40%. (h) For purposes of compliance with the Indenture, the Company's Consolidated Net Income will not be reduced by the amount of any contingent payments made by the Company to former participants in the Equity Participation Plan. See "Summary--The Recapitalization" and "Certain Transactions." (i) EBITDA before EPP represents income before depreciation and amortization, interest expense, income tax expense and charges related to the Company's Equity Participation Plan, which will be terminated upon consummation of the Recapitalization. EBITDA before EPP is not a measure of performance under generally accepted accounting principles, 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 generally accepted accounting principles, or as a measure of profitability or liquidity. The Company has included information concerning EBITDA before EPP as one measure of an issuer's historical ability to service debt. EBITDA before EPP should not be considered as an alternative to, or more meaningful than, income from operations or cash flow as an indication of the Company's operating performance. For purposes of compliance with the Indenture, the Company's Consolidated Net Income and EBITDA will not be reduced by the amount 29 of any contingent payments made by the Company to former participants in the Equity Participation Plan. See "Summary--The Recapitalization" and "Certain Transactions." (j) Represents ratio of EBITDA before EPP to net sales. (k) Represents ratio of Operating income before EPP to net sales. (l) Includes amortization of deferred financing fees of $0.4 million in 1993, $0.4 million in 1994, $0.1 million in 1995 and $0.1 million in 1996, which should be excluded from depreciation and amortization in calculating EBITDA before EPP since such fees are reflected below the operating income line. (m) Actual 1997 amortization of deferred financing fees has been replaced with pro forma non-cash amortization of deferred financing fees of approximately $1.4 million associated with the Recapitalization. Actual amortization for the quarter ended March 27, 1998 has been replaced by pro forma amortization of $0.4 million associated with the Recapitalization. (n) Excludes approximately $1.4 million of non-cash amortization expense for 1997 relating to deferred debt financing costs relating to the Recapitalization. This amount is also excluded from the calculation of the Company's Consolidated Interest Coverage Ratio under the Indenture. (o) 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. (p) Working capital represents current assets, excluding cash, less current liabilities, excluding the current portion of long-term debt. Actual 1997 current liabilities excludes the management bonus liability of $20.0 million. See Note 7(c) to Consolidated Financial Statements. 30 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 Prospectus. The following discussion and analysis covers periods before completion of the Recapitalization. See "Risk Factors" and Pro Forma Consolidated Financial Statements for a further discussion relating to the effect that the transactions described herein may have on the Company. RECENT DEVELOPMENTS AND OUTLOOK 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's principal products include 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 who market to hospitals and other health care providers. In 1997, 63.6% of the Company's net sales were generated from the domestic hospital market, 19.1% from the export market, 14.7% from alternate site provider market and 2.7% from OEM and other markets. The Company's products are sold to over 2,500 distributors and alternate site service providers throughout the United States and in more than 75 countries worldwide. The Company has reported increased annual net sales and EBITDA before EPP in each year since 1990. Net sales increased from $79.1 million in fiscal 1993 to $99.5 million in fiscal 1997, representing a compound annual growth rate of 5.9%. From fiscal 1993 to fiscal 1997, the Company's EBITDA before EPP increased from $15.4 million to $25.4 million, representing a compound annual growth rate of 13.3%. The more rapid increase in EBITDA before EPP relative to net sales is the result of improvements in EBITDA before EPP as a percentage of sales from 19.5% in fiscal 1993 to 25.6% in fiscal 1997. These margin improvements were achieved during a period of heightened cost containment affecting the health care market generally. See "Business--Industry Overview." The Company attributes its ability to increase profit margins to its commitment to cost reduction and operating efficiency. Consistent with the Company's business strategy, the Company has increased its net sales and improved its position within the disposable health care products market in recent years by increasing its respiratory care product offering, introducing disposable products for the anesthesia health care market, expanding its presence in international markets and establishing a position in the growing alternate site market. Through consistent product development efforts, the Company continuously evolves and improves its product offering to fully serve the respiratory care market. In addition to the respiratory care market, the Company developed and introduced disposable products for the anesthesia market starting in 1995. Since that time, sales of anesthesia products have increased and in 1997 contributed $6.5 million in net sales. Net sales from new respiratory and anesthesia products introduced since 1992 represented approximately 18% of the Company's total net sales in fiscal 1997. In 1994, the Company established a sales force dedicated to sales of the Company's products to international markets. The international sales effort has focused largely on major and growing markets for the Company's products. In fiscal 1997, the Company's products were sold to health care providers and distributors in more than 75 international markets representing $19.0 million in net sales. See Note 8 to Consolidated Financial Statements. With the increasing trend toward providing health care outside of traditional hospital settings and the rapid growth of alternate site health care providers, the Company established in 1995 an independent sales force dedicated to this market. Sales of products to alternate site distributors and/or health care providers represented approximately $14.6 million in net sales in fiscal 1997. The Company has targeted the international, alternate site and anesthesia markets as key components for future growth. 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, 31 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. On April 7, 1998, the Company consummated the Recapitalization. See "Summary--Recapitalization." Immediately following consummation of the Recapitalization, FS&Co. owned approximately 87.3% of the outstanding common stock of Holding. The Company and the shareholders that received distributions in the Recapitalization made an election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended, to treat the Recapitalization as an asset purchase for tax purposes, which will have the effect of significantly increasing the basis of the Company's assets, thus increasing depreciation and amortization expenses and other deductions for tax purposes and reducing the Company's taxable income in 1998 and subsequent years. 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.
QUARTER ENDED FISCAL YEAR (unaudited) ----------------------------- --------------------------- MARCH 28, MARCH 27, 1995 1996 1997 1997 1998 -------- -------- ---------- ------------- ------------ (dollars in thousands) Net sales........................................... $86,825 $93,842 $99,509 $23,987 $24,265 Cost of sales....................................... 47,582 49,405 51,732 11,970 13,026 -------- -------- -------- -------- -------- Gross profit...................................... 39,243 44,437 47,777 12,017 11,239 Selling expenses.................................... 8,283 8,961 9,643 2,331 2,317 Distribution expenses............................... 4,595 4,829 5,240 1,261 1,449 General and administrative expenses................. 9,769 11,277 11,456 2,946 3,077 Research and development expenses................... 2,064 2,253 1,845 418 474 Provision for equity participation plan............. 11,415 8,249 6,954 1,966 1,974 -------- -------- -------- -------- -------- Total operating expenses............................ 36,126 35,569 35,138 8,922 9,291 -------- -------- -------- -------- -------- Operating income.................................... 3,117 8,868 12,639 3,095 1,948 Add back: Provision for equity participation plan... 11,415 8,249 6,954 1,966 1,974 -------- -------- -------- -------- -------- Operating income before provision for equity participation plan................................. $14,532 $17,117 $19,593 $ 5,061 $ 3,922 ======== ======== ======== ======== ========
32
FISCAL YEAR QUARTER ENDED ----------------------------- --------------------------- MARCH 28, MARCH 27, 1995 1996 1997 1997 1998 -------- -------- ---------- ------------- ------------ Net sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales....................................... 54.8 52.6 52.0 49.9 53.7 -------- -------- ---------- ------------- ------------ Gross profit...................................... 45.2 47.4 48.0 50.1 46.3 Selling expenses.................................... 9.5 9.5 9.7 9.7 9.5 Distribution expenses............................... 5.3 5.1 5.3 5.3 5.9 General and administrative expenses................. 11.3 12.0 11.5 12.2 12.7 Research and development expenses................... 2.4 2.4 1.9 1.7 1.9 Provision for equity participation plan............. 13.1 8.8 7.0 8.2 8.1 -------- -------- ---------- ------------- ------------ Total operating expenses............................ 41.6 37.9 35.3 37.2 38.3 -------- -------- ---------- ------------- ------------ Operating income.................................... 3.6 9.4 12.7 12.9 8.0 Add back: Provision for equity participation plan... 13.1 8.8 7.0 8.2 8.1 -------- -------- ---------- ------------- ------------ Operating income before provision for equity participation plan................................. 16.7% 18.2% 19.7% 21.1% 16.2% ======== ======== ========== ============= ============
Three Months Ended March 27, 1998 Compared to Three Months Ended March 28, 1997 Net sales, reported net of accrued rebates, were $24.3 million in the first quarter of 1998, an increase of $0.3 million over the same quarter in 1997. This was due primarily to growth of $1.7 million or 36.0% in international sales, primarily due to the Company's focused efforts in this market. Alternate Site sales also increased by $0.3 million or 9.2% as the Company continues to focus sales efforts in this growing market. Partially offsetting these gains was a decrease in domestic sales of $1.7 million or 11.0% due primarily to a relatively light flu season in the first quarter of 1998 compared to 1997. The Company's gross profit margin for the first quarter of 1998 was $11.2 million, a decline of $0.8 million or 6.4% from the first quarter of 1997. As a percentage of net sales, the Company's gross profit margin was 46.3% in the first quarter of 1998 compared to 50.1% in the first quarter of 1997. This decline is largely due to the under absorption of overhead resulting from the Company's efforts to reduce inventory levels in combination with a relatively consistent level of sales volume. On an interim basis, the Company allocates actual manufacturing costs between cost of sales and inventory based on actual production levels. This methodology causes volatility in margins as production levels fluctuate. The Company decreased production and reduced inventories by $0.6 million in the first quarter of 1998 compared to an increase of $1.6 million in inventories in the first quarter of 1997. The decline in inventories caused approximately $1.0 million of additional overhead to be charged to cost of sales in the first quarter of 1998. Selling expense, consisting primarily of sales force salaries, was $2.3 million for the first quarter of 1998, a decrease of $14,000 over the first quarter of 1997. As a percentage of net sales, selling expense decreased to 9.5% for the first quarter of 1998 from 9.7% for the first quarter of 1997. Distribution expenses, consisting primarily of freight charges from the Company's warehouses to its domestic customers, was $1.4 million for the first quarter of 1998, an increase of $0.2 million or 14.9% over the first quarter of 1997. This was primarily due to increased freight rates. General and administrative expenses consist primarily of salaries and other expenses for corporate management, finance, accounting, regulatory and human resources. General and administrative expenses for the first quarter of 1998 were $3.0 million, an increase of $0.1 million or 4.5% over the first quarter of 1997. As a percentage of net sales, general and administrative expenses increased to 12.7% for the first quarter of 1998 from 12.2% for the first quarter of 1997. General and administrative expenses increased in absolute terms as a result of approximately $320,000 in Company legal fees relating to patent litigation in which the Company was granted favorable summary judgment during the first quarter of 1998. The increase was partially offset by cost reductions resultant from the Company's cost containment efforts. 33 Research and development expenses for the first quarter of 1998 were $474,000, a decrease of $56,000 or 13.4% from the first quarter of 1997. The provision for the Equity Participation Plan ("EPP") consists of accrued expenses for payments to be made to certain executives under the EPP. In the first quarter of 1998, the accrued expense was $2.0 million and includes approximately $0.4 million in employer payroll taxes relating to the $20.0 million distribution made on March 13, 1998. The EPP was terminated upon consummation of the Recapitalization and replaced with an executive stock purchase plan and stock option plan. At the time of the Recapitalization, an additional $68.3 million was paid out under the EPP. Interest expense was $0.4 million for the first quarter of 1998, a decrease of $0.1 million or 17%. This decrease was due to lower average debt levels during the first quarter of 1998. Year Ended December 26, 1997 Compared to Year Ended December 27, 1996 Net sales for 1997 were $99.5 million, an increase of $5.7 million or 6.0% over 1996. The increase in net sales was primarily due to increased international and alternate site sales due to increases in unit volume, which was partially offset by a slight decrease in average selling price. For the year, international sales were $19.0 million, an increase of $2.9 million or 18.2% over 1996, and alternate site sales were $14.6 million, an increase of $1.7 million or 13.1% over 1996. Sales to Southeast Asia were adversely affected in 1997 due to economic conditions in the region and the outlook for sales in the region is uncertain in the near term. Approximately 30% of the Company's 1997 total net sales were to a single distributor. The Company's gross profit for 1997 was $47.8 million, an increase of $3.3 million or 7.5% over 1996. As a percentage of net sales, the Company's gross profit increased to 48.0% in 1997 from 47.4% in 1996. The Company has been able to improve its gross profit margin primarily by transferring additional assembly operations to its lower cost operation in Ensenada, Mexico, automating and upgrading the manufacturing process for the Company's products, particularly oxygen masks, and continued cost containment efforts relating to the Company's overhead structure. Selling expense was $9.6 million for 1997, an increase of $0.7 million or 7.6% over 1996. As a percentage of net sales, selling expense increased to 9.7% in 1997 from 9.5% in 1996. Selling expense increased primarily as a result of increased employee compensation related to increased sales commissions and performance compensation in connection with the increase in net sales. In particular, sales commissions increased in connection with sales of selected products targeted by the Company's commission incentive program. Selling expense also increased as a result of fees paid to certain distributors in connection with special promotional programs. Distribution expense was $5.2 million for 1997, an increase of $0.4 million or 8.5% over 1996. This increase was due to increased sales volume. As a percentage of net sales, distribution expense increased to 5.3% in 1997 from 5.1% in 1996. Freight charges relating to international sales are generally paid by the distributor. General and administrative expenses for 1997 were $11.5 million, an increase of $0.2 million or 1.6% over 1996. As a percentage of net sales, general and administrative expenses decreased to 11.5% in 1997 from 12.0% in 1996 as a result of the Company's continued cost containment efforts. General and administrative expenses increased in absolute terms as a result of salary and facility maintenance expense increases and upgrade of the Company's management information systems. Research and development expenses for 1997 were $1.8 million, a decrease of $0.4 million or 18.1% from 1996. This decrease was the result of reduced head count and outside consulting fees. The Company's research and development efforts include expenditures intended to provide improved products to its customers and to upgrade its manufacturing processes. Management expects 1998 research and development expenses to continue at 1997 levels. 34 The provision for the EPP consisted of accrued expense of $7.0 million in 1997, as compared with $8.2 million in 1996, reflecting the total termination liability under the EPP at the end of 1997 and 1996, respectively. The EPP was terminated upon consummation of the Recapitalization and replaced with an executive stock purchase plan. See "Management--Stock Purchase Plan." Interest expense for 1997 was $1.8 million, a decrease of $0.3 million or 15.8% from 1996, primarily as a result of lower average outstanding debt balances during 1997 as compared to 1996. Following the Recapitalization, the Company will have substantially higher interest expenses. See "--Liquidity and Capital Resources" and Pro Forma Consolidated Financial Statements. Prior to the Recapitalization, the Company was a Subchapter S corporation and was not subject to federal income tax. Effective with the Recapitalization the Company terminated S corporation status and is taxed as a Subchapter C corporation. Year Ended December 27, 1996 Compared to Year Ended December 29, 1995 Net sales for 1996 were $93.8 million, an increase of $7.0 million or 8.1% over 1995. The increase in net sales was primarily due to growth in international sales volume. Net sales were also positively impacted due to the Company completing its first full year of sales of its anesthesia product line and increased sales of that product line, which was introduced during 1995. Unit increases were partially offset by price decreases, largely due to changes in GPO affiliations among health care providers. The Company's gross profit for 1996 was $44.4 million, an increase of $5.2 million or 13.2% over 1995. As a percentage of net sales, gross profit increased to 47.4% in 1996 from 45.2% in 1995. The increase in the Company's gross profit margin is primarily attributable to increased utilization of the Company's lower cost manufacturing operations in Ensenada, Mexico, automating and upgrading the manufacturing processes for the Company's products and cost containment efforts relating to the Company's overhead structure. Selling expense for 1996 was $9.0 million, an increase of $0.7 million or 8.2% over 1995, and was unchanged as a percentage of net sales from 1995 to 1996. Selling expense increased primarily as a result of increased employee compensation related to increased sales commissions and performance compensation in connection with the increase in net sales. Distribution expense for 1996 was $4.8 million, an increase of $0.2 million or 5.1% over 1995 due to increased sales volume. As a percentage of net sales, distribution expense decreased to 5.1% in 1996 from 5.3% in 1995. General and administrative expenses for 1996 were $11.3 million, an increase of $1.5 million or 15.4% over 1995. As a percentage of net sales, general and administrative expenses increased to 12.0% in 1996 from 11.3% in 1995. General and administrative expenses increased as a result of the amortization of intangible assets acquired in connection with the acquisition of a passive humidification product line in 1996. In 1995 the Company's general and administrative expenses were lowered by a one-time credit of $0.3 million relating to a workers' compensation program dividend. Research and development expenses for 1996 were $2.3 million, an increase of $0.2 million or 9.2% over 1995. The Company's provision for the EPP consisted of an accrued expense of $8.2 million in 1996 compared to $11.4 million in 1995, reflecting the total termination liability under the EPP at the end of 1996 and 1995, respectively. The EPP was amended and restated in 1995 and the expense for 1995 reflected the full value of the termination liability. In 1996 the expense was due to the Company's increased net income. Interest expense for 1996 was $2.2 million, a decrease of $0.2 million or 10.2% from 1995, primarily as a result of lower average outstanding debt balances during 1996 as compared to 1995. 35 QUARTERLY RESULTS OF OPERATIONS The following table presents the unaudited quarterly net sales and EBITDA before EPP for each of the Company's fiscal quarters in its fiscal years 1996 and 1997. In the opinion of the Company's management, this quarterly information has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this Prospectus and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the unaudited quarterly results set forth herein. The Company's quarterly results have in the past been subject to seasonal and other fluctuations, and thus the operating results for any quarter are not necessarily indicative of results for any future period.
1996 1997 ------------------------------------------------- --------------------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ------------- ----------- ----------- ----------- ----------- ----------- ---------- ----------- (DOLLARS IN THOUSANDS) Net sales....... $ 24,143 $ 21,271 $ 21,566 $ 26,862 $ 23,987 $ 25,106 $ 21,813 $ 28,603 EBITDA before EPP............ 6,278 4,449 5,539 6,928 6,526 6,397 5,103 7,414 1996 1997 ------------------------------------------------- --------------------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ------------- ----------- ----------- ----------- ----------- ----------- ---------- ----------- (PERCENT OF ANNUAL TOTAL) Net sales....... 25.7% 22.7% 23.0% 28.6% 24.1% 25.2% 21.9% 28.8% EBITDA before EPP............ 27.1 19.2 23.9 29.8 25.7 25.1 20.1 29.1
The Company's results of operations exhibit some measure of seasonality. Generally, the Company's sales and EBITDA before EPP 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. Management believes that the fourth quarter of 1996 and the first half of 1997 benefitted from an unusually strong flu season. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are cash flow from operations and borrowing under its working capital facility. Cash provided by operations totaled $15.9 million, $16.1 million and $19.3 million in 1995, 1996 and 1997, respectively, and increased in each year during this period due to the Company's increased sales volume and improved operating margins. Cash provided by operations before EPP payments totalled $7.4 million in the quarter ended March 28, 1997 and $6.8 million in the quarter ended March 27, 1998. The Company made cash payments under the EPP of $20.4 million in the quarter ended March 27, 1998. The Company had operating working capital, excluding cash and short-term debt, of $22.5 million, $26.8 million and $10.0 million as of the end of fiscal 1995, 1996 and 1997, respectively, and $24.6 million and $28.1 million at March 28, 1997 and March 27, 1998, respectively. Inventories were $12.8 million, $14.0 million and $16.6 million as of the end of fiscal 1995, 1996 and 1997, respectively, and $15.1 million and $15.9 million at March 28, 1997 and March 27, 1998, respectively. In order to meet the needs of its customers, the Company must maintain inventories sufficient to permit same-day or next-day filling of most orders. 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 $17.2 million, $20.7 million and $21.3 million at the end of fiscal 1995, 1996 and 1997, respectively, and $16.6 million and $18.7 million at March 28, 1997 and March 27, 1998, respectively. The average number of days sales in accounts receivable outstanding was approximately 77 days for 1997, compared to 74 days for 1996. The Company offers 30 day credit terms to its U.S. hospital distributors. Alternate site and international customers typically 36 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. As a result, the Company anticipates that the amount and aging of its accounts receivable will continue to increase. The Company is exploring the utilization in 1998 or 1999 of a distribution warehouse outside of the United States. While this will have the effect of increasing the Company's investment in inventories, it may also result in lower international accounts receivable than would otherwise be the case because customers will receive products, and consequently pay for them, more quickly. Net cash used in investing activities was $6.1 million, $11.4 million and $3.7 million in 1995, 1996 and 1997, respectively. Primary uses of these funds were to finance the acquisition of the passive humidification product line in 1996 and capital expenditures. Capital expenditures, consisting primarily of new manufacturing equipment purchases and expansion of the Ensenada facility, totaled $5.9 million, $6.4 million and $4.7 million in 1995, 1996 and 1997, respectively. The decrease in 1997 resulted from temporary delays in projects that the Company anticipates will be completed in 1998. During the quarter ended March 28, 1997 net cash provided by investing activities was $951,000, reflecting proceeds from the sale of property. During the quarter ended March 27, 1998, net cash used in investing activities was $771,000, primarily for capital expenditures. The Company currently estimates that capital expenditures will be approximately $6.0 million in each of 1998 and 1999, consisting primarily of additional and replacement manufacturing equipment and new heater placements. Net cash used in financing activities was $11.9 million, $3.7 million and $16.4 million in 1995, 1996 and 1997, respectively, which consisted primarily of repayment of debt and shareholder distributions principally to pay taxes on income passed through by the Company. During the quarter ended March 28, 1997, net cash used in financing activities was $6.6 million, consisting primarily of repayment of debt and shareholder distributions. During the quarter ended March 27, 1998, net cash provided by financing was $14.7 million reflecting net borrowing by the Company. The Company's long term debt at March 27, 1998 consisted of $31.0 million of bank indebtedness, which was refinanced in connection with the Recapitalization. The Company has outstanding $155.0 million of indebtedness, consisting of $115.0 million of Notes and borrowings of $40.0 million under the New Credit Facility. The New Credit Facility consists of a $40.0 million Term Loan Facility (all of which was funded in connection with the Recapitalization) and a $60.0 million Revolving Loan Facility. The Notes bear, and the Exchange Notes will bear, interest at the rate set forth on the cover hereof, payable semiannually, and will require no principal repayments until maturity. See "Description of the Exchange Notes." The Term Loan Facility matures on the sixth anniversary of the initial borrowing and requires principal repayments of between $3.0 million and $11.5 million each year until maturity, commencing on June 30, 1999. The Revolving Loan Facility matures on the sixth anniversary of the initial borrowing and bears interest based on a spread over either a eurodollar or base rate. See "Description of New Credit Facility." In connection with the Recapitalization, the Company issued 300,000 shares of its 11 1/2% Senior PIK Preferred Stock due 2010 with an aggregate liquidation preference of $30.0 million (the "Mirror Preferred Stock") which has terms and provisions materially similar to those of the 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010 of Holding (the "Holding Preferred Stock") and the 11 1/2% Senior Exchangeable PIK Preferred Stock of the Company (the "Exchange 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. See "Description of Other Securities--Holding Preferred Stock" and "--Mirror Preferred Stock." The Company believes that after giving effect to the Recapitalization and the incurrence of indebtedness related thereto (including pursuant to the Notes Offering and the Exchange Offer), based on current levels of operations and anticipated growth, its cash from operations, together with other available sources of liquidity, including borrowings available under the Revolving Loan Facility, will be sufficient over the next several years to fund anticipated capital expenditures and acquisitions and to make required payments of principal and interest on its debt, including payments due on the Notes and obligations under the New Credit Facility. Significant acquisition activity by the Company would require additional financing. 37 YEAR 2000 COMPLIANCE The Company has upgraded its information system capabilities such that it does not believe that its systems will encounter any material "year 2000" problems. The issue surrounding the year 2000 is whether computer systems will properly recognize date sensitive information when the year changes to 2000, or "00." Systems that misinterpret the two-digit date "00" as the year 1900 instead of the year 2000 could generate erroneous data or fail. The Company's products are not subject to year 2000 problems. The Company also relies, directly and indirectly on the external systems of various independent business enterprises, such as its customers, suppliers, creditors, financial organizations, and of governments, both domestically and internationally, for the accurate exchange of data and related information. The Company could be affected as a result of any disruption in the operation of the various third- party enterprises with which the Company interacts. The Company has not assessed the status of such third-party enterprises' information systems. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 129 Disclosure of Information about Capital Structure was issued in February 1997 and was adopted as of December 26, 1997. SFAS No. 130 Reporting Comprehensive Income and SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information were issued in June 1997. SFAS No. 130 was adopted in the first quarter of fiscal 1998. SFAS No. 131 will initially be adopted in the Company's 1998 financial statements. 38 BUSINESS GENERAL 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 2,500 distributors and alternate site service providers throughout the United States and in more than 75 countries worldwide. For fiscal 1997, the Company had net sales of $99.5 million and pro forma EBITDA before EPP of $26.3 million. From 1993 to 1997, the Company's net sales and EBITDA before EPP increased at compound annual rates of approximately 5.9% and 13.3%, respectively. The Company has supplied the disposable respiratory care market for over 50 years and enjoys strong brand name recognition and leading market positions. Based on IMS America data regarding the size of the domestic hospital market for respiratory therapy products, and the Company's estimate of the portion thereof represented by respiratory products, the Company believes that in 1996 it held a share of approximately 25% of the domestic hospital market for the disposable respiratory care products that the Company markets and held number one or two market share positions in 10 product categories representing approximately 75% of the Company's 1997 net sales. IMS America does not distinguish between anesthesia and respiratory products in its market analysis. See "--Industry Overview." In recent years the Company has pursued a number of growth initiatives, including the expansion of its international and alternate site sales efforts and entry into the anesthesia market. The Company established separate sales forces dedicated to the international and alternate site markets in 1993 and 1994, respectively. In 1995, the Company entered the anesthesia market to further leverage its manufacturing platform, distribution channels and strong brand name recognition. In 1997, anesthesia sales represented approximately 6.5% of the Company's total net sales and international and alternate site sales represented 19.1% and 14.7%, of the Company's total net sales, respectively. The Company manufactures and markets over 1,000 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 from its extensive relationships with leading GPOs, as large purchasing organizations play an increasingly important role in hospitals' purchasing decisions. The Company maintains two manufacturing facilities and two distribution facilities in the United States and an assembly operation in Mexico. The Company has reduced its manufacturing and assembly costs through cost reduction programs, process improvement, equipment automation and upgrades and increased utilization of its Ensenada, Mexico facility for labor-intensive operations. Over the past five years the Company has spent $22.4 million to upgrade its manufacturing operations. During this period, the Company's gross margins have improved from 41.3% to 48.0%, reflecting management's ongoing commitment to cost reduction. Hudson Oxygen Therapy Sales Company ("Hudson Oxygen"), Hudson RCI's predecessor, was founded in 1945. In 1989, Hudson Oxygen merged with Respiratory Care Inc. to form Hudson RCI. 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. Holding was incorporated in Delaware in January 1998. Holding's principal executive offices are located at 599 Lexington Avenue, 18th Floor, New York, New York 10022, and its telephone number is (212) 758-2555. 39 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. While no data is available for the size of the alternate site and international markets, IMS America data indicates that in 1996 domestic hospitals purchased approximately $371 million of the disposable respiratory care and anesthesia products that the Company markets. The Company categorizes approximately $208 million (56%) of this amount as respiratory care and $163 million (44%) as anesthesia. In addition, there is a growing alternate site service provider market in the United States, as care is increasingly provided outside of traditional hospital settings. Further, the Company believes there is a large and growing international market for disposable respiratory care and anesthesia products. The Company believes that in countries with higher health care standards, heightened concern regarding cross- contamination and sterilization costs have resulted in disposable medical products replacing traditional reusable products. The Company believes that the trend towards utilizing disposable products is accelerating in developing countries as health care standards improve. Respiratory care and anesthesia principally involve the delivery of oxygen and 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 necessary to humidify or medicate the gas. 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 value of single use, disposable products. The market for respiratory care and anesthesia products is also affected by trends affecting the health care market generally. In particular, the overall trend towards cost containment 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 manufacturers with large 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 GPO provider and strong relationships with distributors are critical to many health care manufacturers, manufacturers 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 40 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. The Company believes that these industry trends create significant market opportunities for an efficient, high volume manufacturer of disposable respiratory care and anesthesia products with an extensive product offering and strong relationships with leading distributors and GPOs. BUSINESS STRATEGY The Company's senior management team has increased net sales and EBITDA before EPP by 5.9% and 13.3%, respectively, from 1993 to 1997 compounded annually, despite facing significant pricing pressure as a result of cost containment trends affecting the health care industry generally. These results are largely attributable to management's expertise within the Company's markets and ability to grow the Company's business and improve profitability margins within a dynamic health care environment. On average, members of the senior management team have over 18 years of experience in the health care industry. The senior management team intends to continue to expand the Company's market position, increase cash flows and capitalize on favorable demographic trends by pursuing the following strategies: ENHANCE MARKET POSITION IN DOMESTIC HOSPITAL MARKET. The Company employs a proactive, consultative sales approach in which the Company works with hospitals to increase efficiency and address their cost containment needs. The Company believes that this approach, combined with high levels of customer service and training, enhances its value as a supplier. The Company has entered into preferred supplier arrangements with 12 national GPOs and seeks both to increase sales of disposable respiratory care products to its existing GPO network and to establish new relationships with additional GPOs. INCREASE PENETRATION OF ANESTHESIA MARKET. The Company plans to continue to build its anesthesia product customer base and improve product margins. Since its entry into the anesthesia market in 1995, the Company has built a sales base by leveraging its established distribution network and strong brand name recognition. To minimize start-up costs, the Company initially outsourced much of the manufacturing of its anesthesia product line. Having validated its market and product strategy, the Company is internalizing the manufacturing of its anesthesia products in order to enhance quality and margins. The Company is also hiring sales personnel with experience in anesthesia and has established a sales commission structure that emphasizes growth in this market segment. EXPAND INTERNATIONALLY. The Company intends to further pursue the large and growing international market for disposable respiratory care and anesthesia products and believes that the Company, as a high-quality, low cost manufacturer with a comprehensive product line, is well-positioned to compete in the international market. The Company has established and is currently expanding its international sales force to further its penetration of this market. The Company's manufacturing facilities have received ISO 9000 certification and the Company anticipates being in full compliance with European CE and Medical Device Directive laws by the June 1998 deadline. The Company has entered into a strategic alliance with a major international health care supplier to facilitate the sales, marketing and distribution of its products in Europe. INCREASE PRESENCE IN ALTERNATE SITE MARKET. The Company has targeted the alternate site market as a key growth market due to cost containment and other health care industry trends. The Company provides a broad product line to patients across multiple care settings through its national distribution network. In 1994, the Company established a sales force dedicated to the alternate site market and intends to continue to increase this sales force. In addition, the Company continually focuses on areas with favorable demographics, such as Florida, Arizona and southern California, where aging populations are large recipients of alternate site care. 41 DEVELOP NEW PRODUCTS. The Company seeks to improve its current market positions and enter new markets through a continuation of its aggressive new product development program. The Company's product development effort targets specific markets in which the Company believes it can favorably compete. As a result of this targeted approach, products introduced since 1992 accounted for approximately 18% of the Company's 1997 net sales. In 1995, the Company entered the disposable anesthesia products market, capitalizing on the Company's manufacturing expertise, similar process technologies, complementary product designs and distribution synergies with the existing respiratory care product line. The Company has also developed new products aimed specifically at the alternate site market, such as more comfortable cannulae that can be worn for longer periods of time. PURSUE STRATEGIC ACQUISITIONS. The Company intends to pursue strategic acquisitions, both domestically and internationally, to expand its product line, improve its market share positions and increase cash flows. Management believes that the Company's business, with its efficient operations, leading distribution network, well-recognized brand name and experienced management team, provides an excellent platform to facilitate the Company's expansion strategy, particularly in the anesthesia and international markets. 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 nine categories: (i) oxygen delivery; (ii) aerosol therapy; (iii) active and passive humidification; (iv) ventilatory support; (v) adaptors, connectors and filters; (vi) resuscitation; (vii) airway management; (viii) electronic monitoring; and (ix) durable equipment.
CATEGORY/PRODUCTS DESCRIPTION - -------------------------------------------------- ---------------------------------------------------------- OXYGEN DELIVERY: Oxygen Masks, Oxygen Used to deliver therapeutic, supplemental oxygen to a Cannulae, Oxygen Tubing patient. Oxygen masks cover the nose and mouth. Nasal cannulae fit inside the nostrils. Both masks and cannulae are connected to an oxygen source via small diameter tubing through which oxygen flows. AEROSOL THERAPY: AQUAPAK(R) Large Volume, Used to create and deliver aerosolized particles of Prefilled Nebulizers; Non-Prefilled Large liquid water, sodium chloride or medication to the patient's Volume Nebulizer; UPDRAFT(R), UPDRAFT airways to dilute and mobilize secretions and/or dilate II(R), AVA-NEB(R) and MICRO MIST(R) Small constricted breathing passages. The peak flow meter is Volume, Medication Nebulizers; Aerosol used to monitor the patient's respiratory status before Tubing; AQUATHERM(R) and THERMAGARD(R) and after an aerosolized medication treatment. Nebulizer Heaters; AQUAPAK Prefilled Ultrasonic Cups; ADDIPAK(R) Prefilled Unit Dose Solutions; POCKETPEAK(R) Peak Flow Meter ACTIVE AND PASSIVE HUMIDIFICATION: Heated humidification systems actively heat and CONCHATHERM(R) Heated Humidifiers, humidify oxygen/air mixtures or anesthetic gases AQUA+(R) Hygroscopic Condenser Humidifiers, provided by a mechanical ventilator or anesthesia gas AQUAPAK Prefilled Humidifiers, Non- machine. Hygroscopic condenser humidifiers passively Prefilled, Reusable Humidifier, Non-Prefilled conserve the heat and humidity in the patient's exhaled Disposable Humidifier breath for use during inspiration. Prefilled and non- prefilled humidifiers are used to add water vapor to oxygen being provided to a patient via a mask or cannula.
42
CATEGORY/PRODUCTS DESCRIPTION - -------------------------------------------------- ---------------------------------------------------------- VENTILATORY SUPPORT: Conventional Ventilator Used to convey an oxygen/air mixture and/or anesthetic Circuits, Heated-Wire Ventilator Circuits, gas from a mechanical ventilator or anesthesia gas Anesthesia Breathing Circuits, Air Cushion machine to a patient during the temporary or long-term Anesthesia Masks, Infant CPAP Systems support of ventilation. The infant CPAP system provides non-invasive respiratory support to premature infants with under-developed, immature lungs. ADAPTORS, CONNECTORS AND FILTERS: A wide The adaptors and connectors are frequently used in variety of adaptors and connectors; Main Flow respiratory care and anesthesia to add accessories, Bacterial/Viral Filters; Pulmonary Function modify configurations, and/or customize other related Filter products to meet specific needs. Filters are used to protect patients, caregivers, and medical equipment from cross-contamination with bacteria and viruses. RESUSCITATION: LIFESAVER(R) Reusable and Used during cardiopulmonary resuscitation ("CPR") to Disposable Resuscitation Bags, Isolation Valves adequately support and/or maintain the patient's and Kits, LIFESAVER Tubes and Kits ventilatory function. AIRWAY MANAGEMENT: SOFTECH(R) Cuffed and Assist in securing and maintaining an open airway and Uncuffed Endotracheal Tubes; CATH-GUIDE(R), unobstructed breathing passage. They also can assure Color-Coded and DUAL-CHANNEL Oral that the patient's ventilation can be maintained and that Pharyngeal Airways; BITEGARD (TM) Oral Bite respiratory secretions can be adequately removed from Block; CATH-GUIDE Closed Suction Catheters the lungs. ELECTRONIC MONITORING: Replacement oxygen The oxygen sensors, monitors and analyzers are used to sensors, Oxygen Monitors and Analyzers, analyze and monitor the amount of oxygen being VENTILARM II(R) Low-Pressure Alarms administered to a patient. The low-pressure alarm is used to detect a patient disconnect or a leak in the breathing circuit during mechanical ventilation. DURABLE EQUIPMENT: Oxygen Regulators; Used to regulate oxygen flow from cylinders, stabilize Cylinder Carts, Trucks and Stands; Portable or transport oxygen or other gas cylinders, and provide Oxygen Units a portable oxygen supply for emergency use.
SALES, MARKETING AND DISTRIBUTION While substantially all 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. The Company's five largest alternate site accounts are Apria Healthcare Group Inc., Gulf South Medical Supply, Inc., Moore Medical Corp., Redline Healthcare Corp. and VGM & Associates. Internationally, the Company sells its products to distributors that market to hospitals and other health care providers. The Company's sales personnel currently call on approximately 2,800 health care providers, 50 hospital distributors and 700 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. 43 In the current 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 12 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. These arrangements set forth pricing and terms for various levels of purchasing, although 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 two of its major GPOs, VHA, Inc. and Columbia/HCA Healthcare Corporation. The Company's most significant GPO relationships are with AmeriNet Inc., Columbia/HCA Healthcare Corporation, Health Services Corporation of America, MedEcon Medical Services, Purchase Connection Limited, University HealthSystem Consortium and VHA, Inc. 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 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 offers heaters to domestic customers on a "no-charge" lease basis. The Company has heaters with a net book value of approximately $1.4 million placed at service provider locations under this program. The Company utilizes a network of over 1,800 hospital distributors, as well as additional alternate site distributors, 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, and is seeking similar status with other national vendors. Owens & Minor is the Company's largest distributor, accounting for approximately $30.0 million or approximately 30% of total 1997 net sales, and approximately $7.0 million or approximately 29% of sales in the first quarter of 1998. 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 their 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 offers select large health care providers a reward for purchasing a broader selection of the Company's product lines. The program allows a rebate in the form of merchandise credit for purchasing minimum volumes from a selected group of products. The Company's international distributors place their orders directly with dedicated international customer service representatives based in Temecula. Customer orders are shipped from one of two warehouse locations. Sales strategies and marketing plans are tailored to each market with involvement of the distributor. Region and territory sales managers are responsible for supporting, training and launching of products into their regions. The Company utilizes a network of 100 international distributors, typically on an exclusive basis within each market. MANUFACTURING AND ASSEMBLY The Company operates two manufacturing facilities and two distribution facilities in the United States and an assembly facility in Ensenada, Mexico. While the Company believes that it is operating at a high utilization rate for optimal efficiency, existing facilities could support increased capacity with additional machinery and workers. The Company's manufacturing facility in Temecula, California houses 59 injection molding machines, 55 of which are automated. During the past four years, 28 out of the 59 machines have been replaced, which has increased capacity, as the new machines are more efficient. Tubing is produced on 8 extrusion lines: 4 corrugated, 3 oxygen or "spaghetti", and 1 repellitizer/regrinder. The Temecula facility uses 10-12 million pounds of over 30 different kinds of resin annually; the most prominent are PVC, polyethylene and polypropylene. Sterile prefilled 44 humidification and nebulization products and electronics are manufactured using 7 blow/fill/seal machines in the Company's facility in Arlington Heights, Illinois. The Company's facility located in Ensenada, Mexico is primarily used for the assembly of certain products molded 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 occasionally outsources production of certain products while it establishes its ability to penetrate a target market. Having achieved an acceptable level of penetration, the Company internalizes the manufacturing function in order to increase margins and improve quality control. The Company monitors the quality of its products at the Temecula, Arlington Heights and Ensenada 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 has 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 and Ensenada. The Arlington Heights products are manufactured in a sterile environment and are certified sterile as a result of the production process. The Ensenada and Arlington Heights facilities are certified as ISO 9002 compliant and the Temecula facility is certified as ISO 9001 compliant. 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 1997 were Tubing Grade PVC, Clear PVC, LDPE-EVA, Polypropylene, Aluminum Cylinder, Pre-Cut Elastic, Non-Tubing Grade PVC, Cannula Blanks, Acrylic Resin and Hose-End Grade PVC. The Company believes that it is able to purchase materials at a cost no higher than its competitors. The Company does not have long-term supply contracts for any of its purchased raw materials. 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 15 people, including nine engineers. The Company's research and development 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. The Company has invested heavily in the anesthesia product line, as the Company continues to penetrate this market. The Company makes several new product introductions every year. Significant products introduced in the last five years have been the line of heat-moisture exchangers, POCKETPEAK peak flow meter, SOFTECH endotracheal tubes, MICRO MIST small volume nebulizer and CONCHA IV heated humidification system. The Company constantly works to reduce costs through improved continued process improvements. Over the past several years, approximately 50% of total R&D expenses have been to improve operational efficiency. COMPETITION The medical supply industry is characterized by intense competition. The Company's primary competitor in the respiratory care sector is Allegiance Corporation and its primary competitors in the anesthesia sector include Allegiance Corporation, The Kendall Company, Smiths Industries Medical Systems, Inc. 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 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 45 intellectual property rights. However, the Company does file patent applications on concepts and processes developed by the Company's personnel. The Company has 18 patents in the U.S. and two patents pending. Many of the U.S. patents have corresponding patents issued in Canada, Europe and various Asian countries. The Company is currently preparing several patent applications covering intellectual property associated with the closed suction catheter product and advanced humidification devices. 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. 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 FDC 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 FDC 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 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 the FDA's GMP/QSR Regulations, 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 local, 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 the sterilizer 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, which it has not done to date. 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 46 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. See "Risk Factors--Government Regulation." LEGAL PROCEEDINGS 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. PROPERTIES The Company owns approximately 30 acres of land in Temecula, California on which its headquarters, one of two principal manufacturing centers and three other buildings totalling 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 2000. Prefilled sterile solutions and electronics are manufactured in Arlington Heights. The Company also leases a 73,000 square foot distribution warehouse in Elk Grove, Illinois under a lease that expires in 2000. The Company believes that its current facilities are adequate for its present level of operations. Management expects that the Arlington Heights and Elk Grove leases will be renewed on favorable terms. EMPLOYEES As of March 27, 1998, the Company employed 1,180 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. 47 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following individuals are the executive officers and directors of Holding and Hudson RCI:
NAME AGE POSITION - ---------------------- --- ------------------------------------------------ Richard W. Johansen... 46 President, Chief Executive Officer and Director Lougene Williams...... 53 Senior Vice President Jay R. Ogram.......... 42 Chief Financial Officer Brian W. Morgan....... 58 Vice President, Human Resources Helen Hudson Lovaas... 59 Director Jon D. Ralph.......... 33 Director Charles P. Rullman.... 49 Director Ronald P. Spogli...... 50 Director
Richard W. Johansen is President, Chief Executive Officer and Director of the Company and assumed the same positions with Holding after consummation of the Recapitalization. Mr. Johansen became President of the Company in 1993 and assumed the additional responsibilities of Chief Executive Officer in May 1997. From 1989 to 1993, he served as Vice President, Marketing and Sales for the Company following the 1989 acquisition of Respiratory Care Inc. by Hudson RCI. He held the same position with Respiratory Care Inc. as well as prior executive positions in the area of business development with its parent company, The Kendall Company. 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. Jay R. Ogram is the Company's Chief Financial Officer, having served in this capacity since 1996, and assumed the same position with Holding after consummation of the Recapitalization. From 1984 until his assumption of Chief Financial Officer responsibilities, Mr. Ogram held prior positions as Accounting Manager and Vice President and Controller of the Company. Prior to joining the Company, he had held executive positions in financial management with a major health care company. Brian W. Morgan is Vice President, Human Resources, having held this position since 1989, and assumed the same position with Holding after consummation of the Recapitalization. Mr. Morgan held similar positions in human resources at Respiratory Care Inc. since 1978. Helen Hudson Lovaas is a director of the Company and became a director of Holding after consummation of the Recapitalization. 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. Jon D. Ralph became a director of Hudson RCI and of Holding in connection with the Recapitalization. Mr. Ralph joined FS&Co. in 1989 and became a Principal in January 1998. Prior to joining FS&Co., 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 EnviroSource, Inc. and The Pantry, Inc. Charles P. Rullman became a director of Hudson RCI and of Holding in connection with the Recapitalization. Mr. Rullman joined FS&Co. 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. 48 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 Hudson RCI and of Holding in connection with the Recapitalization. He is a founding Principal of FS&Co., which was founded in 1983. Mr. Spogli is the Chairman of the Board and a director of EnviroSource, Inc. Mr. Spogli also serves on the Boards of Directors of Calmar Inc., Buttrey Food and Drug Stores Company, AFC Enterprises, Inc. and Brylane Inc. Directors of Hudson RCI and of Holding are elected annually and hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified. EXECUTIVE COMPENSATION The following table sets forth the compensation earned by the Company's Chairman and Chief Executive Officer and the four most highly compensated executive officers who earned salary and bonus in excess of $100,000 for services rendered in all capacities to the Company and its subsidiaries for the fiscal year ended December 26, 1997 (collectively, with the exception of Helen Hudson Lovaas, who resigned in connection with the Recapitalization, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION -------------------------------------- FISCAL NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2) - ------------------------------------------- -------- --------- --------- ---------------- ----------------- Helen Hudson Lovaas........................ 1997 $286,353 $ 88,601 -- $9,000 Chairman and Chief Executive Officer(3) Richard W. Johansen........................ 1997 $256,535 $141,101 -- $9,000 President and Chief Executive Officer Lougene Williams........................... 1997 $180,005 $ 70,475 -- $9,000 Senior Vice President Jay R. Ogram............................... 1997 $140,520 $ 48,357 -- $8,394 Chief Financial Officer Brian W. Morgan............................ 1997 $127,368 $ 42,984 -- $7,477 Vice President, Human Resources
_____________________ (1) Does not reflect an aggregate amount of approximately $2.7 million earned by the Named Executive Officers, during 1997 under the Equity Participation Plan. Participants in the Equity Participation Plan, including the Named Executive Officers, received an aggregate of $88.3 million (including the $2.7 million earned in 1997) under the Equity Participation Plan. See "Certain Transactions." During 1997, no executive officer named above received perquisites and other personal benefits, securities 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) Resigned as Chief Executive Officer in May 1997. EXECUTIVE EMPLOYMENT AGREEMENTS On April 7, 1998, the Company entered into employment agreements with each of the Named Executive Officers. 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 49 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 two management bonus plans for its executives, one for senior management and one for executive management. The plan for senior management is based on a combination of the financial goals of the Company and goals set for individual employees. The plan has minimum goals of 70% attainment for operating income before EPP and 75% attainment of the individual plan. The payout is based 70% on attainment of Company financial performance and 30% attainment of individual performance goals. The plan for executive management is based on the financial goals of the Company. The payout to an individual is based on his or her bonus level and the percentage attainment of the operating income before EPP goal for the Company. In order to participate, 70% of operating income before EPP must be achieved. 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. In addition, employees may contribute to a 401(k) plan that has no matching contributions by the Company. Employees must have six months of service to be eligible to participate in the 401(k) plan and may contribute up to 10% of their annual compensation, or 6% if the employee is a highly compensated participant. EQUITY PARTICIPATION PLAN The Company's Equity Participation Plan, which was terminated upon consummation of the Recapitalization, provided for an aggregate of $88.3 million to be paid to participants under the Equity Participation Plan at the consummation of the Recapitalization. See "Certain Transactions." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Board of Directors of the Company determines the compensation of the executive officers. During fiscal 1997, Mrs. Lovaas determined the compensation of the Company's Chief Executive Officer and Mrs. Lovaas and Mr. Johansen participated in deliberations regarding the compensation of the Company's other executive officers. STOCK OPTION PLAN The Board of Directors of the Company plans to adopt a stock option plan (the "Option Plan") permitting grants of up to 15% of Hudson RCI's common stock. The Option Plan and each outstanding option thereunder will be subject to termination in the event of a change in control of Hudson RCI or Holding, as more particularly described in the Option Plan. In addition, all options granted pursuant to the Option Plan will terminate 45 days 50 after termination of employment (unless termination was for cause, in which event an option will terminate immediately) or 180 days in the event of termination due to death or disability. Shares received upon exercise of options will be subject to both a right of first refusal and a repurchase right at stated prices in favor of Hudson RCI and will also be subject to obligations to sell at the request of FS&Co. and co-sale rights in favor of the optionee. A portion of the options granted pursuant to the Option Plan ("Time Vesting Options") will vest over a five-year period in equal annual installments or, alternatively, will vest in full upon a sale of Hudson RCI or Holding. Time Vesting Options will terminate on the eight-year anniversary of the closing of the Recapitalization. A portion of the options granted pursuant to the Option Plan ("Company Performance Options") will be earned in installments based upon satisfaction of annual performance targets over a five-year period. In the event Hudson RCI or Holding is sold prior to the fifth year following the grant of Company Performance Options, such options will accelerate proportionately based on achievement of annual performance targets through the year ended prior to the sale. In addition, upon a sale of Hudson RCI or Holding, if 90% of the annual performance targets for all years ended prior to the sale have been achieved, 50% of the options subject to installments for years ended prior to the sale will be deemed earned (inclusive of installments previously earned). Finally, to the extent FS&Co. achieves a specific internal rate of return on its investment in Holding for a sale, Company Performance Options will also be earned under certain circumstances. In addition, a portion of the options granted pursuant to the Option Plan will be earned upon the realization by FS&Co. of a specific internal rate of return on its investment in Holding. STOCK SUBSCRIPTION PLANS In connection with the Recapitalization, 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 Purchase Plans provide for a repurchase option in favor of Holding upon termination of employment at stated repurchase prices. In addition, the Stock Purchase 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 FS&Co. and co- sale rights if FS&Co. sells its shares to a third party. The following table sets forth, for the Named Executive Officers, the number of shares purchased pursuant to the Stock Purchase Plans:
NAME NUMBER OF SHARES - ----------------------------------- ------------------ Richard W. Johansen................ 300,000(1) Lougene Williams................... 100,000 Jay R. Ogram....................... 100,000 Brian W. Morgan.................... 15,000
___________________ (1) Represents shares held of record by the Johansen Family Trust U/D/T dated 8/16/91, of which Mr. Johansen and his wife, Barbara L. Johansen, are the trustees. 51 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth certain information, as of May 31, 1998, 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. The following table should be read in conjunction with the security ownership table for Hudson RCI.
SHARES OF SHARES OF COMMON PERCENT PREFERRED PERCENT NAME OF BENEFICIAL OWNER STOCK OF CLASS STOCK OF CLASS - ------------------------------------------------------------------- ---------- -------- ----------- ----------- River Holding Corp.(1)............................................. 6,300,000 80.8% 300,000 100% Helen Hudson Lovaas(2)............................................. 1,500,000 19.2% -- Richard W. Johansen(3)............................................. -- -- Lougene Williams(3)................................................ -- -- Jay R. Ogram(3).................................................... -- -- Brian W. Morgan(3)................................................. -- -- Jon D. Ralph(4).................................................... -- -- Charles P. Rullman(4).............................................. -- -- Ronald P. Spogli(4)................................................ -- -- All Named Executive Officers and directors of the Company as a group.......................................................... -- --
- ------------------- (1) As holder of 87.3% of the common stock of Holding, FS&Co. will have the power to vote and dispose of the shares held by Holding. See "--River Holding Corp." (2) Represents shares held of record by the Helen Lovaas Separate Property Trust U/D/T dated 7/17/97 (the "Trust"). As sole trustee of the Trust, Mrs. Lovaas has the sole power to vote and dispose of the shares owned by the Trust. The address of the Trust is c/o Hudson Respiratory Care Inc., 27711 Diaz Road, P.O. Box 9020, Temecula, California 92589. (3) The business address of these individuals is Hudson Respiratory Care Inc., 27711 Diaz Road, P.O. Box 9020, Temecula, California 92589. (4) The business address of these individuals is Freeman Spogli & Co. Incorporated, 11100 Santa Monica Boulevard, Suite 1900, Los Angeles, California 90025. CERTAIN TRANSACTIONS SHAREHOLDERS' AGREEMENT Upon the closing of the Recapitalization Agreement, the Continuing Shareholder and Holding entered into a Shareholders' Agreement (the "Shareholders' Agreement"). Under the Shareholders' Agreement, Holding and the Continuing Shareholder have the right to purchase their pro rata share of certain new issuances of capital stock by Hudson RCI. In addition, the Shareholders' Agreement provides that upon certain issuances of common stock of Holding to employees of the Company, and contribution of the consideration received for such issuance to Hudson RCI, an equivalent number of shares of Hudson RCI's common stock will be issued to Holding. The Shareholders' Agreement provides for restrictions on the transferability of the shares held by the Continuing Shareholder for a period of two years following the consummation of the Recapitalization, and provides for a right of first offer on the Continuing Shareholder's common stock. In addition, the agreement provides that upon sales by Holding of common stock of Hudson RCI or by FS&Co. of common stock of Holding, the Continuing Shareholder is obligated to sell all its shares of common stock at the request of Holding and the Continuing Shareholder has the right to participate in such sale on a pro rata basis. If Hudson RCI engages in an initial public offering with respect to its common stock, the Shareholders' Agreement provides that Holding will exchange all of the common stock of Hudson RCI it holds for newly issued common stock of Hudson RCI and the Mirror Preferred 52 Stock (as defined below) will be exchanged, at Holding's option, into Company Preferred Stock or Company Exchange Debentures, which in turn will be exchanged for Exchange Preferred Stock. Holding will then liquidate and distribute Hudson RCI's common stock to its common holders. Hudson RCI will grant unlimited piggyback registration rights (after an initial public offering) to FS&Co. and the Continuing Shareholder and, commencing six (6) months after the initial public offering, three (3) demand registrations to FS&Co., and one demand registration to the Continuing Shareholder. The Shareholders' Agreement provides that the parties thereto will vote their shares to elect Helen Hudson Lovaas to the Board of Directors. PAYMENTS RELATING TO THE RECAPITALIZATION In connection with the Recapitalization, two trusts of which Mrs. Lovaas is the sole trustee received payments of an aggregate of $131.1 million. Such trusts will also receive payments in an aggregate of approximately $3.3 million if the Company achieves certain operating performance targets for fiscal 1998. In addition, FS&Co. received a transaction fee of $4.0 million. Under the Equity Participation Plan, upon consummation of the Recapitalization, certain employees of the Company received an aggregate of $88.3 million, a substantial portion of which was received by the Named Executive Officers. Senior management, including the Named Executive Officers, will receive an additional $2.4 million if the Company achieves certain operating performance targets for fiscal 1998. For purposes of compliance with the Indenture, the payment of such $2.4 million by the Company will not reduce Hudson RCI's Consolidated Net Income or EBITDA. 53 DESCRIPTION OF NEW CREDIT FACILITY On April 7, 1998, Hudson RCI entered into the New Credit Facility, for which Salomon Brothers Inc is arranger and syndication agent and Bankers Trust Company is administrative agent. Pursuant to the New Credit Facility, a syndicate of lenders ("Lenders") lent to Hudson RCI up to $100.0 million in the form of senior secured credit facilities, consisting of a $40.0 million term loan facility (the "Term Loan Facility") and a $60.0 million revolving credit facility (the "Revolving Credit Facility"). The Revolving Credit Facility has a letter of credit sublimit of $7.5 million. Use of Proceeds; Maturity. The entire Term Loan Facility was drawn in connection with the Recapitalization. The balance of the New Credit Facility will be made available to Hudson RCI and its subsidiaries (i) for working capital and general corporate purposes of Hudson RCI, (ii) for acquisitions, and (iii) for issuing commercial and standby letters of credit. The New Credit Facility will mature on the sixth anniversary of closing of the Recapitalization. Prepayment; Reduction of Commitments. The Term Loan Facility amortizes in quarterly installments through final maturity. In addition, borrowings under the New Credit Facility are required to be prepaid, subject to certain exceptions, with (i) 75% (or 50% for years when Hudson RCI's ratio of Debt to EBITDA (as defined) is less than 5:1) of Excess Cash Flow (as defined), (ii) 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), (iii) 100% of the net proceeds of certain issuances of debt obligations of Hudson RCI and its subsidiaries and (iv) 100% of the net proceeds from insurance recoveries and condemnations. The Revolving Credit Facility must be prepaid upon payment in full of the Term Loan Facility. Voluntary prepayments are permitted in whole or in part, at the option of Hudson RCI, in minimum principal amounts to be agreed upon, without premium or penalty, subject to reimbursement of the Lenders' redeployment costs in the case of prepayment of eurodollar borrowings other than on the last day of the relevant interest period. Interest. The interest rate under the New Credit Facility is based, at the option of Hudson RCI, upon either a eurodollar rate plus 2.25% per annum or a base rate plus 1.25% per annum. If Hudson RCI achieves performance goals to be agreed upon, the margins will be reduced in increments to be agreed upon. A commitment fee of 0.50% per annum will be charged on the unused portion of the New Credit Facility. Collateral and Guarantees. The New Credit Facility is guaranteed by Holding and all existing and subsequently acquired or organized domestic and, to the extent no adverse tax consequences would result, foreign, subsidiaries of Hudson RCI. The New Credit Facility is secured by a first priority lien in substantially all of the properties and assets of Hudson RCI and the Guarantors now owned or acquired later, including a pledge of all of the capital stock of Hudson RCI owned by Holding and all of the shares held by Hudson RCI of Hudson RCI's 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 Hudson RCI. Covenants. The New Credit Facility contains covenants restricting the ability of Holding, Hudson RCI and Hudson RCI'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, (viii) engage in transactions with affiliates. Hudson RCI is also required to comply with financial covenants with respect to (a) a maximum leverage ratio, (b) a minimum fixed charge coverage ratio, (c) a minimum interest coverage ratio and (d) a minimum EBITDA. Events of Default. Events of default under the New Credit Facility include but are not limited to (i) the Company's failure to pay principal when due or interest after a grace period, (ii) the Company's material breach of any covenant, representation or warranty contained in the loan documents, (iii) customary cross-default provisions, (iv) events of bankruptcy, insolvency or dissolution of the Company or its subsidiaries, (v) the levy of certain judgments against the Company, its subsidiaries, or their assets, (vi) the actual or asserted invalidity of security documents or guarantees of the Company or its subsidiaries, and (vii) a change of control of the Company. 54 The preceding discussion of certain of the provisions of the New Credit Facility is not intended to be exhaustive and is qualified in its entirety by reference to the provisions of the New Credit Facility. Copies of the New Credit Facility are available upon request from the Company. 55 DESCRIPTION OF THE EXCHANGE NOTES The Notes were, and the Exchange Notes will be, issued under an Indenture, dated as of April 7, 1998 (the "Indenture") by and among Hudson RCI, Holding and United States Trust Company of New York, as trustee (the "Trustee"), a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. Upon the effectiveness of this Registration Statement filed under the Securities Act with respect to the Exchange Notes, the Indenture will be subject to and governed by the Trust Indenture Act of 1939, as amended (the "TIA"). The terms of the Exchange Notes include those stated in the Indenture and those made part of the Indenture by reference to the TIA as in effect on the date of the Indenture. The Exchange Notes are subject to all such terms, and holders of the Exchange Notes are referred to the Indenture and the TIA for a statement of them. The following is a summary of the material terms and provisions of the Exchange Notes. This summary does not purport to be a complete description of the Exchange Notes and is subject to the detailed provisions of, and qualified in its entirety by reference to, the Exchange Notes and the Indenture (including the definitions contained therein). A copy of the form of Indenture may be obtained from the Company by any holder or prospective investor upon request. Definitions relating to certain capitalized terms are set forth under "-- Certain Definitions". Capitalized terms that are used but not otherwise defined herein have the meanings ascribed to them in the Indenture and such definitions are incorporated herein by reference. For purposes of this Section, references to the "Company" shall mean Hudson Respiratory Care Inc. excluding its subsidiaries. Capitalized terms used in this Section and not otherwise defined below have the respective meanings assigned to them in the Indenture. GENERAL The Exchange Notes will mature on April 15, 2008, and will be limited to an aggregate principal amount of $115.0 million. The Exchange Notes will bear interest at the rate set forth on the cover page from the date of issuance, or from the most recent date to which interest has been paid, payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 1998, to the Persons who are registered holders of the Exchange Notes at the close of business on the preceding April 1 or October 1, as the case may be. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal of, and premium, if any, and interest on, the Exchange Notes will be payable in immediately available funds, and the Exchange Notes will be exchangeable and transferable, at an office or agency of the Company, one of which will be maintained for such purpose in The City of New York (which initially will be the corporate trust office of the Trustee); provided, however, that payment of interest may be made at the option of the Company by check mailed to the Person entitled thereto as shown on the Security Register. The Exchange Notes will be issued only in fully registered form without coupons, in denominations of $1,000 or any integral multiple thereof. No service charge will be made for any registration of transfer or exchange of Exchange Notes, except for any tax or other governmental charge that may be imposed in connection therewith. If (a) on or prior to the 150th day following the date of original issuance of the Notes, neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been declared effective, (b) on or prior to the 180th day following the date of original issuance of the Notes, neither the Registered Exchange Offer has been consummated nor the Shelf Registration Statement has been declared effective, or (c) after either the Exchange Offer Registration Statement or the Shelf Registration Statement has been declared effective, such Registration Statement thereafter ceases to be effective or usable (subject to certain exceptions) in connection with resales of Notes or Exchange Notes in accordance with and during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (a) through (c), a "Registration Default"), interest ("Special Interest") will accrue on the principal amount of the Notes and the Exchange Notes (in addition to the stated interest on the Notes and the Exchange Notes) from and including the date on which any such Registration Default shall occur to but excluding the date on which all Registration Defaults have been cured. Special Interest will accrue at a rate of 0.25% per annum during the 90-day period immediately following the occurrence of such Registration Default and shall increase by 0.25% per annum at the end of each subsequent 90-day period, but in no event shall such rate exceed 1.00% per annum. 56 SUBORDINATION The Exchange Notes will be senior subordinated, unsecured obligations of the Company. The payment of the principal of, and premium, if any, and interest on, the Exchange Notes will be subordinated in right of payment to the payment when due of all Senior Debt of the Company. The Exchange Notes will rank pari passu in right of payment with any future Senior Subordinated Debt and senior to any future Subordinated Obligations of the Company. The Subsidiary Guaranty of any Subsidiary Guarantor will rank subordinate in right of payment to all Senior Indebtedness of such Subsidiary Guarantor, pari passu with any Senior Subordinated Debt of such Subsidiary Guarantor and senior to any Subordinated Obligations of such Subsidiary Guarantor. The Exchange Notes and the Subsidiary Guaranties also will be effectively subordinated to any secured debt of the Company and the Subsidiary Guarantors, as the case may be to the extent of the value of the assets securing such debt. As of March 27, 1998, after giving effect to the Recapitalization, the Company would have had $40.0 million of Senior Debt, all of which would have represented secured Debt under the New Credit Facility. The Company would also have had $60.0 million of undrawn commitments available under the New Credit Facility, which if drawn upon will constitute Senior Debt. The Company would not have had any outstanding Pari Passu Debt or Subordinated Obligations. The Exchange Notes will be effectively subordinated to creditors (including trade creditors) and preferred stockholders, if any, of Subsidiaries of the Company that are not Subsidiary Guarantors. Since a portion of the operations of the Company are conducted through Subsidiaries, the Company's ability to service its debt, including the Exchange Notes, is partially dependent upon the earnings of any such Subsidiaries and the distribution of those earnings to, or upon loans or other payments of funds by those Subsidiaries to, the Company. The payment of dividends and the making of loans and advances to the Company by such Subsidiaries are subject to statutory restrictions. Under certain circumstances, any Subsidiary Guaranties could be effectively subordinated to all the obligations of the Subsidiary Guarantors in which event restrictions of the type described above on the ability of such Subsidiary Guarantors (in addition to the Company's other Subsidiaries) to distribute funds to the Company could further adversely effect the Company's ability to service its debt. As of March 27, 1998, after giving effect to the Recapitalization, Industrias Hudson, the Company's principal Subsidiary, would have had total balance sheet liabilities of $0.1 million. The Company may not pay principal of, or premium, if any, or interest on, the Exchange Notes, or make any deposit pursuant to the provisions described under "--Defeasance", and may not repurchase, redeem or otherwise retire any Exchange Notes (collectively, "pay the Exchange Notes"), if (a) any principal, premium or interest in respect of any Senior Debt is not paid within any applicable grace period (including at maturity) or (b) any other default on Senior Debt occurs and the maturity of such Senior Debt is accelerated in accordance with its terms unless, in either case, (i) the default has been cured or waived and any such acceleration has been rescinded or (ii) such Senior Debt has been paid in full in cash; provided, however, that the Company may pay the Exchange Notes without regard to the foregoing if the Company and the Trustee receive written notice approving such payment from the Representative of each issue of Designated Senior Debt. During the continuance of any default (other than a default described in clause (a) or (b) of the preceding sentence) with respect to any Designated Senior Debt pursuant to which the maturity thereof may be accelerated immediately without further notice (except notice required to effect the acceleration) or the expiration of any applicable grace period, the Company may not pay the Exchange Notes for a period (a "Payment Blockage Period") commencing upon the receipt by the Company and the Trustee of written notice of such default from the Representative of the holders of such Designated Senior Debt specifying an election to effect a Payment Blockage Period (a "Payment Blockage Notice") and ending 179 days thereafter (unless such Payment Blockage Period is earlier terminated (a) by written notice to the Trustee and the Company from the Representative which gave such Payment Blockage Notice, (b) because such default is no longer continuing or (c) because such Designated Senior Debt has been repaid in full in cash). Unless the holders of such Designated Senior Debt or the Representative of such holders have accelerated the maturity of such Designated Senior Debt and not rescinded such acceleration, the Company may (unless otherwise prohibited as described in the first sentence of this paragraph) resume payments on the Exchange Notes after the end of such Payment Blockage Period. Not more than one Payment Blockage Notice with respect to all issues of Designated Senior Debt may be given in any consecutive 360-day period, irrespective of the number of defaults with respect to one or more issues of Designated Senior Debt during such period. 57 Upon any payment or distribution of the assets of the Company upon a total or partial liquidation, dissolution or winding up of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its Property, the holders of Senior Debt will be entitled to receive payment in full in cash before the holders of the Exchange Notes are entitled to receive any payment of principal of or interest on the Exchange Notes, except that holders of Exchange Notes may receive and retain shares of stock and any debt securities that are subordinated to Senior Debt to at least the same extent as the Exchange Notes. Until the Senior Debt is paid in full in cash, any distribution to which holders of the Exchange Notes would be entitled but for the subordination provisions of the Indenture will be made to holders of the Senior Debt. If a payment or distribution is made to holders of Exchange Notes that, due to the subordination provisions, should not have been made to them, such holders are required to hold it in trust for the holders of Senior Debt and pay it over to them as their interests may appear. If payment of the Exchange Notes is accelerated when any Designated Senior Debt is outstanding, the Company may not pay the Exchange Notes until three business days after the Representatives of all issues of Designated Senior Debt receive notice of such acceleration and, thereafter, may pay the Exchange Notes only if the Indenture otherwise permits payment at that time. The Subsidiary Guaranty of each Subsidiary Guarantor will be subordinated to Senior Debt of the applicable Subsidiary Guarantor to the same extent and in the same manner as the Exchange Notes are subordinated to Senior Debt of the Company. By reason of the subordination provisions contained in the Indenture, in the event of bankruptcy or similar proceedings relating to the Company or a Subsidiary Guarantor, holders of Senior Debt and other creditors (including trade creditors) of the Company or such Subsidiary Guarantor may recover more ratably, even if the Exchange Notes or the applicable Subsidiary Guaranty are pari passu with their claims, than the holders of the Exchange Notes. In such event, there may be insufficient assets or no assets remaining to pay the principal of or interest on the Exchange Notes. Payment from the money or the proceeds of U.S. Government Obligations held in any defeasance trust pursuant to the provisions described under "-- Defeasance" will not be subject to the subordination provisions described above. See "Risk Factors--Subordination of Notes, Exchange Notes and Subsidiary Guaranties," "--Fraudulent Conveyance and Distribution Limitation Considerations," "--Substantial Leverage; Shareholders' Deficit" and "Description of New Credit Facility." SUBSIDIARY GUARANTIES The obligations of the Company under the Indenture, including the repurchase obligation resulting from a Change of Control, will be fully and unconditionally guaranteed, jointly and severally, on a senior subordinated, unsecured basis by each Restricted Subsidiary of the Company which Guarantees the Company's obligations under the New Credit Facility in the future. Upon the sale or other disposition of a Subsidiary Guarantor or the sale or disposition of all or substantially all the assets of a Subsidiary Guarantor (in each case other than to the Company or an Affiliate of the Company) permitted by the Indenture, such Subsidiary Guarantor will be released from all its obligations under its Subsidiary Guaranty. See "--Certain Covenants--Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries". Any Subsidiary Guarantor that is designated an Unrestricted Subsidiary in accordance with the Indenture will be released from all its obligations under its Subsidiary Guaranty. Each of the Company and, when they exist, the Subsidiary Guarantors has agreed to contribute to any other Subsidiary Guarantor which makes payments pursuant to its Subsidiary Guaranty an amount equal to the Company's or such Subsidiary Guarantor's proportionate share of such payment, based on the net worth of the Company or such Subsidiary Guarantor relative to the aggregate net worth of the Company and the Subsidiary Guarantors. 58 REDEMPTION The Exchange Notes will not be redeemable at the option of the Company prior to April 15, 2003. Thereafter, the Exchange Notes will be redeemable at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' prior notice, at the following redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest (if any) to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on April 15 of the years set forth below:
REDEMPTION YEAR PRICE ------------------- ------------- 2003 104.563% 2004 103.042% 2005 101.521% 2006 and thereafter 100.000%
Any notice to holders of such a redemption need not set forth the redemption price of such Exchange Notes but need only set forth the calculation thereof as described in the immediately preceding paragraph. The redemption price, calculated as aforesaid, shall be set forth in an Officers' Certificate delivered to the Trustee no later than two business days prior to the redemption date. At any time and from time to time, prior to April 15, 2001, the Company may redeem up to a maximum of 35% of the original aggregate principal amount of the Exchange Notes with the proceeds of one or more Public Equity Offerings, at a redemption price equal to 109 1/8% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that after giving effect to any such redemption, at least 65% of the original aggregate principal amount of the Exchange Notes remains outstanding. Any such redemption shall be made within 60 days of such Public Equity Offering upon not less than 30 nor more than 60 days' notice. SINKING FUND There will be no mandatory sinking fund payments for the Exchange Notes. REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL Upon the occurrence of a Change of Control, each holder of Exchange Notes shall have the right to require the Company to repurchase all or any part of such holder's Exchange Notes pursuant to the offer described below (the "Change of Control Offer") at a purchase price (the "Change of Control Purchase Price") equal to 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the purchase date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). Within 30 days following any Change of Control, the Company shall (a) cause a notice of the Change of Control Offer to be sent at least once to the Dow Jones News Service or similar business news service in the United States and (b) send, by first-class mail, with a copy to the Trustee, to each holder of Exchange Notes, at such holder's address appearing in the Security Register, a notice stating: (i) that a Change of Control has occurred and a Change of Control Offer is being made pursuant to the covenant entitled "Repurchase at the Option of Holders Upon a Change of Control" and that all Exchange Notes timely tendered will be accepted for payment; (ii) the 59 Change of Control Purchase Price and the purchase date, which shall be, subject to any contrary requirements of applicable law, a business day no earlier than 30 days nor later than 60 days from the date such notice is mailed; (iii) the circumstances and relevant facts regarding the Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to the Change of Control); and (iv) the procedures that holders of Exchange Notes must follow in order to tender their Exchange Notes (or portions thereof) for payment, and the procedures that holders of Exchange Notes must follow in order to withdraw an election to tender Exchange Notes (or portions thereof) for payment. The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Exchange Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the covenant described hereunder, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the covenant described hereunder by virtue of such compliance. The Change of Control repurchase feature is a result of negotiations between the Company and the Initial Purchasers. Management has no present intention to engage in a transaction involving a Change of Control, although it is possible that the Company would decide to do so in the future. Subject to certain covenants described below, the Company could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the Indenture, but that could increase the amount of debt outstanding at such time or otherwise affect the Company's capital structure or credit ratings. The definition of Change of Control includes a phrase relating to the sale, transfer, assignment, lease, conveyance or other disposition of "all or substantially all" the Company's assets. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of Exchange Notes to require the Company to repurchase such Exchange Notes as a result of a sale, transfer, assignment, lease, conveyance or other disposition of less than all the assets of the Company may be uncertain. The New Credit Facility prohibits the Company from purchasing any Exchange Notes, and also provides that the occurrence of certain of the events that would constitute a Change of Control would constitute a default under such existing debt. Other future debt of the Company may contain prohibitions of certain events which would constitute a Change of Control or require such debt to be repurchased upon a Change of Control. Moreover, the exercise by holders of Exchange Notes of their right to require the Company to repurchase such Exchange Notes could cause a default under existing or future debt of the Company, even if the Change of Control itself does not, due to the financial effect of such repurchase on the Company. Finally, the Company's ability to pay cash to holders of Exchange Notes upon a repurchase may be limited by the Company's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases. The Company's failure to purchase Exchange Notes in connection with a Change of Control would result in a default under the Indenture which would, in turn, constitute a default under existing (and may constitute a default under future) debt of the Company. If such debt constitutes Designated Senior Debt, the subordination provisions in the Indenture would likely restrict payment to holders of Exchange Notes. The provisions under the Indenture relative to the Company's obligation to make an offer to repurchase the Exchange Notes as a result of a Change of Control may be waived or modified (at any time prior to the occurrence of such Change of Control) with the written consent of the holders of a majority in principal amount of the Exchange Notes. CERTAIN COVENANTS Limitation on Company and Subsidiary Guarantor Debt. The Company shall not, and shall not permit any Subsidiary Guarantor to, Incur, directly or indirectly, any Debt unless, after giving pro forma effect to the application of the proceeds thereof, no Default or Event of Default would occur as a consequence of such Incurrence or be continuing following such Incurrence and either (a) after giving effect to the Incurrence of such Debt and the application of the proceeds thereof, the Consolidated Interest Coverage Ratio would be greater than 1.75 to 1.00 60 if such Debt is Incurred from the Issue Date through April 15, 2000, and 2.00 to 1.00 if such Debt is Incurred thereafter or (b) such Debt is Permitted Debt. The term "Permitted Debt" is defined to include the following: (a) Debt evidenced by the Exchange Notes and of Subsidiary Guarantors evidenced by Subsidiary Guaranties; (b) (i) Debt under the Credit Facility; provided that the aggregate principal amount of all such Debt under the Credit Facility comprised of (A) term loans at any one time outstanding shall not exceed $40.0 million minus all principal amounts repaid in respect of such term loans and (B) revolving credit loans or obligations at any one time outstanding shall not exceed the greater of (x) $60.0 million, which amount shall be permanently reduced by the amount of Net Available Cash used to repay Debt under the Credit Facility, and not subsequently reinvested in Additional Assets or used to purchase Exchange Notes, pursuant to the covenant described under "--Limitation on Asset Sales" and (y) the sum of the amounts equal to (1) 60% of the net book value of the inventory of the Company and the Restricted Subsidiaries and (2) 85% of the net book value of the accounts receivable of the Company and the Restricted Subsidiaries, in each case as of the most recent fiscal quarter ending at least 45 days prior to the date of determination and (ii) subject to the proviso contained in clause (iii) of the covenant described under "--Limitation on Non-Guarantor Subsidiary Debt," "--Guarantees of Debt under the Credit Facility"; (c) Debt in respect of Capital Lease Obligations and Purchase Money Debt; provided that (i) the aggregate principal amount of such Debt does not exceed the Fair Market Value (on the date of the Incurrence thereof) of the Property acquired, constructed or leased (including costs of installation, taxes and delivery charges with respect to such acquisition, construction or lease) and (ii) the aggregate principal amount of all Debt Incurred and then outstanding pursuant to this clause (c) (together with all Permitted Refinancing Debt Incurred in respect of Debt previously Incurred pursuant to this clause (c) and then outstanding) does not exceed $15.0 million; (d) Debt of the Company owing to and held by any Wholly Owned Subsidiary and Debt of a Wholly Owned Subsidiary owing to and held by the Company or any Wholly Owned Subsidiary; provided, however, that any subsequent issue or transfer of Capital Stock or other event that results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of any such Debt (except to the Company or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Debt by the issuer thereof; (e) Debt of a Wholly Owned Subsidiary Incurred and outstanding on or prior to the date on which such Wholly Owned Restricted Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary (other than Debt Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of transactions pursuant to which such Wholly Owned Restricted Subsidiary became a Subsidiary of the Company or was otherwise acquired by the Company); provided that at the time such Wholly Owned Restricted Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary and after giving pro forma effect to the Incurrence of such Debt, the Company would have been able to Incur $1.00 of additional Debt pursuant to clause (a) in the first paragraph of this covenant; (f) Debt under Interest Rate Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting interest rate risk in the ordinary course of the financial management of the Company or such Restricted Subsidiary and not for speculative purposes, provided that the obligations under such agreements are directly related to payment obligations on Debt otherwise permitted by the terms of this covenant; (g) Debt under Currency Exchange Protection Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting currency exchange rate risks directly related to 61 transactions entered into by the Company or such Restricted Subsidiary in the ordinary course of business and not for speculative purposes; (h) Debt in connection with one or more standby letters of credit or performance bonds issued for the account of the Company or a Restricted Subsidiary in the ordinary course of business or pursuant to self-insurance obligations and not in connection with the borrowing of money or the obtaining of advances; (i) Debt outstanding on the Issue Date not otherwise described in clauses (a) through (h) above; (j) Debt not otherwise described in clauses (a) through (i) above in an aggregate principal amount outstanding at any one time not to exceed $15.0 million; and (k) Permitted Refinancing Debt Incurred in respect of Debt Incurred pursuant to clause (a) of the first paragraph of this covenant and clauses (a), (c), (e) and (i) above, subject, in the case of clause (c) above, to the limitations set forth in the proviso thereto. Notwithstanding the immediately foregoing two paragraphs, (a) the Company shall not, and shall not permit any Subsidiary Guarantor to, Incur any Debt pursuant to such paragraphs if the proceeds thereof are used, directly or indirectly, to Refinance (i) any Subordinated Obligations unless such Debt shall be subordinated to the Exchange Notes and the Subsidiary Guaranties, as applicable, to at least the same extent as such Subordinated Obligations or (ii) any Senior Subordinated Debt unless such Debt shall be Senior Subordinated Debt or shall be subordinated to the Exchange Notes and the Subsidiary Guaranties, as applicable and (b) the Company shall not permit any Restricted Subsidiary to Incur any Debt pursuant to such paragraph if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations or Senior Subordinated Debt. Limitation on Non-Guarantor Subsidiary Debt. The Company shall not permit any Restricted Subsidiary which is not a Subsidiary Guarantor to, directly or indirectly, Incur any Debt except: (i) Debt outstanding on the Issue Date and any Permitted Refinancing Debt with respect thereto; (ii) Debt described in clauses (e) or (h) of the definition of Permitted Debt under "--Limitation on Company and Subsidiary Guarantor Debt"; provided, however, that Industrias Hudson may Incur Debt in an aggregate principal amount outstanding at any one time not to exceed $5.0 million; and (iii) Guarantees of the Company's obligations under the New Credit Facility; provided that any Restricted Subsidiary which Incurs any such Guarantee shall concurrently therewith execute and deliver to the Trustee a Subsidiary Guaranty. Limitation on Restricted Payments. The Company shall not make, and shall not permit any Restricted Subsidiary to make, directly or indirectly, any Restricted Payment if at the time of, and after giving pro forma effect to, such proposed Restricted Payment, (a) a Default or Event of Default shall have occurred and be continuing, (b) the Company could not Incur at least $1.00 of additional Debt pursuant to clause (a) of the first paragraph of the covenant described under "-- Limitation on Company and Subsidiary Guarantor Debt" or (c) the aggregate amount of such Restricted Payment and all other Restricted Payments declared or made since the Issue Date (the amount of any Restricted Payment, if made other than in cash, to be based upon Fair Market Value) would exceed an amount equal to the sum of: (i) 50% of the aggregate amount of Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter during which the Issue Date occurs to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or if the aggregate amount of Consolidated Net Income for such period shall be a deficit, minus 100% of such deficit), 62 (ii) Capital Stock Sale Proceeds, (iii) the amount by which Debt of the Company Incurred after the Issue Date is reduced on the Company's balance sheet upon the conversion or exchange (other than by the Company or a Subsidiary of the Company) subsequent to the Issue Date of any Debt (other than Subordinated Obligations) of the Company for Capital Stock (other than Disqualified Stock) of the Company (less the amount of any cash or other Property distributed by the Company or any Restricted Subsidiary upon such conversion or exchange), and (iv) an amount equal to the sum of (A) the net reduction in Investments in any Person other than the Company or a Restricted Subsidiary resulting from dividends, repayments of loans or advances or other transfers of Property, in each case to the Company or any Restricted Subsidiary from such Person, to the extent such dividends, repayments or transfers do not increase the amount of Permitted Investments permitted to be made pursuant to clause (i) of the definition thereof and (B) the portion (proportionate to the Company's equity interest in such Unrestricted Subsidiary) of the Fair Market Value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided, however, that the foregoing sum shall not exceed, in the case of any Person, the amount of Investments previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in such Person, and (v) $7.5 million. Notwithstanding the foregoing limitation, the Company may: (a) pay dividends on its Capital Stock within 60 days of the declaration thereof if, on said declaration date, such dividends could have been paid in compliance with the Indenture; provided, however, that at the time of such payment of such dividend, no other Default or Event of Default shall have occurred and be continuing (or result therefrom); provided further, however, that such dividend shall be included in the calculation of the amount of Restricted Payments; (b) purchase, repurchase, redeem, legally defease, acquire or retire for value Capital Stock of the Company or Subordinated Obligations in exchange for, or in an amount not in excess of the proceeds of the substantially concurrent sale of, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any of its Subsidiaries for the benefit of their employees); provided, however, that (i) such purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments and (ii) the Capital Stock Sale Proceeds from such exchange or sale shall be excluded from the calculation pursuant to clause (c)(ii) above; (c) purchase, repurchase, redeem, legally defease, acquire or retire for value any Subordinated Obligations in exchange for, or in an amount not in excess of the proceeds of the substantially concurrent sale of, Permitted Refinancing Debt; provided, however, that such purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments; (d) 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 for value, shares of, or options to purchase shares of, common stock of the Company or Holding from employees or former employees of the Company, Holding or any of their Subsidiaries (or their estates or beneficiaries thereof) upon death, disability, retirement or termination pursuant to the terms of the agreements (including employment agreements) or plans (or amendments thereto) approved by the Board or Directors or the board of directors of 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 common stock; provided, however, that (i) the aggregate amount of such purchases, 63 repurchases, redemptions, defeasances, acquisitions or retirements shall not exceed $1.0 million in any year or $5.0 million during the term of the Exchange Notes, except that (x) such amounts shall be increased by the aggregate net amount of cash received by the Company after the Issue Date from the sale of such shares to, or the exercise of options to purchase such shares by, employees of the Company, Holding or any of their Subsidiaries and (y) the Company may forgive or return Employee Notes without regard to the limitation set forth in clause (d)(i) above and such forgiveness or return shall not be treated as a Restricted Payment for purpose of determining compliance with such clause (d)(i) and (ii) such purchases, repurchases, defeasances, acquisitions or retirements (but not forgiveness or return of Employee Notes) shall be included in the calculation of the amount of Restricted Payments; (e) purchase or redeem Subordinated Obligations pursuant to asset sale or change of control provisions contained in the governing instrument relating thereto; provided, however, that (i) no offer or purchase obligation may be triggered in respect of any such Subordinated Obligation unless a corresponding obligation also arises with respect to the Exchange Notes and (ii) in any event, no repurchase or redemption of any such Subordinated Obligation may be consummated unless and until the Company shall have satisfied all repurchase obligations with respect to any required purchase offer made with respect to the Exchange Notes; provided, however, that such purchases or redemptions shall be included in the calculation of the amount of Restricted Payments; and (f) make payments to Helen Hudson Lovaas pursuant to the Merger Agreement in an aggregate amount not to exceed $1.1 million in any fiscal year or $3.3 million during the term of the Exchange Notes (plus, in each case, interest due on the unpaid portion of such required payments in accordance with the Merger Agreement); provided, however, that such payments shall be excluded in the calculation of the amount of Restricted Payments. Limitation on Liens. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, Incur or suffer to exist, any Lien (other than Permitted Liens) upon any of its Property (including Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired, or any interest therein or any income or profits therefrom, unless (i) if such Lien secures Senior Subordinated Debt, the Exchange Notes or the applicable Subsidiary Guaranty are secured on an equal and ratable basis with such Debt and (ii) if such Lien secures Subordinated Obligations, such Lien shall be subordinated to a Lien securing the Exchange Notes or the applicable Subsidiary Guaranty in the same Property as that securing such Lien to the same extent as such Subordinated Obligations are subordinated to the Exchange Notes and the Subsidiary Guaranties. Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries. The Company shall not (a) sell, pledge, hypothecate or otherwise dispose of any shares of Capital Stock of a Restricted Subsidiary or (b) permit any Restricted Subsidiary to, directly or indirectly, issue or sell or otherwise dispose of any shares of its Capital Stock, other than (i) directors' qualifying shares, (ii) to the Company or a Wholly Owned Subsidiary or (iii) a disposition of 100% of the shares of Capital Stock of a Restricted Subsidiary that complies with the covenant described under "--Limitation on Asset Sales"; provided, however, that, in the case of this clause (iii), upon consummation of such disposition, any such Restricted Subsidiary shall be released from all its obligations under its Subsidiary Guaranty. Limitation on Asset Sales. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale unless (a) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the Property subject to such Asset Sale; (b) at least 75% of the consideration paid to the Company or such Restricted Subsidiary in connection with such Asset Sale is in the form of cash or cash equivalents or the assumption by the purchaser of liabilities of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Exchange Notes or the applicable Subsidiary Guaranty) as a result of which the Company and the Restricted Subsidiaries are no longer obligated with respect to such liabilities; and (c) the Company delivers an Officers' Certificate to the Trustee certifying that such Asset Sale complies with the foregoing clauses (a) and (b). The Net Available Cash (or any portion thereof) from Asset Sales may be applied by the Company or a Restricted Subsidiary, to the extent the Company or such Restricted Subsidiary elects (or is required by the terms of any Debt): (a) to prepay, repay, legally defease or purchase Senior Debt of the Company or any Subsidiary 64 Guarantor or Debt of any Restricted Subsidiary that is not a Subsidiary Guarantor (excluding, in any such case, Disqualified Stock and Debt owed to the Company or an Affiliate of the Company); or (b) to reinvest in Additional Assets (including by means of an Investment in Additional Assets by a Restricted Subsidiary with Net Available Cash received by the Company or another Restricted Subsidiary); provided, however, that in connection with any prepayment, repayment, legal defeasance or purchase of Debt pursuant to clause (a) above, the Company or such Subsidiary Guarantor or other Restricted Subsidiary shall retire such Debt and shall cause the related loan commitment (if any) to be permanently reduced by an amount equal to the principal amount so prepaid, repaid, legally defeased or purchased. Any Net Available Cash from an Asset Sale not applied in accordance with the preceding paragraph within twelve months from the date of the receipt of such Net Available Cash shall constitute "Excess Proceeds". When the aggregate amount of Excess Proceeds exceeds $10.0 million (taking into account income earned on such Excess Proceeds, if any), the Company will be required to make an offer to purchase (the "Prepayment Offer") the Exchange Notes which offer shall be in the amount of the Excess Proceeds, on a pro rata basis according to principal amount, at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the purchase date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date) in accordance with the procedures (including prorating in the event of oversubscription) set forth in the Indenture. To the extent that any portion of the amount of Net Available Cash remains after compliance with the preceding sentence and provided that all holders of Exchange Notes have been given the opportunity to tender their Exchange Notes for purchase in accordance with the Indenture, the Company or such Restricted Subsidiary may use such remaining amount for any purpose permitted by the Indenture and the amount of Excess Proceeds will be reset to zero. Within five business days after the Company is obligated to make a Prepayment Offer as described in the preceding paragraph, the Company shall send a written notice, by first-class mail, to the holders of Exchange Notes, accompanied by such information regarding the Company and its Subsidiaries as the Company in good faith believes will enable such holders to make an informed decision with respect to such Prepayment Offer. Such notice shall state, among other things, the purchase price and the purchase date, which shall be, subject to any contrary requirements of applicable law, a business day no earlier than 30 days nor later than 60 days from the date such notice is mailed. The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Exchange Notes pursuant to the covenant described hereunder. To the extent that the provisions of any securities laws or regulations conflict with provisions of the covenant described hereunder, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the covenant described hereunder by virtue thereof. Limitation on Restrictions on Distributions from Restricted Subsidiaries. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist any consensual restriction on the right of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, or pay any Debt or other obligation owed, to the Company or any other Restricted Subsidiary (except, with respect to restrictions on dividends of non-cash Property, as permitted pursuant to clause (ii) of the next sentence), (b) make any loans or advances to the Company or any other Restricted Subsidiary or (c) transfer any of its Property to the Company or any other Restricted Subsidiary. The foregoing limitations will not apply (i) with respect to clauses (a), (b) and (c), to restrictions (A) in effect on the Issue Date, (B) relating to Debt of a Restricted Subsidiary and existing at the time it became a Restricted Subsidiary if such restriction was not created in connection with or in anticipation of the transaction or series of transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company or (C) which result from the Refinancing of Debt Incurred pursuant to an agreement referred to in clause (i)(A) or (B) above or in clause (ii)(A) or (B) below, provided such restriction is no less favorable to the holders of Exchange Notes than those under the agreement evidencing the Debt so Refinanced, and (ii) with respect to clause (c) only, to restrictions (A) relating to Debt that is permitted to be Incurred and secured without also securing the Exchange Notes or the applicable Subsidiary Guaranty without equal and ratable treatment pursuant to the covenants described under "--Limitation on Company and Subsidiary Guarantor Debt" and "--Limitation on Liens" that limit 65 the right of the debtor to dispose of the Property securing such Debt, (B) encumbering Property at the time such Property was acquired by the Company or any Restricted Subsidiary, so long as such restriction relates solely to the Property so acquired and was not created in connection with or in anticipation of such acquisition, (C) resulting from customary provisions restricting subletting or assignment of leases or customary provisions in other agreements that restrict assignment of such agreements or rights thereunder or (D) customary restrictions contained in asset sale agreements limiting the transfer of such Property pending the closing of such sale. Limitation on Transactions with Affiliates. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, conduct any business or enter into or suffer to exist any transaction or series of transactions (including the purchase, sale, transfer, assignment, lease, conveyance or exchange of any Property or the rendering of any service) with, or for the benefit of, any Affiliate of the Company (an "Affiliate Transaction"), unless (a) the terms of such Affiliate Transaction are (i) set forth in writing, (ii) in the interest of the Company or such Restricted Subsidiary, as the case may be, and (iii) no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could be obtained in a comparable arm's-length transaction with a Person that is not an Affiliate of the Company, (b) if such Affiliate Transaction involves aggregate payments or value in excess of $2.5 million, the Board of Directors (including a majority of the disinterested members of the Board of Directors) approves such Affiliate Transaction and, in its good faith judgment, believes that such Affiliate Transaction complies with clauses (a) (ii) and (iii) of this paragraph as evidenced by a Board Resolution promptly delivered to the Trustee and (c) if such Affiliate Transaction involves aggregate payments or value in excess of $5.0 million, the Company obtains a written opinion from an Independent Appraiser to the effect that the consideration to be paid or received in connection with such Affiliate Transaction is fair, from a financial point of view, to the Company or such Restricted Subsidiary, as the case may be. Notwithstanding the foregoing limitation, the Company or any Restricted Subsidiary may enter into or suffer to exist the following: (i) any transaction or series of transactions between the Company and one or more Restricted Subsidiaries or between two or more Restricted Subsidiaries in the ordinary course of business; provided that no more than 5% of the total voting power of the Voting Stock (on a fully diluted basis) of any such Restricted Subsidiary is owned by an Affiliate of the Company (other than a Restricted Subsidiary); (ii) any Restricted Payment permitted to be made pursuant to the covenant described under "--Limitation on Restricted Payments"; (iii) the payment of compensation (including amounts paid pursuant to employee benefit plans) for the personal services of officers, directors and employees of the Company or any of the Restricted Subsidiaries, so long as the Board of Directors in good faith shall have approved the terms thereof and deemed the services theretofore or thereafter to be performed for such compensation to be fair consideration therefor; (iv) loans and advances to employees made in the ordinary course of business and consistent with the past practices of the Company or such Restricted Subsidiary, as the case may be; provided that such loans and advances do not exceed $1.0 million in the aggregate at any one time outstanding; (v) the payment of fees and expenses in connection with the Recapitalization pursuant to written agreements in effect on the Issue Date; (vi) the sale of common stock of the Company for cash; provided, that the Company may receive Employee Notes in an aggregate principal amount not in excess of $1.0 million at any one time outstanding; (vii) the payment of dividends in kind in respect of (i) the Company Mirror Preferred Stock or (ii) any other Preferred Stock issued in compliance with this covenant; and 66 (viii) a proportionate split of, or a common stock dividend payable on, the common stock of the Company. Limitation on Layered Debt. The Company shall not, and shall not permit any Subsidiary Guarantor to, Incur, directly or indirectly, any Debt which is subordinate or junior in right of payment to any Senior Debt unless such Debt is Senior Subordinated Debt or is expressly subordinated in right of payment to Senior Subordinated Debt. In addition, no Subsidiary Guarantor shall Guarantee, directly or indirectly, any Debt of the Company that is subordinate or junior in right of payment to any Senior Debt unless such Guarantee is expressly subordinate in right of payment to, or ranks pari passu with, the Subsidiary Guaranty of such Subsidiary Guarantor. Designation of Restricted and Unrestricted Subsidiaries. The Board of Directors may designate any Subsidiary of the Company (other than Industrias Hudson) to be an Unrestricted Subsidiary if (a) the Subsidiary to be so designated does not own any Capital Stock or Debt of, or own or hold any Lien on any Property of, the Company or any other Restricted Subsidiary, (b) the Subsidiary to be so designated is not obligated under any Debt, Lien or other obligation that, if in default, would result (with the passage of time or notice or otherwise) in a default on any Debt of the Company or of any Restricted Subsidiary and (c) either (i) the Subsidiary to be so designated has total assets of $1,000 or less or (ii) such designation is effective immediately upon such entity becoming a Subsidiary of the Company. Unless so designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company will be classified as a Restricted Subsidiary; provided, however, that such Subsidiary shall not be designated a Restricted Subsidiary and shall be automatically classified as an Unrestricted Subsidiary if either of the requirements set forth in clauses (x) and (y) of the immediately following paragraph will not be satisfied after giving pro forma effect to such classification. Except as provided in the first sentence of this paragraph, no Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary. Upon designation of a Restricted Subsidiary as an Unrestricted Subsidiary in compliance with this covenant, such Restricted Subsidiary will, by delivery of a supplemental indenture in form satisfactory to the Trustee, be released from any Subsidiary Guaranty previously made by such Subsidiary. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary if, immediately after giving pro forma effect to such designation, (x) the Company could Incur at least $1.00 of additional Debt pursuant to clause (a) of the first paragraph of the covenant described under "- - -Company and Subsidiary Guarantor Debt" and (y) no Default or Event of Default shall have occurred and be continuing or would result therefrom. Any such designation or redesignation by the Board of Directors will be evidenced to the Trustee by filing with the Trustee a Board Resolution giving effect to such designation or redesignation and an Officers' Certificate (a) certifying that such designation or redesignation complies with the foregoing provisions and (b) giving the effective date of such designation or redesignation, such filing with the Trustee to occur within 45 days after the end of the fiscal quarter of the Company in which such designation or redesignation is made (or, in the case of a designation or redesignation made during the last fiscal quarter of the Company's fiscal year, within 90 days after the end of such fiscal year). Limitation on Holding's Business. Holding shall not, directly or indirectly, engage in any business or activity other than the ownership of Capital Stock of the Company and business activities incidental thereto. MERGER, CONSOLIDATION AND SALE OF PROPERTY The Company shall not merge, consolidate or amalgamate with or into any other Person (other than a merger of a Wholly Owned Subsidiary into the Company) or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all its Property in any one transaction or series of transactions unless: (a) the Company shall be the surviving Person (the "Surviving Person") or the Surviving Person (if other than the Company) formed by such merger, consolidation or amalgamation or to which such sale, transfer, assignment, lease, conveyance or disposition is made shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia; (b) the Surviving Person (if other than the Company) expressly assumes, by supplemental indenture in form satisfactory to the Trustee, executed and delivered to the Trustee by 67 such Surviving Person, the due and punctual payment of the principal of, and premium, if any, and interest on, all the Exchange Notes, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of the Indenture to be performed by the Company; (c) in the case of a sale, transfer, assignment, lease, conveyance or other disposition of all or substantially all the Property of the Company, such Property shall have been transferred as an entirety or virtually as an entirety to one Person; (d) immediately before and after giving effect to such transaction or series of transactions on a pro forma basis (and treating, for purposes of this clause (d) and clauses (e) and (f) below, any Debt which becomes, or is anticipated to become, an obligation of the Surviving Person or any Restricted Subsidiary as a result of such transaction or series of transactions as having been Incurred by the Surviving Person or such Restricted Subsidiary at the time of such transaction or series of transactions), no Default or Event of Default shall have occurred and be continuing; (e) immediately after giving effect to such transaction or series of transactions on a pro forma basis, the Company or the Surviving Person, as the case may be, would be able to Incur at least $1.00 of additional Debt under clause (a) of the first paragraph of the covenant described under "--Certain Covenants--Company and Subsidiary Guarantor Debt"; provided, however, that this clause (e) shall not apply to a merger between the Company and a Wholly Owned Subsidiary of the Company or Holding incorporated in another state of the United States solely for the purpose of reincorporating the Company as long as the total amount of Debt of the Company and its Restricted Subsidiaries is not increased as a result thereof; and (f) the Company shall deliver, or cause to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that such transaction and the supplemental indenture, if any, in respect thereto comply with this covenant and that all conditions precedent herein provided for relating to such transaction have been satisfied. The Surviving Person shall succeed to, and be substituted for, and may exercise every right and power of the Company under the Indenture, but the predecessor Company in the case of a sale, transfer, assignment, lease, conveyance or other disposition shall not be released from the obligation to pay the principal of, and premium, if any, and interest on, the Exchange Notes. EVENTS OF DEFAULT Events of Default in respect of the Exchange Notes as set forth in the Indenture include: (a) failure to make the payment of any interest on the Exchange Notes when the same becomes due and payable, and such failure continues for a period of 30 days; (b) failure to make the payment of any principal of, or premium, if any, on, any of the Exchange Notes when the same becomes due and payable at its Stated Maturity, upon acceleration, redemption, optional redemption, required repurchase or otherwise; (c) failure to comply with the covenant described above under "--Merger, Consolidation and Sale of Property"; (d) failure to comply with any other covenant or agreement in the Exchange Notes or in the Indenture (other than a failure which is the subject of the foregoing clause (a), (b) or (c)) and such failure continues for 30 days after written notice is given to the Company as provided below; (e) a default under any Debt by the Company or any Restricted Subsidiary which results in acceleration of the stated maturity of such Debt, or failure to pay any such Debt at final maturity, in an aggregate amount greater than $7.5 million (or its foreign currency equivalent at the time) (the "cross acceleration provisions"); (f) any judgment or judgments for the payment of money in an aggregate amount in excess of $7.5 million (or its foreign currency equivalent at the time) shall be rendered against the Company or any Restricted Subsidiary and shall not be waived, satisfied or discharged for any period of 30 consecutive days during which a stay of enforcement shall not be in effect (the "judgment default provisions"); (g) certain events involving bankruptcy, insolvency or reorganization of the Company or any Significant Subsidiary (the "bankruptcy provisions"); and (h) the Subsidiary Guaranty of any Significant Subsidiary or, if issued, Industrias Hudson ceases to be in full force and effect (other than in accordance with the terms thereof) or any Significant Subsidiary or, if applicable, Industrias Hudson denies or disaffirms its obligations under its Subsidiary Guaranty (the "guaranty provisions"). A Default under clause (d) is not an Event of Default until the Trustee or the holders of not less than 25% in aggregate principal amount of the Exchange Notes then outstanding notify the Company of the Default and the Company does not cure such Default within the time specified after receipt of such notice. Such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default". 68 The Company shall deliver to the Trustee, within 30 days after the occurrence thereof, written notice in the form of an Officers' Certificate of any event which with the giving of notice and the lapse of time would become an Event of Default, its status and what action the Company is taking or proposes to take with respect thereto. The Indenture provides that if an Event of Default with respect to the Exchange Notes (other than an Event of Default resulting from certain events involving bankruptcy, insolvency or reorganization with respect to the Company or any Significant Subsidiary) shall have occurred and be continuing, the Trustee or the registered holders of not less than 25% in aggregate principal amount of the Exchange Notes then outstanding may declare to be immediately due and payable the principal amount of all the Exchange Notes then outstanding, plus accrued but unpaid interest to the date of acceleration. In case an Event of Default resulting from certain events of bankruptcy, insolvency or reorganization with respect to the Company or any Significant Subsidiary shall occur, such amount with respect to all the Exchange Notes shall be due and payable immediately without any declaration or other act on the part of the Trustee or the holders of the Exchange Notes. After any such acceleration, but before a judgment or decree based on acceleration is obtained by the Trustee, the registered holders of a majority in aggregate principal amount of the Exchange Notes then outstanding may, under certain circumstances, rescind and annul such acceleration if all Events of Default, other than the nonpayment of accelerated principal, premium or interest, have been cured or waived as provided in the Indenture. Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default shall occur and be continuing, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the holders of the Exchange Notes, unless such holders shall have offered to the Trustee reasonable indemnity. Subject to such provisions for the indemnification of the Trustee, the holders of a majority in aggregate principal amount of the Exchange Notes then outstanding will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the Exchange Notes. No holder of Exchange Notes will have any right to institute any proceeding with respect to the Indenture, or for the appointment of a receiver or trustee, or for any remedy thereunder, unless (a) such holder has previously given to the Trustee written notice of a continuing Event of Default, (b) the registered holders of at least 25% in aggregate principal amount of the Exchange Notes then outstanding have made written request and offered reasonable indemnity to the Trustee to institute such proceeding as trustee and (c) the Trustee shall not have received from the registered holders of a majority in aggregate principal amount of the Exchange Notes then outstanding a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days. However, such limitations do not apply to a suit instituted by a holder of any Exchange Note for enforcement of payment of the principal of, and premium, if any, or interest on, such Exchange Note on or after the respective due dates expressed in such Exchange Note. AMENDMENTS AND WAIVERS Subject to certain exceptions, the Indenture may be amended with the consent of the registered holders of a majority in aggregate principal amount of the Exchange Notes then outstanding (including consents obtained in connection with a tender offer or exchange offer for the Exchange Notes) and any past default or compliance with any provisions may also be waived (except a default in the payment of principal, premium or interest and certain covenants and provisions of the Indenture which cannot be amended without the consent of each holder of an outstanding Exchange Note) with the consent of the registered holders of at least a majority in aggregate principal amount of the Exchange Notes then outstanding. However, without the consent of each holder of an outstanding Exchange Note, no amendment may, among other things, (a) reduce the amount of Exchange Notes whose holders must consent to an amendment or waiver, (b) reduce the rate of or extend the time for payment of interest on any Exchange Note, (c) reduce the principal of or extend the Stated Maturity of any Exchange Note, (d) make any Exchange Note payable in money other than that stated in the Exchange Note, (e) impair the right of any holder of the Exchange Notes to receive payment of principal of and interest on such holder's Exchange Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such holder's Exchange Notes or any Subsidiary Guaranty, (f) release any security interest that may have been granted in favor of the holders of the Exchange Notes, (g) reduce the premium payable upon the redemption or repurchase of any 69 Exchange Note, or change the time at which any Exchange Note may be redeemed, as described under "--Optional Redemption", (h) reduce the premium payable upon a Change of Control or, at any time after a Change of Control or Asset Sale has occurred, change the time at which the Change of Control Offer or Prepayment Offer relating thereto must be made or at which the Exchange Notes must be repurchased pursuant to such Change of Control Offer or (i) make any change to the subordination provisions of the Indenture that would adversely affect the holders of the Exchange Notes or (j) make any change in any Subsidiary Guaranty that would adversely affect the holders of the Exchange Notes. Without the consent of any holder of the Exchange Notes, the Company and the Trustee may amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to provide for the assumption by a successor corporation of the obligations of the Company under the Indenture, to provide for uncertificated Exchange Notes in addition to or in place of certificated Exchange Notes (provided that the uncertificated Exchange Notes are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Exchange Notes are described in Section 163(f)(2)(B) of the Code), to add additional Guarantees with respect to the Exchange Notes or to release Subsidiary Guarantors from Subsidiary Guaranties as provided by the terms of the Indenture, to secure the Exchange Notes, to add to the covenants of the Company for the benefit of the holders of the Exchange Notes or to surrender any right or power conferred upon the Company, to make any change that does not adversely affect the rights of any holder of the Exchange Notes in any material respect, to make any change to the subordination provisions of the Indenture that would limit or terminate the benefits available to any holder of Senior Debt under such provisions or to comply with any requirement of the Commission in connection with the qualification of the Indenture under the Trust Indenture Act. No amendment may be made to the subordination provisions of the Indenture that adversely affects the rights of any holder of Senior Debt then outstanding unless the holders of such Senior Debt (or their Representative) consent to such change. The consent of the holders of the Exchange Notes is not necessary under the Indenture to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. After an amendment under the Indenture becomes effective, the Company is required to mail to each registered holder of the Exchange Notes at such holder's address appearing in the Security Register a notice briefly describing such amendment. However, the failure to give such notice to all holders of the Exchange Notes, or any defect therein, will not impair or affect the validity of the amendment. DEFEASANCE The Company at any time may terminate all its obligations under the Exchange Notes and the Indenture ("legal defeasance"), except for certain obligations, including those respecting the defeasance trust and obligations to register the transfer or exchange of the Exchange Notes, to replace mutilated, destroyed, lost or stolen Exchange Notes and to maintain a registrar and paying agent in respect of the Exchange Notes. The Company at any time may terminate its obligations under the covenants described under "--Repurchase at the Option of Holders Upon a Change of Control" and "--Certain Covenants", the operation of the cross acceleration provisions, the judgment default provisions, the bankruptcy provisions with respect to Significant Subsidiaries, the guaranty provisions described under "--Events of Default" above and the limitations contained in clauses (e) and (f) under the first paragraph of "--Merger, Consolidation and Sale of Property" above ("covenant defeasance"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Exchange Notes may not be accelerated because of an Event of Default with respect thereto. If the Company exercises its covenant defeasance option, payment of the Exchange Notes may not be accelerated because of an Event of Default specified in clause (d) (with respect to the covenants described under "--Certain Covenants"), (e), (f), (g) (with respect only to Significant Subsidiaries) or (h) under "--Events of Default" above or because of the failure of the Company to comply with clauses (e) and (f) under the first paragraph of "--Merger, Consolidation and Sale of Property" above. If the Company exercises its legal defeasance option or its covenant defeasance option, each Subsidiary Guarantor will be released from all its obligations under its Subsidiary Guaranty. 70 In order to exercise either defeasance option, the Company must, among other things, irrevocably deposit in trust (the "defeasance trust") with the Trustee money or U.S. Government Obligations for the payment of principal of and interest on the Exchange Notes to maturity or redemption, as the case may be, and must comply with certain other conditions, including delivery to the Trustee of an Opinion of Counsel to the effect that holders of the Exchange Notes will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit and defeasance and will be subject to Federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred (and, in the case of legal defeasance only, such Opinion of Counsel must be based on a ruling of the Internal Revenue Service or other change in applicable Federal income tax law). GOVERNING LAW The Indenture and the Exchange Notes are governed by the internal laws of the State of New York without reference to principles of conflicts of law. THE TRUSTEE United States Trust Company of New York is the Trustee under the Indenture. The Indenture provides that, except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the Indenture. During the existence of an Event of Default, the Trustee will exercise such of the rights and powers vested in it under the Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms as well as any other capitalized terms used herein for which no definition is provided. "Additional Assets" means (a) any Property (other than cash, cash equivalents and securities) to be owned by the Company or any Restricted Subsidiary and used in a Related Business; or (b) Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary from any Person other than an Affiliate of the Company; provided, however, that, in the case of clause (b), such Restricted Subsidiary is primarily engaged in a Related Business. "Affiliate" of any specified Person means (a) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person or (b) any other Person who is a director or officer of (i) such specified Person, (ii) any Subsidiary of such specified Person or (iii) any Person described in clause (a) above. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of the covenant described under "--Certain Covenants-- Limitation on Transactions with Affiliates", "--Limitation on Asset Sales" and the definition of "Additional Assets" only, "Affiliate" shall also mean any beneficial owner of shares representing 5% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Voting Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. "Asset Sale" means any sale, lease, transfer, issuance or other disposition (or series of related sales, leases, transfers, issuances or dispositions) by the Company or any Restricted Subsidiary, including any disposition by 71 means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of (a) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares) or (b) any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary other than, in the case of clauses (a) and (b) above, (i) any disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (ii) for purposes of the covenant described under "--Certain Covenants--Limitation on Asset Sales" only, any disposition that constitutes a Permitted Investment or Restricted Payment permitted by the covenant described under "--Certain Covenants--Limitation on Restricted Payments", (iii) any disposition effected in compliance with the first paragraph of the covenant described under "--Merger, Consolidation and Sale of Property", (iv) any Sale and Leaseback Transaction completed within 180 days following the original acquisition of the subject assets where such Sale and Leaseback Transaction represents the intended financing of Property acquired after the Issue Date and (v) any disposition or series of related dispositions of assets having a Fair Market Value and sale price of less than $500,000. "Attributable Debt" in respect of a Sale and Leaseback Transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Average Life" means, as of any date of determination, with respect to any Debt or Preferred Stock, the quotient obtained by dividing (a) the sum of the product of the numbers of years (rounded to the nearest one-twelfth of one year) from the date of determination to the dates of each successive scheduled principal payment of such Debt or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (b) the sum of all such payments. "Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "Capital Lease Obligations" means any obligation under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of Debt represented by such obligation shall be the capitalized amount of such obligations determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. For purposes of "--Certain Covenants--Limitation on Liens", a Capital Lease Obligation shall be deemed secured by a Lien on the Property being leased. "Capital Stock" means, with respect to any Person, any shares or other equivalents (however designated) of corporate stock, partnership interests or any other participations, rights, warrants, options or other interests in the nature of an equity interest in such Person, including Preferred Stock, but excluding any debt security convertible or exchangeable into such equity interest. "Capital Stock Sale Proceeds" means the aggregate cash proceeds received by the Company from the issuance or sale (other than to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any of its Subsidiaries for the benefit of their employees) by the Company of any class of its Capital Stock (other than Disqualified Stock) after the Issue Date, net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Change of Control" means the occurrence of any of the following events: (a) prior to the first Public Equity Offering, the Permitted Holders cease to be the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of a majority of the voting 72 power of the Voting Stock of the Company, whether as a result of the issuance of securities of the Company, any merger, consolidation, liquidation or dissolution of the Company, any direct or indirect transfer of securities by the Permitted Holders or otherwise (for purposes of this clause (a), the Permitted Holders will be deemed to beneficially own any Voting Stock of a corporation (the "specified corporation") held by any other corporation (the "parent corporation") so long as the Permitted Holders beneficially own, directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of such parent corporation); or (b) after the first Public Equity Offering, any "Person" or "group" (as such terms are used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provisions to either of the foregoing), including any group acting for the purpose of acquiring, holding, voting or disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act, other than any one or more of the Permitted Holders, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 35% or more of the voting power of the Voting Stock of the Company; provided, however, that the Permitted Holders are the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, in the aggregate of a lesser percentage of the total voting power of all classes of the Voting Stock of the Company than such other Person or group (for purposes of this clause (b), such Person or group shall be deemed to beneficially own any Voting Stock of a specified corporation held by a parent corporation so long as such Person or group beneficially owns, directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of such parent corporation); or (c) the sale, transfer, assignment, lease, conveyance or other disposition, directly or indirectly, of all or substantially all the assets of the Company and the Restricted Subsidiaries, considered as a whole (other than a disposition of such assets as an entirety or virtually as an entirety to a Wholly Owned Subsidiary or one or more Permitted Holders) shall have occurred, or the Company merges, consolidates or amalgamates with or into any other Person (other than one or more Permitted Holders) or any other Person (other than one or more Permitted Holders) merges, consolidates or amalgamates with or into the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is reclassified into or exchanged for cash, securities or other Property, other than any such transaction where (i) the outstanding Voting Stock of the Company is reclassified into or exchanged for Voting Stock of the surviving corporation and (ii) the holders of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the surviving corporation immediately after such transaction and in substantially the same proportion as before the transaction; or (d) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election or appointment by such Board or whose nomination for election by the shareholders of the Company was approved by a vote of 66 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 members of the Board of Directors then in office; or (e) the shareholders of the Company shall have approved any plan of liquidation or dissolution of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Consolidated Interest Coverage Ratio" means, as of any date of determination, the ratio of (a) the aggregate amount of EBITDA for the most recent four consecutive fiscal quarters ending at least 45 days prior to such determination date to (b) Consolidated Interest Expense for such four fiscal quarters; provided, however, that 73 (i) if the Company or any Restricted Subsidiary has Incurred any Debt since the beginning of such period that remains outstanding or if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio is an Incurrence of Debt, or both, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Debt as if such Debt had been Incurred on the first day of such period and the discharge of any other Debt repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Debt as if such discharge had occurred on the first day of such period, (ii) if since the beginning of such period the Company or any Restricted Subsidiary shall have repaid, repurchased, legally defeased or otherwise discharged any Debt with Capital Stock Sale Proceeds, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such discharge as if such discharge had occurred on the first day of such period, (iii) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Sale or if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio is an Asset Sale, or both, EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the Property which is the subject of such Asset Sale for such period, or increased by an amount equal to the EBITDA (if negative) directly attributable thereto for such period, in either case as if such Asset Sale had occurred on the first day of such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Debt of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Asset Sale, as if such Asset Sale had occurred on the first day of such period (or, if the Capital Stock of any Restricted Subsidiary is sold, by an amount equal to the Consolidated Interest Expense for such period directly attributable to the Debt of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Debt after such sale), (iv) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of Property, including any acquisition of Property occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Debt) as if such Investment or acquisition occurred on the first day of such period and (v) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Sale, Investment or acquisition of Property that would have required an adjustment pursuant to clause (iii) or (iv) above if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Sale, Investment or acquisition occurred on the first day of such period. For purposes of this definition, pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company and as further contemplated by the definition of the term "pro forma". If any Debt bears a floating rate of interest and is being given pro forma effect, the interest expense on such Debt shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Debt if such Interest Rate Agreement has a remaining term in excess of 12 months). "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent Incurred by the Company or its Restricted Subsidiaries, (a) interest expense attributable to capital leases, (b) amortization of debt discount and debt issuance cost, including commitment fees, other than with respect to Debt Incurred in connection with the Recapitalization, (c) capitalized interest, (d) non-cash interest expenses, (e) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (f) net costs associated with Hedging Obligations (including amortization of fees), (g) Disqualified Dividends other than Disqualified Dividends paid with shares of Capital Stock of the Company which is not Disqualified Stock, (h) Preferred Stock dividends in respect of all Preferred Stock of Restricted Subsidiaries held by Persons other than the Company or a Wholly Owned Subsidiary, (i) interest Incurred in connection with Investments in discontinued operations, (j) interest accruing on any Debt of any other Person to the extent such Debt is Guaranteed by the Company or any Restricted Subsidiary and (k) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Debt Incurred by such plan or trust. 74 "Consolidated Net Income" means, for any period, the net income (loss) of the Company and its consolidated Subsidiaries; provided, however, that there shall not be included in such Consolidated Net Income (a) any net income (loss) of any Person (other than the Company) if such Person is not a Restricted Subsidiary, except that (i) subject to the exclusion contained in clause (d) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to a Restricted Subsidiary, to the limitations contained in clause (c) below) and (ii) the Company's equity in a net loss of any such Person other than an Unrestricted Subsidiary for such period shall be included in determining such Consolidated Net Income, (b) for the purposes of the covenant described under "--Certain Covenants--Limitation on Restricted Payments" only, any net income (loss) of any Person acquired by the Company or any of its consolidated Subsidiaries in a pooling of interests transaction for any period prior to the date of such acquisition, (c) any net income (but not loss) of any Restricted Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions, directly or indirectly, to the Company, except that subject to the exclusion contained in clause (d) below, the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to another Restricted Subsidiary, to the limitation contained in this clause), (d) any gain (or, for purposes of the covenants described under "--Certain Covenants--Limitation on Company and Subsidiary Guarantor Debt" and "--Merger, Consolidation and Sale of Property" only, loss) realized upon the sale or other disposition of any Property of the Company or any of its consolidated Subsidiaries (including pursuant to any Sale and Leaseback Transaction) which is not sold or otherwise disposed of in the ordinary course of business, provided, that any tax benefit or tax liability resulting therefrom shall be excluded in such Consolidated Net Income, (e) any extraordinary gain or loss, provided, that any tax benefit or tax liability resulting therefrom shall be excluded in such Consolidated Net Income, (f) the cumulative effect of a change in accounting principles and (g) (i) any non-cash compensation expense realized for grants of performance shares, stock options or other stock awards to officers, directors and employees of the Company or any Restricted Subsidiary or (ii) compensation expense realized with respect to periods prior to the Issue Date in respect of payments under the Company's 1994 Amended and Restated Equity Participation Plan or compensation expense, to the extent accrued in 1998, related to contingent payments to existing managers of the Company pursuant to the Merger Agreement in an aggregate amount not in excess of $2.4 million. Notwithstanding the foregoing, for the purposes of the covenant described under "--Certain Covenants--Limitation on Restricted Payments" only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clause (c)(iv) thereof. "Credit Facility" means, with respect to the Company or any Restricted Subsidiary, one or more debt or commercial paper facilities with banks or other institutional lenders (including the New Credit Facility) providing for revolving credit loans, term loans, receivables or inventory financing (including through the sale of receivables or inventory to such lenders or to special purpose, bankruptcy remote entities formed to borrow from such lenders against such receivables or inventory) or trade letters of credit, in each case together with any amendments, supplements, modifications (including by any extension of the maturity thereof), refinancings or replacements thereof by a lender or syndicate of lenders in one or more successive transactions (including any such transaction that changes the amount available thereunder, replaces such agreement or document, or provides for other agents or lenders). "Currency Exchange Protection Agreement" means, in respect of a Person, any foreign exchange contract, currency swap agreement, currency option or other similar agreement or arrangement designed to protect such Person against fluctuations in currency exchange rates. "Debt" means, with respect to any Person on any date of determination (without duplication), (a) the principal of and premium (if any) in respect of (i) debt of such Person for money borrowed and (ii) debt evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (b) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale and Leaseback 75 Transactions entered into by such Person; (c) all obligations of such Person issued or assumed as the deferred purchase price of Property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (d) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in (a) through (c) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit); (e) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person, any Preferred Stock (but excluding, in each case, any accrued dividends); (f) all obligations of the type referred to in clauses (a) through (e) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee; (g) all obligations of the type referred to in clauses (a) through (f) of other Persons secured by any Lien on any Property of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such Property or the amount of the obligation so secured; and (h) to the extent not otherwise included in this definition, Hedging Obligations of such Person. The amount of Debt of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided that the amount outstanding at any time of any Debt issued with original issue discount is the face amount of such Debt less the remaining unamortized portion of the original issue discount of such Debt at such time as determined in accordance with GAAP. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Designated Senior Debt" means any Senior Debt which has, at the time of determination, an aggregate principal amount outstanding of at least $10.0 million (including the amount of all undrawn commitments and matured and contingent reimbursement obligations pursuant to letters of credit thereunder) that is specifically designated in the instrument evidencing such Senior Debt and is designated in a notice delivered by the Company to the holders or a Representative of the holders of such Senior Debt and in an Officers' Certificate delivered to the Trustee as "Designated Senior Debt" of the Company for purposes of the Indenture; provided that the New Credit Facility shall be deemed to be Designated Senior Debt under the Indenture. "Disqualified Dividends" means, for any dividend with respect to Disqualified Stock, the quotient of the dividend divided by the difference between one and the maximum statutory federal income tax rate (expressed as a decimal number between 1 and 0) then applicable to the issuer of such Disqualified Stock. "Disqualified Stock" means, with respect to any Person, Redeemable Stock of such Person as to which (i) the maturity, (ii) mandatory redemption or (iii) redemption, repurchase, conversion or exchange at the option of the holder thereof occurs, or may occur, on or prior to the first anniversary of the Stated Maturity of the Exchange Notes; provided, however, that Redeemable Stock of such Person that would not otherwise be characterized as Disqualified Stock under this definition shall not constitute Disqualified Stock (a) if such Redeemable Stock is convertible or exchangeable into Debt or Disqualified Stock solely at the option of the issuer thereof or (b) solely as a result of provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Redeemable Stock upon the occurrence of a "change of control" occurring prior to the first anniversary of the Stated Maturity of the Exchange Notes, if (x) such repurchase obligation may not be triggered in respect of such Redeemable Stock unless a corresponding obligation also arises with respect to the Exchange Notes and (y) no such repurchase or redemption is permitted to be consummated unless and until such Person shall have satisfied all repurchase or redemption obligations with respect to any required purchase offer made with respect to the Exchange Notes. "Domestic Restricted Subsidiary" means any Restricted Subsidiary other than (a) a Foreign Restricted Subsidiary or (b) a Subsidiary of a Foreign Restricted Subsidiary. 76 "EBITDA" means, for any period, an amount equal to, for the Company and its consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income for such period, plus the following to the extent reducing Consolidated Net Income for such period: (i) the provision for taxes based on income or profits or utilized in computing net loss, (ii) Consolidated Interest Expense, (iii) depreciation, (iv) amortization expense and (v) any other non-cash items (other than any such non-cash item to the extent that it represents an accrual of or reserve for cash expenditures in any future period), minus (b) all non-cash items increasing Consolidated Net Income for such period (other than any such non-cash item to the extent that it will result in the receipt of cash payments in any future period). Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its shareholders. "Employee Notes" means promissory notes of employees of the Company, Holding or any of their Subsidiaries payable to the Company or Holding and received in connection with the substantially concurrent purchase of common stock of the Company or Holding by such employees. "Event of Default" has the meaning set forth under "-Events of Default". "Exchange Act" means the Securities Exchange Act of 1934. "Fair Market Value" means, with respect to any Property, the price which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair Market Value will be determined, except as otherwise provided, (a) if such Property has a Fair Market Value equal to or less than $2.5 million, by any Officer of the Company or (b) if such Property has a Fair Market Value in excess of $2.5 million, by a majority of the Board of Directors and evidenced by a Board Resolution, dated within 30 days of the relevant transaction, delivered to the Trustee. "Foreign Restricted Subsidiary" means any Restricted Subsidiary which is not organized under the laws of the United States of America or any State thereof or the District of Columbia. "GAAP" means United States generally accepted accounting principles as in effect on the Issue Date, including those set forth (a) in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (b) in the statements and pronouncements of the Financial Accounting Standards Board, (c) in such other statements by such other entity as approved by a significant segment of the accounting profession and (d) the rules and regulations of the Commission governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the Commission. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Debt of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing any obligation. "Hedging Obligation" of any Person means any obligation of such Person pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement or any other similar agreement or arrangement. 77 "Holding" means River Holding Corp., the corporate parent of the Company, and any successor thereto. "Incur" means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by merger, conversion, exchange or otherwise), extend, assume, Guarantee or become liable in respect of such Debt or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Debt or obligation on the balance sheet of such Person (and "Incurrence" and "Incurred" shall have meanings correlative to the foregoing); provided, however, that a change in GAAP that results in an obligation of such Person that exists at such time, and is not theretofore classified as Debt, becoming Debt shall not be deemed an Incurrence of such Debt; provided further, however, that solely for purposes of determining compliance with "--Certain Covenants--Limitation on Company and Subsidiary Guarantor Debt" and "--Limitation on Non-Guarantor Subsidiary Debt", amortization of debt discount shall not be deemed to be the Incurrence of Debt, provided that in the case of Debt sold at a discount, the amount of such Debt Incurred shall at all times be the aggregate principal amount at Stated Maturity. "Industrias Hudson" means Industrias Hudson S.A. de C.V. "Independent Appraiser" means an investment banking firm of national standing or any third party appraiser of national standing, provided that such firm or appraiser is not an Affiliate of the Company. "Interest Rate Agreement" means, for any Person, any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement designed to protect against fluctuations in interest rates. "Investment" by any Person means any direct or indirect loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of such Person), advance or other extension of credit or capital contribution (by means of transfers of cash or other Property to others or payments for Property or services for the account or use of others, or otherwise) to, or Incurrence of a Guarantee of any obligation of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person. For purposes of the covenant described under "--Certain Covenants--Limitation on Restricted Payments", "--Designation of Restricted and Unrestricted Subsidiaries" and the definition of "Restricted Payment", "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary equal to an amount (if positive) equal to (a) the Company's "Investment" in such Subsidiary at the time of such redesignation less (b) the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the time of such redesignation. In determining the amount of any Investment made by transfer of any Property other than cash, such Property shall be valued at its Fair Market Value at the time of such Investment. "Issue Date" means the date on which the Exchange Notes are initially issued. "Lien" means, with respect to any Property of any Person, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property (including any Capital Lease Obligation, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing or any Sale and Leaseback Transaction). "Merger Agreement" means the Amended and Restated Merger Agreement between Holding, River Acquisition Corp., the Company and shareholders of the Company dated as of March 15, 1998, as in effect on the Issue Date. "Mirror Preferred Stock" means the 11 1/2% Senior PIK Preferred Stock due 2010 of the Company. 78 "Moody's" means Moody's Investors Service, Inc. or any successor to the rating agency business thereof. "Net Available Cash" from any Asset Sale means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Debt or other obligations relating to the Property that is the subject of such Asset Sale or received in any other noncash form), in each case net of (a) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such Asset Sale, (b) all payments made on any Debt which is secured by any Property subject to such Asset Sale, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such Property, or which must by its terms, or in order to obtain a necessary consent to such Asset Sale, or by applicable law, be repaid out of the proceeds from such Asset Sale, (c) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Sale and (d) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the Property disposed in such Asset Sale and retained by the Company or any Restricted Subsidiary after such Asset Sale. "New Credit Facility" means the credit facilities made available pursuant to the Credit Agreement dated as of April 7, 1998 among the Company, Holding, the lenders party thereto, Salomon Smith Barney Inc, as Arranger, Advisor and Syndication Agent and Bankers Trust Company, as Administrative Agent. "Officer" means the Chief Executive Officer, the President, the Chief Financial Officer or any Executive Vice President of the Company. "Officers' Certificate" means a certificate signed by two Officers of the Company, at least one of whom shall be the principal executive officer or principal financial officer of the Company, and delivered to the Trustee. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "Permitted Holders" means Helen Hudson Lovaas, any member of the senior management of the Company or Holding on the Issue Date and Freeman Spogli & Co. Incorporated or any successor entity thereof controlled by the principals of Freeman Spogli & Co. Incorporated or any entity controlled by, or under common control with, Freeman Spogli & Co. Incorporated. "Permitted Investment" means any Investment by the Company or a Restricted Subsidiary in (a) any Restricted Subsidiary or any Person that will, upon the making of such Investment, become a Restricted Subsidiary; provided that the primary business of such Restricted Subsidiary is a Related Business; (b) any Person if as a result of such Investment such Person is merged or consolidated with or into, or transfers or conveys all or substantially all its Property to, the Company or a Restricted Subsidiary; provided that such Person's primary business is a Related Business; (c) Temporary Cash Investments; (d) receivables owing to the Company or a Restricted Subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Company or such Restricted Subsidiary deems reasonable under the circumstances; (e) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (f) (i) loans and advances to employees made in the ordinary course of business consistent with past practices of the Company or such Restricted Subsidiary, as the case may be; provided that such loans and advances do not exceed $1.0 million at any one time outstanding and (ii) loans and advances to, or the receipt of Employee Notes from, employees of Holding, the Company or any of their Subsidiaries made or received in connection with the substantially concurrent purchase of common stock of Holding or the Company by such employees; provided that the aggregate principal amount of such loans, advances and notes payable shall not exceed $1.0 million at any one time outstanding; (g) stock, obligations or other securities received in settlement of debts created in the ordinary course of business and owing to the Company or a Restricted Subsidiary or in satisfaction of judgments; (h) any Person to the extent such Investment represents the non-cash portion of the consideration received in connection with an Asset Sale consummated in compliance with 79 the covenant described under "--Certain Covenants--Limitation on Asset Sales"; and (i) Investments in Persons engaged in a Related Business not to exceed $10.0 million at any one time outstanding (it being agreed that an Investment shall cease to be outstanding to the extent of dividends, repayments of loans or advances or other transfers of Property received by the Company or any Restricted Subsidiary from such Persons, provided that such amounts do not increase the amount of Restricted Payments which the Company and the Restricted Subsidiaries may make pursuant to clause (c)(iv)(A) of the covenant described under "--Certain Covenants--Limitation on Restricted Payments"). "Permitted Liens" means: (a) Liens securing Senior Debt of the Company or any Subsidiary Guarantor; (b) Liens for taxes, assessments or governmental charges or levies on the Property of the Company or any Restricted Subsidiary if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings; (c) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens, on the Property of the Company or any Restricted Subsidiary arising in the ordinary course of business and securing payment of obligations which are not more than 60 days past due or are being contested in good faith and by appropriate proceedings; (d) Liens on the Property of the Company or any Restricted Subsidiary Incurred in the ordinary course of business to secure performance of obligations with respect to statutory or regulatory requirements, performance or return-of-money bonds, surety or indemnity bonds or other obligations of a like nature and Incurred in a manner consistent with industry practice, in each case which are not Incurred in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of Property and which do not in the aggregate impair in any material respect the use of Property in the operation of the business of the Company and the Restricted Subsidiaries taken as a whole; (e) Liens on Property at the time the Company or any Restricted Subsidiary acquired such Property, including any acquisition by means of a merger or consolidation with or into the Company or any Restricted Subsidiary; provided, however, that any such Lien may not extend to any other Property of the Company or any Restricted Subsidiary; provided further, however, that such Liens shall not have been Incurred in anticipation of or in connection with the transaction or series of transactions pursuant to which such Property was acquired by the Company or any Restricted Subsidiary; (f) Liens on the Property of a Person at the time such Person becomes a Restricted Subsidiary; provided, however, that any such Lien may not extend to any other Property of the Company or any other Restricted Subsidiary which is not a direct Subsidiary of such Person; provided further, however, that any such Lien was not Incurred in anticipation of or in connection with the transaction or series of transactions pursuant to which such Person became a Restricted Subsidiary; (g) pledges or deposits by the Company or any Restricted Subsidiary under workmen's compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Debt) or leases to which the Company or any Restricted Subsidiary is party, or deposits to secure public or statutory obligations of the Company, or deposits for the payment of rent, in each case Incurred in the ordinary course of business; (h) utility easements, building restrictions and such other encumbrances or charges against real Property as are of a nature generally existing with respect to properties of a similar character; (i) judgment and attachment Liens in connection with (A) judgments that do not constitute an Event of Default so long as the judgment creditor is not seeking enforcement thereof and reserves have been established to the extent required by GAAP as in effect at such time and (B) litigation and legal 80 proceedings that are being contested in good faith by appropriate proceedings (or as to which the Company or Restricted Subsidiary, as the case may be, is preparing to promptly initiate appropriate proceedings) so long as reserves have been established to the extent required by GAAP as in effect at such time and so long as such Liens do not encumber assets by an aggregate amount (together with the amount of any unstayed judgments against the Company or any Restricted Subsidiary) in excess of $7.5 million; (j) Liens existing on the Issue Date not otherwise described in clauses (a) through (i) above; and (k) Liens on the Property of the Company or any Restricted Subsidiary to secure any Refinancing, in whole or in part, of any Debt secured by Liens referred to in clause (a), (e), (f) or (j) above; provided, however, that any such Lien shall be limited to all or part of the same Property that secured the original Lien (together with improvements and accessions to such Property) and the aggregate principal amount of Debt that is secured by such Lien shall not be increased to an amount greater than the sum of (i) the outstanding principal amount, or, if greater, the committed amount, of the Debt secured by Liens described under clause (a), (e), (f) or (j) above, as the case may be, at the time the original Lien became a Permitted Lien under the Indenture and (ii) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, Incurred by the Company or such Restricted Subsidiary in connection with such Refinancing. "Permitted Refinancing Debt" means any Debt that Refinances any other Debt, including any successive Refinancings, so long as (a) such Debt is in an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) not in excess of the sum of (i) the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding of the Debt being Refinanced and (ii) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, related to such Refinancing, (b) the Average Life of such Debt is equal to or greater than the Average Life of the Debt being Refinanced, (c) the Stated Maturity of such Debt is no earlier than the Stated Maturity of the Debt being Refinanced and (d) such Debt is subordinated in right of payment to Senior Debt and the Exchange Notes to at least the same extent, if any, as the Debt being Refinanced; provided, however, that Permitted Refinancing Debt shall not include (x) Debt of a Subsidiary that Refinances Debt of the Company or (y) Debt of the Company or a Restricted Subsidiary that Refinances Debt of an Unrestricted Subsidiary. "Person" means any individual, corporation, company (including any limited liability company), partnership, joint venture, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock" means any Capital Stock of a Person, however designated, which entitles the holder thereof to a preference with respect to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of any other class of Capital Stock issued by such Person. "pro forma" means, with respect to any calculation made or required to be made pursuant to the terms hereof, a calculation performed in accordance with Article 11 of Regulation S-X promulgated under the Securities Act, as interpreted in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, or otherwise a calculation made in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, as the case may be. "Property" means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including Capital Stock in, and other securities of, any other Person. "Public Equity Offering" means an underwritten public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act. 81 "Purchase Money Debt" means Debt (a) consisting of the deferred purchase price of property, conditional sale obligations, obligations under any title retention agreement, other purchase money obligations and obligations in respect of industrial revenue bonds, in each case where the maturity of such Debt does not exceed the anticipated useful life of the asset being financed, and (b) Incurred to finance the acquisition or construction by the Company or a Restricted Subsidiary of such asset, including remodelling thereof and additions and improvements thereto; provided, however, that such Debt is Incurred within 180 days after such acquisition of such asset by the Company or a Restricted Subsidiary or completion of such construction, remodelling, addition or improvement, as the case may be. "Redeemable Stock" means, with respect to any Person, any Capital Stock that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable, in either case at the option of the holder thereof) or otherwise (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b) is or may become redeemable or repurchaseable at the option of the holder thereof, in whole or in part, or (c) is convertible or exchangeable, in either case at the option of the holder thereof, for Debt or Disqualified Stock. "Refinance" means, in respect of any Debt, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Debt, in exchange or replacement for, such Debt. "Refinanced" and "Refinancing" shall have correlative meanings. "Related Business" means any business that is related, ancillary or complementary to the businesses of the Company and the Restricted Subsidiaries on the Issue Date. "Representative" means the trustee, agent or representative expressly authorized to act in such capacity, if any, for an issue of Senior Debt. "Restricted Payment" means (a) any dividend or distribution (whether made in cash, securities or other Property) declared or paid on or with respect to any shares of Capital Stock of the Company or any Restricted Subsidiary (including any payment in connection with any merger or consolidation with or into the Company or any Restricted Subsidiary), except for any dividend or distribution which is made solely to the Company or a Restricted Subsidiary (and, if such Restricted Subsidiary is not a Wholly Owned Subsidiary, to the other shareholders of such Restricted Subsidiary on a pro rata basis or on a basis that results in the receipt by the Company or a Restricted Subsidiary of dividends or distributions of greater value than it would receive on a pro rata basis) or any dividend or distribution payable solely in shares of Capital Stock (other than Disqualified Stock) of the Company; (b) the purchase, repurchase, redemption, acquisition or retirement for value of any Capital Stock of the Company or any Affiliate of the Company (other than from the Company or a Restricted Subsidiary) or any securities exchangeable for or convertible into any such Capital Stock, including the exercise of any option to exchange any Capital Stock (other than for or into Capital Stock of the Company that is not Disqualified Stock); (c) the purchase, repurchase, redemption, acquisition or retirement for value, prior to any scheduled maturity, scheduled sinking fund or mandatory redemption payment, any Subordinated Obligation (other than the purchase, repurchase or other acquisition of any Subordinated Obligation 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 (d) any Investment (other than Permitted Investments) in any Person. "Restricted Subsidiary" means (a) any Subsidiary of the Company unless such Subsidiary shall have been designated an Unrestricted Subsidiary as permitted or required pursuant to the covenant described under "--Certain Covenants-- Designation of Restricted and Unrestricted Subsidiaries" and (b) an Unrestricted Subsidiary which is redesignated as a Restricted Subsidiary as permitted pursuant to the covenant described under "--Certain Covenants--Designation of Restricted and Unrestricted Subsidiaries". "S&P" means Standard & Poor's Ratings Service or any successor to the rating agency business thereof. "Sale and Leaseback Transaction" means any arrangement relating to Property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such Property to another Person and the Company or a Restricted Subsidiary leases it from such Person. 82 "Securities Act" means the Securities Act of 1933. "Senior Debt" of the Company means (a) all obligations consisting of the principal, premium, if any, and accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company to the extent post-filing interest is allowed in such proceeding) in respect of (i) Debt of the Company for borrowed money and (ii) Debt of the Company evidenced by notes, debentures, bonds or other similar instruments permitted under the Indenture for the payment of which the Company is responsible or liable; (b) all Capital Lease Obligations of the Company; (c) all obligations of the Company (i) for the reimbursement of any obligor on any letter of credit, bankers' acceptance or similar credit transaction, (ii) under Hedging Obligations or (iii) issued or assumed as the deferred purchase price of Property and all conditional sale obligations of the Company and all obligations under any title retention agreement permitted under the Indenture; and (d) all obligations of other Persons of the type referred to in clauses (a), (b) and (c) for the payment of which the Company is responsible or liable as Guarantor; provided, however, that Senior Debt shall not include (A) Debt of the Company that is by its terms subordinate or pari passu in right of payment to the Exchange Notes, including any Senior Subordinated Debt or any Subordinated Obligations; (B) any Debt Incurred in violation of the provisions of the Indenture; (C) accounts payable or any other obligations of the Company to trade creditors created or assumed by the Company in the ordinary course of business in connection with the obtaining of materials or services (including Guarantees thereof or instruments evidencing such liabilities); (D) any liability for Federal, state, local or other taxes owed or owing by the Company; (E) any obligation of the Company to any Subsidiary; or (F) any obligations with respect to any Capital Stock. "Senior Debt" of any Subsidiary Guarantor has a correlative meaning. "Senior Subordinated Debt" of the Company means the Exchange Notes and any other subordinated Debt of the Company that specifically provides that such Debt is to rank pari passu with the Exchange Notes and is not subordinated by its terms to any other subordinated Debt or other obligation of the Company which is not Senior Debt. "Senior Subordinated Debt" of any Subsidiary Guarantor has a correlative meaning. "Significant Subsidiary" means any Subsidiary that would be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the Commission. "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). "Subordinated Obligation" means any Debt of the Company or any Subsidiary Guarantor (whether outstanding on the Issue Date or thereafter Incurred) which is subordinate or junior in right of payment to the Exchange Notes or the applicable Subsidiary Guarantee pursuant to a written agreement to that effect. "Subsidiary" means, in respect of any Person, any corporation, company, association, partnership, joint venture or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled directly or indirectly, by (a) such Person, (b) such Person and one or more Subsidiaries of such Person or (c) one or more Subsidiaries of such Person. "Subsidiary Guarantor" means each Domestic Restricted Subsidiary that becomes a Subsidiary Guarantor pursuant to the covenant described under "-- Certain Covenants--Limitation on Non-Guarantor Subsidiary Debt". "Subsidiary Guaranty" means a Guarantee on the terms set forth in the Indenture by a Subsidiary Guarantor of the Company's obligations with respect to the Exchange Notes. "Temporary Cash Investments" means any of the following: (a) Investments in U.S. Government Obligations; (b) Investments in time deposit accounts, certificates of deposit and money market deposits maturing within 90 days of the date of acquisition thereof issued by a bank or trust company which is organized under the 83 laws of the United States of America or any state thereof having capital, surplus and undivided profits aggregating in excess of $500.0 million and whose long-term debt is rate "A-3" or "A-" or higher according to Moody's or S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act); (c) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (a) entered into with a bank meeting the qualifications described in clause (b) above; (d) Investments in commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America with a rating at the time as of which any Investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act); (e) direct obligations (or certificates representing an ownership interest in such obligations) of any state of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of such state is pledged and which are not callable or redeemable at the issuer's option, provided that (i) the long-term debt of such state is rated "A- 3" or "A-" or higher according to Moody's or S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)) and (ii) such obligations mature within 180 days of the date of acquisition thereof; and (f) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (a) through (e) above. "Unrestricted Subsidiary" means (a) any Subsidiary of the Company in existence on the Issue Date that is not a Restricted Subsidiary; (b) any Subsidiary of an Unrestricted Subsidiary; and (c) any Subsidiary of the Company that is designated after the Issue Date as an Unrestricted Subsidiary as permitted or required pursuant to the covenant described under "--Certain Covenants--Designation of Restricted and Unrestricted Subsidiaries" and not thereafter redesignated as a Restricted Subsidiary as permitted pursuant thereto. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "Voting Stock" of a corporation means all classes of Capital Stock of such corporation then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means, at any time, a Restricted Subsidiary all the Voting Stock of which (except directors' qualifying shares) is at such time owned, directly or indirectly, by the Company and its other Wholly Owned Subsidiaries. BOOK-ENTRY SYSTEM The Exchange Notes may be issued in the form of one or more global securities (collectively, a "Global Security"). A Global Security will be deposited with, or on behalf of, the DTC and registered in the name of the DTC or its nominee. Except as set forth below, a Global Security may be transferred, in whole and not in part, only to the DTC or another nominee of the DTC. Investors may hold their beneficial interests in a Global Security directly through the DTC if they have an account with the DTC or indirectly through organizations which have accounts with the DTC. Depository Procedures Upon the issuance of a Global Security, DTC or its nominee will credit the accounts of Persons holding through it with the respective principal amounts of the Exchange Notes represented by such Global Security purchased by such Persons in the Offering. Such accounts shall be designated by the Initial Purchasers. Ownership of beneficial interests in a Global Security will be limited to Persons that have accounts with DTC ("participants") or Persons that may hold interests through participants. Any Person acquiring an interest in a Global Security 84 through an offshore transaction in reliance on Regulation S of the Securities Act may hold such interest through Cedel or Euroclear. Ownership of beneficial interests in a Global Security will be shown on, and the transfer of that ownership interest will be effected only through, records maintained by DTC (with respect to participants' interests) and such participants (with respect to the owners of beneficial interests in such Global Security other than participants). The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to transfer beneficial interests in a Global Security. Payment of principal of and interest on Exchange Notes represented by a Global Security will be made in immediately available funds to DTC or its nominee, as the case may be, as the sole registered owner and the sole holder of the Exchange Notes represented thereby for all purposes under the Indenture. The Company has been advised by DTC that upon receipt of any payment of principal of or interest on any Global Security, DTC will immediately credit, on its book- entry registration and transfer system, the accounts of participants with payments in amounts proportionate to their respective beneficial interests in the principal or face amount of such Global Security as shown on the records of DTC. Payments by participants to owners of beneficial interests in a Global Security held through such participants will be governed by standing instructions and customary practices as is now the case with securities held for customer accounts registered in "street name" and will be the sole responsibility of such participants. A Global Security may not be transferred except as a whole by DTC or a nominee of DTC to a nominee of DTC or to DTC. A Global Security is exchangeable for certificated Exchange Notes only if (a) DTC notifies the Company that it is unwilling or unable to continue as a depositary for such Global Security or if at any time DTC ceases to be a clearing agency registered under the Exchange Act, (b) the Company in its discretion at any time determines not to have all the Exchange Notes represented by such Global Security or (c) there shall have occurred and be continuing a Default or an Event of Default with respect to the Exchange Notes represented by such Global Security. Any Global Security that is exchangeable for certificated Exchange Notes pursuant to the preceding sentence will be exchanged for certificated Exchange Notes in authorized denominations and registered in such names as DTC or any successor depositary holding such Global Security may direct. Subject to the foregoing, a Global Security is not exchangeable, except for a Global Security of like denomination to be registered in the name of DTC or any successor depositary or its nominee. In the event that a Global Security becomes exchangeable for certificated Exchange Notes, (a) certificated Exchange Notes will be issued only in fully registered form in denominations of $1,000 or integral multiples thereof, (b) payment of principal of, and premium, if any, and interest on, the certificated Exchange Notes will be payable, and the transfer of the certificated Exchange Notes will be registerable, at the office or agency of the Company maintained for such purposes and (c) no service charge will be made for any registration of transfer or exchange of the certificated Exchange Notes, although the Company may require payment of a sum sufficient to cover any tax or governmental charge imposed in connection therewith. So long as DTC or any successor depositary for a Global Security, or any nominee, is the registered owner of such Global Security, DTC or such successor depositary or nominee, as the case may be, will be considered the sole owner or holder of the Exchange Notes represented by such Global Security for all purposes under the Indenture and the Exchange Notes. Except as set forth above, owners of beneficial interests in a Global Security will not be entitled to have the Exchange Notes represented by such Global Security registered in their names, will not receive or be entitled to receive physical delivery of certificated Exchange Notes in definitive form and will not be considered to be the owners or holders of any Exchange Notes under such Global Security. Accordingly, each Person owning a beneficial interest in a Global Security must rely on the procedures of DTC or any successor depositary, and, if such Person is not a participant, on the procedures of the participant through which such Person owns its interest, to exercise any rights of a holder under the Indenture. The Company understands that under existing industry practices, in the event that the Company requests any action of holders or that an owner of a beneficial interest in a Global Security desires to give or take any action which a holder is entitled to give or take under the Indenture, DTC or any successor depositary would authorize the participants holding the relevant beneficial interest to give or take such action and such participants would authorize beneficial owners owning through such participants to give or take such action or would otherwise act upon the instructions of beneficial owners owning through them. 85 DTC has advised the Company that DTC is a limited-purpose trust company organized under the Banking Law of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered under the Exchange Act. DTC was created to hold the securities of its participants and to facilitate the clearance and settlement of securities transactions among its participants in such securities through electronic book-entry changes in accounts of the participants, thereby eliminating the need for physical movement of securities certificates. DTC's participants include securities brokers and dealers (which may include the Initial Purchasers), banks, trust companies, clearing corporations and certain other organizations some of whom (or their representatives) own DTC. Access to DTC's book-entry system is also available to others, such as banks, brokers, dealers and trust companies, that clear through or maintain a custodial relationship with a participant, either directly or indirectly. Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in Global Securities among participants of DTC, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. None of the Company, the Trustee or the Initial Purchasers will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. 86 DESCRIPTION OF OTHER SECURITIES EXCHANGE PREFERRED STOCK In connection with the Recapitalization, Holding issued 300,000 shares of its 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010, $100 liquidation preference per share (the "Holding Preferred Stock"). Concurrently with the Exchange Offer, Holding is offering to exchange the Holding Preferred Stock for its 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010 (the "Exchange Preferred Stock"), which Exchange Preferred Stock in being registered pursuant to the terms of the Exchange Offer Registration Agreement. Subject to certain conditions, the Holding Preferred Stock is, and the Exchange Preferred Stock will be, exchangeable for the Company's 11 1/2% Subordinated Exchange Debentures due 2010 or the Company's 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010, $100 liquidation preference per share, at the option of Holding at any time. When issued, the Exchange Preferred Stock will be validly issued, fully paid and nonassessable. The holders of the Exchange Preferred Stock will have no preemptive or preferential right to purchase or subscribe to stock, obligations, warrants, or other securities of Holding of any class. Ranking. The Exchange Preferred Stock will, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank (i) senior to all classes of common stock and to each other class of capital stock or series of preferred stock of Holding, the terms of which do not expressly provide that it ranks senior to, or on a parity with, the Exchange Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution of Holding ("Junior Stock"); and (ii) on a parity with each other class of capital stock or series of preferred stock of Holding, the terms of which expressly provide that such class or series will rank on a parity with the Exchange Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution ("Parity Stock"). While any shares of Exchange Preferred Stock are outstanding, Holding may not authorize, create or increase the authorized amount of any class or series of capital stock or preferred stock, the terms of which expressly provide that such class or series will rank senior to the Exchange Preferred Stock as to dividend rights and rights upon liquidation, winding-up and dissolution of Holding (collectively referred to as "Senior Stock"), or Parity Stock, without the consent of the holders of at least 66 2/3% of the outstanding shares of Exchange Preferred Stock. Creditors of Holding will have priority over the Exchange Preferred Stock with respect to claims on the assets of Holding. In addition, creditors and stockholders of Holding's subsidiaries, including the Company and Industrias Hudson, will have priority over the Exchange Preferred Stock with respect to claims on the assets of such subsidiaries, including claims of Holding with respect to the Mirror Preferred Stock. Holding will rely upon distributions or advances from the Company and its subsidiaries to provide the funds necessary to pay cash dividends on the Exchange Preferred Stock. The Company and its subsidiaries are subject to contractual and statutory limitations on their ability to make distributions and advances to Holding. In particular, the New Credit Facility prohibits and the Indenture governing the Notes and the Exchange Notes restricts the payment of distributions and advances by the Company and its subsidiaries to Holding and future agreements may contain similar restrictions. Dividends. The holders of shares of Exchange Preferred Stock will be entitled to receive, when, as and if dividends are declared by the board of directors of Holding out of funds of Holding legally available therefor, cumulative preferential dividends from the date of issuance of the Exchange Preferred Stock accruing at the rate per share of 11 1/2% per annum, payable semi-annually on April 15 and October 15. Dividends will be payable in cash, except that on each dividend payment date occurring on or prior to April 15, 2003, dividends may be paid, at Holding's option, by the issuance of additional shares of Exchange Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. Optional Redemption. The Exchange Preferred Stock will not be redeemable at the option of Holding prior to April 15, 2003. Thereafter, the Exchange Preferred Stock will be redeemable, at Holding's option, in whole or in part, at any time or from time to time, upon not less than 30 no more than 60 days' prior notice at the redemption prices set forth in the Certificate of Designation governing the Exchange Preferred Stock (the "Certificate of Designation") plus accumulated and unpaid dividends (including an amount in cash equal to a prorated dividend for any partial dividend). In addition, at any time prior to April 15, 2001, Holding may redeem, 87 at its option, (i) up to 50% or (ii) all but not less than all of the outstanding shares of Exchange Preferred Stock with the proceeds of any public equity offering of common stock of the Company at a redemption price (expressed as a percentage of the liquidation preference thereof) of 111 1/2% plus accumulated and unpaid dividends (including an amount in cash equal to a prorated dividend for any partial dividend period). Any such redemption shall be made upon consummation of such public equity offering upon not less than 30 nor more than 60 days' notice. Exchange for Company Exchange Debentures or Company Preferred Stock. Holding may, at its option, subject to certain conditions, exchange the Exchange Preferred Stock at any time, in whole but not in part, for either Company Exchange Debentures or Company Preferred Stock; provided, however, that (i) on the date of such exchange there are no accumulated and unpaid dividends on the Exchange Preferred Stock (including the dividend payable on such date) or other contractual impediments to such exchange; (ii) the exchange is permitted under applicable laws; (iii) immediately after giving effect to such exchange, no Default (as defined in the Company Exchange Indenture) or Voting Rights Triggering Event (as defined in the Company Certificate of Designation), as applicable, shall have occurred and be continuing; and (iv) the Company shall have delivered to the Trustee under the Company Exchange Indenture or the transfer agent for the Company Preferred Stock, as applicable, an opinion of counsel with respect to the due authorization and issuance of the Company Exchange Debentures or Company Preferred Stock, as applicable. The exchange of the Exchange Preferred Stock for Company Exchange Debentures or Company Preferred Stock is prohibited by the terms of the New Credit Facility and the exchange of Exchange Preferred Stock for Company Exchange Debentures is limited by the terms of the Indenture governing the Notes and the Exchange Notes. See "Description of the Exchange Notes" and "Description of New Credit Facility." Upon any exchange of Exchange Preferred Stock for Company Exchange Debentures, holders of outstanding shares of Exchange Preferred Stock will be entitled to receive $1.00 principal amount of Company Exchange Debentures for each $1.00 liquidation preference of Exchange Preferred Stock held by them and an amount in cash equal to a prorated dividend for any partial dividend period; provided, however, that Holding may pay cash in lieu of issuing a Company Exchange Debenture in a principal amount less than $1,000. Upon any exchange of Exchange Preferred Stock for Company Preferred Stock holders of outstanding shares of Exchange Preferred Stock will be entitled to receive shares of Company Preferred Stock with an aggregate liquidation preference equal to the aggregate liquidation preference of the shares of Exchange Preferred Stock so exchanged and an amount in cash equal to a prorated dividend for any partial dividend period. Holding may pay cash in lieu of issuing a fractional share of Company Preferred Stock. Mandatory Redemption. On April 15, 2010, Holding will be required to redeem (subject to the legal availability of funds therefor) all outstanding shares of Exchange Preferred Stock at a price in cash equal to the liquidation preference thereof, plus accumulated and unpaid dividends (including an amount in cash equal to a prorated dividend for any partial dividend period), if any, to the date of redemption. Holding will not be required to make sinking fund payments with respect to the Exchange Preferred Stock. Liquidation Preference. Upon any voluntary or involuntary liquidation, dissolution or winding-up of Holding, each holder of Exchange Preferred Stock will be entitled to be paid, out of the assets of Holding available for distribution to stockholders, an amount equal to the liquidation preference per share of Exchange Preferred Stock held by such holder, plus accumulated and unpaid dividends thereon to the date fixed for liquidation, dissolution or winding-up. Voting Rights. The holders of Exchange Preferred Stock, except as otherwise required under Delaware law or as provided in the Certificate of Designation, shall not be entitled or permitted to vote on any matter required or permitted to be voted upon by the stockholders of Holding. The Certificate of Designation will provide that if (i) dividends on the Exchange Preferred Stock are in arrears and unpaid (and, in the case of dividends payable after April 15, 2003, are not paid in cash) for six or more dividend periods (whether or not consecutive), (ii) Holding fails to redeem the Exchange Preferred Stock on April 15, 2010, or fails to otherwise discharge any redemption obligation with respect to the Exchange Preferred Stock, (iii) Holding fails to make an offer to purchase all of the outstanding shares of Exchange Preferred Stock following a change of control (whether or not Holding is permitted to do so by the terms of the Indenture, the New Credit Facility or any other obligation of Holding), (iv) a breach or violation of any covenant contained in the Certificate of Designation occurs and, subject to certain exceptions, continues for a period of 30 days or more after Holding receives notice thereof specifying the default from the 88 holders of at least 25% of the shares of Exchange Preferred Stock then outstanding, (v) a breach or violation of any of the provisions of the Mirror Preferred Stock occurs, or (vi) Holding fails to pay at final maturity (giving effect to any applicable grace period) the principal amount of any indebtedness of Holding or any subsidiary of Holding or the stated maturity of any such indebtedness of Holding or any subsidiary of Holding is accelerated because of a default and the total amount of such indebtedness exceeds $7.5 million (individually, a "Voting Rights Triggering Event"), then the holders of the outstanding shares of Exchange Preferred Stock, voting together as a class with the holders of any other series of preferred stock upon which like rights have been conferred and are exercisable, will be entitled to elect two additional members to the board of directors of Holding to serve on such board of directors, and the number of members of such board of directors will be immediately and automatically increased by two. Repurchase at the Option of Holders Upon a Change of Control. Upon the occurrence of certain events constituting a change of control of Holding, each holder of Exchange Preferred Stock shall have the right to require Holding to repurchase all or any part of such holder's Exchange Preferred Stock at a purchase price equal to 101% of the liquidation preference thereof, plus accrued and unpaid dividends thereon, if any, to the purchase date. Since the New Credit Facility prohibits the Company from paying or making, and the Indenture limits the ability of the Company to pay or make dividends or loans to Holding, Holding's ability to pay cash to holders of Exchange Preferred Stock upon a repurchase will be limited. See "Description of New Credit Facility" and "Description of the Exchange Notes." Certain Covenants. The Certificate of Designation contains covenants restricting the ability of Holding, the Company and the Company's restricted subsidiaries to, among others, (i) incur additional debt, (ii) make certain restricted payments and investments, (iii) issue or sell capital stock of certain restricted subsidiaries, (iv) restrict distributions from certain restricted subsidiaries, (v) enter into transactions with affiliates and (vi) engage in certain consolidations, mergers or transfers of assets. In addition, the Certificate of Designation restricts the ability of Holding to engage in any business or activity other than those relating to the ownership of capital stock of the Company. All of these restrictions will be subject to a number of important qualifications. The preceding discussion of certain provisions of the Exchange Preferred Stock is not intended to be exhaustive and is qualified in its entirety by reference to the provisions of the Certificate of Designation governing the Exchange Preferred Stock, copies of which are available upon request from Holding. MIRROR PREFERRED STOCK In connection with the Recapitalization, Holding acquired 300,000 shares of the Company's 11 1/2% Senior PIK Preferred Stock due 2010 (the "Mirror Preferred Stock"). Dividends on the Mirror Preferred Stock accrue from the date of issuance and are payable semiannually in arrears on April 15 and October 15 of each year (each a "Dividend Payment Date"), commencing October 15, 1998, at a rate per annum of 11 1/2% of the liquidation preference per share. The liquidation preference of each share of Mirror Preferred Stock is $100 (the "Liquidation Preference"). Dividends are payable in cash, except that on each Dividend Payment Date occurring on or prior to April 15, 2003, dividends may be paid, at the Company's option, by the issuance of additional shares of Mirror Preferred Stock (including fractional shares) having an aggregate liquidation preference equal to the amount of such dividends. The Company is required to redeem the Mirror Preferred Stock on April 15, 2010, at a redemption price equal to 100% of the liquidation preference thereof plus accumulated and unpaid dividends, if any, to the date of redemption. The Mirror Preferred Stock ranks (i) senior to all existing and future Junior Stock of the Company and (ii) on a parity with all existing and future Parity Stock of the Company. In addition, the Mirror Preferred Stock will rank junior in right of payment to all obligations of the Company and its subsidiaries, including Industrias Hudson. The Mirror Preferred will be entitled to one half a vote per share on all matters submitted to the Company's common shareholders and will vote as a class with the Common Stock. Upon consummation of the Recapitalization, the Company amended the Mirror Preferred Stock to contain additional provisions substantially similar to the Exchange Preferred Stock, except that the Mirror Preferred Stock will not be exchangeable. 89 COMPANY PREFERRED STOCK If Holding elects to exchange any Exchange Preferred Stock for Company Preferred Stock, holders of outstanding shares of Exchange Preferred Stock will be entitled to receive shares of Company Preferred Stock with an aggregate liquidation preference equal to the aggregate liquidation preference of the shares of Exchange Preferred Stock so exchanged and an amount in cash equal to a prorated dividend for any partial dividend period. Holding may pay cash in lieu of a fractional share of Company Preferred Stock. If issued in exchange for the Exchange Preferred Stock, the Company Preferred Stock will be validly issued, fully paid and nonassessable. The holders of the Company Preferred Stock will have no preemptive or preferential right to purchase or subscribe to stock, obligations, warrants, or other securities of the Company of any class. The Company Preferred Stock is expected to be eligible for trading in the Portal Market. Ranking. The Company Preferred Stock will, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank (i) senior to all existing and future Parity Stock of the Company and (ii) on a parity with all existing and future Parity Stock of the Company. While any shares of Company Preferred Stock are outstanding, the Company may not authorize, create or increase the authorized amount of any class or series of Senior Stock or Parity Stock without the consent of the holders of a least 66 2/3% of the outstanding shares of Company Preferred Stock. Creditors of the Company, including the lenders under the New Credit Facility and holders of the Notes, will have priority over the Company Preferred Stock with respect to claims on the assets of the Company. In addition, creditors and stockholders of the Company's subsidiaries, including Industrias Hudson, will have priority over the Company Preferred Stock with respect to claims on the assets of such subsidiaries. Dividends. The holders of shares of the Company Preferred Stock will be entitled to receive, when, as and if dividends are declared by the board of directors of the Company out of funds of the Company legally available therefor, cumulative preferential dividends from the date of issuance of the Company Preferred Stock accruing at the rate per share of 11 1/2% per annum, payable semiannually. Dividends will be payable in cash, except that on each dividend payment date occurring on or prior to April 15, 2003, dividends may be paid, at the Company's option, by the issuance of additional shares of the Company Preferred Stock (including fractional shares) having an aggregate liquidation preference equal to the amount of such dividends. Optional Redemption. The Company Preferred Stock will not be redeemable at the option of the Company prior to April 15, 2003. Thereafter, the Company Preferred Stock will be redeemable, at the Company's option, in whole or in part, at any time or from time to time, upon not less than 30 no more than 60 days' prior notice at the redemption prices set forth in the Certificate of Designation governing the Company Preferred Stock (the "Company Exchange Certificate of Designation") plus accumulated and unpaid dividends (including an amount in cash equal to a prorated dividend for any partial dividend). In addition, at any time prior to April 15, 2001, the Company may redeem, at its option, (i) up to 50% or (ii) all but not less than all of the outstanding shares of Company Preferred Stock with the proceeds of any public equity offering of common stock of the Company at a redemption price (expressed as a percentage of the liquidation preference thereof) of 111 1/2% plus accumulated and unpaid dividends (including an amount in cash equal to a prorated dividend for any partial dividend period). Any such redemption shall be made upon consummation of such public equity offering upon not less than 30 nor more than 60 days' notice. Exchange for Company Exchange Debentures. The Company may, at its option, subject to certain conditions, exchange the Company Preferred Stock, in whole but not in part, for Company Exchange Debentures at any time; provided, however, that (i) on the date of such exchange there are no accumulated and unpaid dividends on the Company Preferred Stock (including the dividend payable on such date) or other contractual impediments to such exchange; (ii) the exchange is permitted under applicable laws; (iii) immediately after giving effect to such exchange, no Default (as defined in the Company Exchange Indenture) shall have occurred and be continuing; and (iv) the Company shall have delivered to the Trustee under the Company Exchange Indenture an opinion of counsel with respect to the due authorization and issuance of the Company Exchange Debentures. The exchange of the Company Preferred Stock for Company Exchange Debentures is limited by the terms of the New Credit Facility and the Indenture governing the Notes and the Exchange Notes. See "Description of New Credit Facility" and "Description of the Exchange Notes." Upon any exchange of Company Preferred Stock for Company Exchange Debentures, holders of outstanding shares of Company Preferred Stock will be entitled to receive $1.00 principal 90 amount of Company Exchange Debentures for each $1.00 liquidation preference of Company Preferred Stock held by them and an amount in cash equal to a prorated dividend for any partial dividend period; provided, however, that the Company may pay cash in lieu of issuing a Company Exchange Debenture in a principal amount less than $1,000. Mandatory Redemption. On April 15, 2010, the Company will be required to redeem (subject to the legal availability of funds therefor) all outstanding shares of Company Preferred Stock at a price in cash equal to the liquidation preference thereof, plus accumulated and unpaid dividends (including an amount in cash equal to a prorated dividend for any partial dividend period), if any, to the date of redemption. The Company will not be required to make sinking fund payments with respect to the Company Preferred Stock. Liquidation Preference. Upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, each holder of Company Preferred Stock will be entitled to be paid, out of the assets of the Company available for distribution to stockholders, an amount equal to the liquidation preference per share of Company Preferred Stock held by such holder, plus accumulated and unpaid dividends thereon to the date fixed for liquidation, dissolution or winding-up. Voting Rights. The holders of Company Preferred Stock, except as otherwise required under California law or as provided in the Company Exchange Certificate of Designation, shall not be entitled or permitted to vote on any matter required or permitted to be voted upon by the stockholders of the Company. The Company Exchange Certificate of Designation will provide that if (i) dividends on the Company Preferred Stock are in arrears and unpaid (and, in the case of dividends payable after April 15, 2003, are not paid in cash) for six or more dividend periods (whether or not consecutive), (ii) the Company fails to redeem the Company Preferred Stock on April 15, 2010, or fails to otherwise discharge any redemption obligation with respect to the Company Preferred Stock, (iii) the Company fails to make an offer to purchase all of the outstanding shares of Company Preferred Stock following a change of control (whether or not the Company is permitted to do so by the terms of the Indenture, the New Credit Facility or any other obligation of the Company), (iv) a breach or violation of any covenant contained in the Certificate of Designation occurs and, subject to certain exceptions, continues for a period of 30 days or more after the Company receives notice thereof specifying the default from the holders of at least 25% of the shares of Company Preferred Stock then outstanding, (v) a breach or violation of any of the provisions of the Mirror Preferred Stock occurs, or (vi) the Company fails to pay at final maturity (giving effect to any applicable grace period) the principal amount of any indebtedness of the Company or any subsidiary of the Company or the stated maturity of any such indebtedness of the Company or any subsidiary of the Company is accelerated because of a default and the total amount of such indebtedness exceeds $7.5 million, then the holders of the outstanding shares of Company Preferred Stock, voting together as a class with the holders of any other series of preferred stock upon which like rights have been conferred and are exercisable, will be entitled to elect two additional members to the board of directors of the Company to serve on such board of directors, and the number of members of such board of directors will be immediately and automatically increased by two. Repurchase at the Option of Holders Upon a Change of Control. Upon the occurrence of certain events constituting a change of control of the Company, each holder of Company Preferred Stock shall have the right to require the Company to repurchase all or any part of such holder's Company Preferred Stock at a purchase price equal to 101% of the liquidation preference thereof, plus accrued and unpaid dividends thereon, if any, to the purchase date. The indenture governing the Notes limits the ability of the Company to repurchase the Company Preferred Stock. Certain Covenants. The Company Exchange Certificate of Designation contains covenants restricting the ability of the Company and the Company's subsidiaries to, among others, (i) incur additional debt, (ii) make certain restricted payments and investments, (iii) issue or sell capital stock of certain restricted subsidiaries, (iv) restrict distributions from certain restricted subsidiaries, (v) enter into transactions with affiliates and (vi) engage in certain consolidations, mergers or transfers of assets. All of these restrictions will be subject to a number of important qualifications. 91 The preceding discussion of certain provisions of the Company Preferred Stock is not intended to be exhaustive and is qualified in its entirety by reference to the provisions of the Company Exchange Certificate of Designation governing the Company Preferred Stock, copies of which are available upon request from the Company. COMPANY EXCHANGE DEBENTURES The Company Exchange Debentures, if issued, will be issued under the Exchange Indenture dated as of April 7, 1998 (the "Company Exchange Indenture"). The Company Exchange Debentures are expected to be eligible for trading in the Portal Market. The Company Exchange Debentures will mature on April 15, 2010 and will be limited in aggregate principal amount to the liquidation preference of the Exchange Preferred Stock or Company Preferred Stock, as the case may be, plus without duplication, accumulated and unpaid dividends on the exchange date of the Exchange Preferred Stock into Company Exchange Debentures (plus any additional Company Exchange Debentures issued in lieu of cash interest as described herein). Interest. The Company Exchange Debentures will bear interest at the rate of 11 1/2% per annum from the most recent date on which interest has been paid or, if no interest has been paid from the Exchange Date, payable semiannually in cash (or, on or prior to April 15, 2003, in additional Company Exchange Debentures, at the option of Company) in arrears. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Optional Redemption. The Company Exchange Debentures will not be redeemable at the option of Company prior to April 15, 2003. Thereafter, the Company Exchange Debentures will be redeemable, at the Company's option, in whole or in part at any time or from time to time, upon not less than 30 no more than 60 days' prior notice at the redemption prices set forth in the Company Exchange Indenture plus accrued interest to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). In addition, at any time prior to April 15, 2001, the Company may redeem, at its option, (i) up to 50% or (ii) all but not less than all of the outstanding Company Exchange Debentures with the proceeds of any public equity offering of common stock of the Company at a redemption price (expressed as a percentage of principal amount) of 111 1/2% plus accrued interest to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). Any such redemption shall be made upon consummation of such public equity offering upon not less than 30 nor more than 60 days' notice. Subordination. The Company Exchange Debentures will be subordinated, unsecured obligations of the Company. The payment of the principal of, and premium, if any, and interest on, the Company Exchange Debentures will be subordinated in right of payment to the payment when due of all Senior Debt (including senior subordinated indebtedness) of the Company. The Company Exchange Debentures will rank pari passu in right of payment with any future subordinated obligations of the Company. The Company Exchange Debentures will be effectively subordinated to creditors (including trade creditors) and preferred stockholders, if any, of subsidiaries of the Company. Since a portion of the operations of the Company are conducted through subsidiaries, the Company's ability to service its debt, including the Company Exchange Debentures, is partially dependent upon the earnings of any such Subsidiaries and the distribution of those earnings to, or upon loans or other payments of funds by those Subsidiaries to, the Company. The payment of dividends and the making of loans and advances to the Company by such Subsidiaries are subject to statutory restrictions. The Company may not pay principal of, or premium, if any, or interest on, or defease, the Company Exchange Debentures and may not repurchase, redeem or otherwise retire any Company Exchange Debentures (collectively, "pay the Company Exchange Debentures"), if (a) any principal, premium or interest in respect of any Senior Debt (as defined), including the New Credit Facility and the Notes and Exchange Notes, is not paid within any applicable grace period (including at maturity) or (b) any other default on Senior Debt occurs and the maturity of such Senior Debt is accelerated in accordance with its terms unless, in either case, (i) the default has been cured or waived and any such acceleration has been rescinded or (ii) such Senior Debt has been paid in full in cash; provided, however, that the Company may pay the Company Exchange Debentures without regard to the foregoing 92 if the Company and the Trustee receive written notice approving such payment from the Representative of each issue of Designated Senior Debt (as defined). During the continuance of any default (other than a default described in clause (a) or (b) of the preceding sentence) with respect to any Designated Senior Debt pursuant to which the maturity thereof may be accelerated immediately without further notice or the expiration of any applicable grace period, the Company may not pay the Company Exchange Debentures for a period (a "Payment Blockage Period") commencing upon the receipt by the Company and the Exchange Trustee of written notice of such default from the Representative of the holders of such Designated Senior Debt specifying an election to effect a Payment Blockage Period and ending 179 days thereafter. Upon any payment or distribution of the assets of the Company upon a total or partial liquidation, dissolution or winding up of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, the holders of Senior Debt, including the New Credit Facility and the Notes or Exchange Notes, will be entitled to receive payment in full in cash before the holders of the Company Exchange Debentures are entitled to receive any payment of principal of or interest on the Company Exchange Debentures, except that holders of Company Exchange Debentures may receive and retain shares of stock and any debt securities that are subordinated to Senior Debt to at least the same extent as the Company Exchange Debentures. Repurchase at the Option of the Holders Upon a Change of Control. Upon the occurrence of certain events constituting a change of control of the Company, each holder of Company Exchange Debentures shall have the right to require the Company to repurchase all or any part of such holder's Company Exchange Debentures at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the purchase date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). The New Credit Facility prohibits, and the indenture governing the Notes and Exchange Notes limits, the ability of the Company to repurchase the Company Exchange Debentures. Certain Covenants. The Company Exchange Indenture contains covenants restricting the ability of the Company and certain of the Company's subsidiaries to, among others, (i) incur additional debt, (ii) make certain restricted payments and investments, (iii) create certain liens, (iv) issue or sell capital stock of restricted subsidiaries, (v) make certain asset sales, (vi) restrict distributions from restricted subsidiaries, (vii) enter into transactions with affiliates, and (viii) engage in certain consolidations, mergers and transfers of assets. All of these restrictions will be subject to a number of important qualifications. Events of Default. Events of Default in respect of the Company Exchange Debentures as set forth in the Company Exchange Indenture include: (i) failure to make the payment of any interest on the Company Exchange Debentures when the same becomes due and payable, and such failure continues for a period of 30 days, (ii) failure to make the payment of any principal of, or premium, if any, on, any of the Company Exchange Debentures when the same becomes due and payable at its stated maturity, upon acceleration, redemption, optional redemption, required repurchase or otherwise, (iii) failure to comply with any other covenant or agreement in the Company Exchange Debentures or in the Company Exchange Indenture, subject in certain cases, to applicable grace periods, (iv) cross-acceleration to any debt of the Company or any Restricted Subsidiary (as defined) in an aggregate amount greater than $7.5 million, (v) entering of any judgment or judgments for the payment of money in an aggregate amount in excess of $7.5 million against the Company or any Restricted Subsidiary, and (vi) certain events involving bankruptcy, insolvency or reorganization of the Company or any Significant Subsidiary (as defined). The preceding discussion of certain provisions of the Company Exchange Debentures is not intended to be exhaustive and is qualified in its entirety by reference to the provisions of the Company Exchange Indenture, copies of which are available upon request from the Company. 93 CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES The following general discussion summarizes certain of the material U.S. federal income tax aspects of the acquisition, ownership and disposition of the Exchange Notes that are exchanged for Notes in the Exchange Offer. This discussion is a summary for general information only and does not consider all aspects of U.S. federal income taxation that may be relevant to the purchase, ownership and disposition of the Exchange Notes by a prospective investor in light of such investor's individual circumstances. This discussion also does not address the U.S. federal income tax consequences of ownership of Exchange Notes not held as capital assets within the meaning of Section 1221 of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), or the U.S. federal income tax consequences to investors subject to special treatment under the U.S. federal income tax laws, such as dealers in securities or foreign currency, tax- exempt entities, financial institutions, insurance companies, persons that hold the Exchange Notes as part of a "straddle," a "hedge" or a "conversion transaction," persons that have a "functional currency" other than the U.S. dollar, and investors in pass-through entities. In addition, this discussion does not describe any tax consequences arising under U.S. federal gift and estate taxes (except to the limited extent set forth below under "Non-U.S. Holders") or under the tax laws of any state, local or foreign jurisdiction. This discussion is based upon the Code, existing regulations thereunder, and current administrative rulings and court decisions. All of the foregoing is subject to change, possibly on a retroactive basis, and any such change could affect the continuing validity of this discussion. PERSONS CONSIDERING THE PURCHASE OF EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE APPLICATION OF FEDERAL INCOME TAX LAWS, AS WELL AS THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION, TO THEIR PARTICULAR SITUATIONS. U.S. HOLDERS The following discussion is limited to the U.S. federal income tax consequences relevant to a holder of an Exchange Note that is (i) a citizen or resident (as defined in Section 7701(b)(1) of the Code) of the United States, (ii) a corporation or other entity taxable as a corporation organized under the laws of the United States or any political subdivision thereof or therein, (iii) an estate, the income of which is subject to U.S. federal income tax regardless of the source, (iv) a trust, with respect to which a court within the United States is able to exercise primary supervision over its administration and one or more United States persons have the authority to control all its substantial decisions or (v) a person whose worldwide income or gain is subject to U.S. federal income tax on a net income basis (a "U.S. Holder"). Certain U.S. federal income tax consequences relevant to a holder other than a U.S. Holder are discussed separately below. STATED INTEREST Interest on an Exchange Note will be taxable to a U.S. Holder as ordinary interest income at the time it accrues or is received in accordance with such Holder's method of accounting for U.S. federal income tax purposes. MARKET DISCOUNT If an Exchange Note is acquired at a "market discount," some or all of any gain realized upon a sale or other disposition or payment at maturity or some or all of a partial principal payment, of such Exchange Note may be treated as ordinary income, as described below. For this purpose, "market discount" is the excess (if any) of the issue price, or, in the case of a subsequent purchaser, the stated redemption price at maturity, over the purchase price, subject to a statutory de minimis exception. Unless a U.S. Holder has elected to include the market discount in income as it accrues, any gain realized on any subsequent disposition of such Exchange Note (other than in connection with certain nonrecognition transactions) or payment at maturity, or some or all of any partial principal payment with respect to the Exchange Note, will be treated as ordinary income to the extent of the market discount 94 that has not previously been included in income and that is treated as having accrued during the period such U.S. Holder held the Exchange Note. The amount of market discount treated as having accrued will be determined either (i) on a straight-line basis by multiplying the market discount times a fraction, the numerator of which is the number of days the Exchange Note was held by the U.S. Holder and the denominator of which is the total number of days after the date such U.S. Holder acquired the Exchange Note up to and including the date of its maturity or (ii) if the U.S. Holder so elects, on a constant interest rate method. A U.S. Holder may make that election with respect to any Exchange Note but, once made, such election is irrevocable. In lieu of recharacterizing gain upon disposition as ordinary income to the extent of accrued market discount at the time of disposition, a U.S. Holder of an Exchange Note acquired at a market discount may elect to include market discount in income currently, through the use of either the straight-line inclusion method or the elective constant interest method. Once made, the election to include market discount in income currently applies to all Exchange Notes and other obligations held by the U.S. Holder that are purchased at a market discount during the taxable year for which the election is made, and all subsequent taxable years of the U.S. Holder, unless the Internal Revenue Service (the "IRS") consents to a revocation of the election. If an election is made to include market discount in income currently, the basis of the Exchange Note in the hands of the U.S. Holder will be increased by the market discount thereon as it is included in income. Unless a U.S. Holder who acquires an Exchange Note at a market discount elects to include market discount in income currently, such U.S. Holder may be required to defer deductions of all or a portion of any interest paid on indebtedness allocable to such Exchange Notes in an amount not exceeding the deferred income until such income is realized. BOND PREMIUM If a U.S. Holder purchases an Exchange Note and immediately after the purchase the adjusted basis of the Exchange Note exceeds the sum of all amounts payable on the instrument after the purchase date (other than qualified stated interest), the Exchange Note has "bond premium." A U.S. Holder may elect to amortize such bond premium over the remaining term of such Exchange Note (or if it results in a smaller amount of amortizable bond premium, until an earlier call date and in such case by reference to the amount payable on that date). If bond premium is amortized, the amount of interest that must be included in the U.S. Holder's income for each period ending on an interest payment date or at the stated maturity, as the case may be, will be reduced by the portion of premium allocable to such period based on the Exchange Note's yield to maturity (or earlier call date, if reference to the call date and price produces a smaller allowance). If such an election to amortize bond premium is not made, a U.S. Holder must include the full amount of each interest payment in income in accordance with its regular method of accounting and will receive a tax benefit from the premium only in computing such U.S. Holder's gain or loss upon the sale or other disposition or payment of the principal amount of the Exchange Note. An election to amortize premium will apply to amortizable bond premium on all Exchange Notes and other bonds, the interest on which is includible in the U.S. Holder's gross income, held at the beginning of the U.S. Holder's first taxable year to which the election applies or that are thereafter acquired and may be revoked only with the consent of the IRS. SALE, EXCHANGE OR REDEMPTION OF THE EXCHANGE NOTES Upon the disposition of an Exchange Note by sale, exchange or redemption, a U.S. Holder will generally recognize gain or loss equal to the difference between (i) the amount realized on the disposition (other than amounts attributable to accrued interest not yet taken into income) and (ii) the U.S. Holder's adjusted tax basis in the Exchange Note. A U.S. Holder's adjusted tax basis in an Exchange Note generally will equal the cost of the Exchange Note to the U.S. Holder increased by amounts includible in income as market discount (if the U.S. Holder 95 elects to include market discount on a current basis) and reduced by the amount of any payments, other than qualified stated interest payments, received and any bond premium amortized by any U.S. Holder. Assuming the Exchange Note is held as a capital asset, such gain or loss (except to the extent that the market discount rules otherwise provide) will generally constitute capital gain or loss and will be long-term capital gain (taxable at a maximum rate of 20%) if a U.S. Holder who is an individual has held such Exchange Note for longer than eighteen months and mid-term capital gain (taxable at a maximum rate of 28%) if such a U.S. Holder has held such Exchange Note for more than 12 months and not more than 18 months. EXCHANGE OFFER The exchange of a Note for an Exchange Note pursuant to the Exchange Offer should not constitute a taxable exchange. Upon failure to comply with certain of its obligations under the Registration Rights Agreement, the Company would be required to pay Special Interest on the Notes. Although the matter is not free from doubt, if Special Interest becomes payable on the Notes, such Special Interest should be treated in the same manner as stated interest on the Notes. BACKUP WITHHOLDING AND INFORMATION REPORTING Under the Code, a U.S. Holder of an Exchange Note may be subject, under certain circumstances, to information reporting and or backup withholding at a 31% rate with respect to cash payments in respect of interest on, or the gross proceeds from disposition of, an Exchange Note thereof. This withholding applies, only if a U.S. Holder (i) fails to furnish its social security or other taxpayer identification number ("TIN") within a reasonable time after a request therefor, (ii) furnishes an incorrect TIN, (iii) fails to report interest properly, or (iv) fails, under certain circumstances to provide a certified statement, signed under penalty of perjury, that the TIN provided is its correct number and that it is not subject to backup withholding. Any amount withheld from a payment to a U.S. Holder under the backup withholding rules is allowable as a credit and (and may entitle such holder to a refund) against such Holder's U.S. federal income tax liability, provided that the required information is furnished to the IRS. Certain persons are exempt from backup withholding, including corporations and certain financial institutions. Holders of Exchange Notes should consult their tax advisors as to their qualification for exemption from withholding and the procedure for obtaining such exemption. NON-U.S. HOLDERS The following discussion is limited to the U.S. federal income and estate tax consequences relevant to a holder of an Exchange Note that is not a U.S. Holder (a "Non-U.S. Holder"). This discussion does not deal with all aspects of U.S. federal income and estate taxation that may be relevant to the purchase, ownership or disposition of the Exchange Notes by any particular Non-U.S. Holder in light of such Holder's personal circumstances. For purposes of the following discussion, interest and gain on the sale, exchange or other disposition of the Exchange Note will be considered "U.S. trade or business income" if such income or gain is (i) effectively connected with the conduct of a U.S. trade or business or (ii) in the case of a treaty resident, attributable to a U.S. permanent establishment (or to a fixed base) in the United States. STATED INTEREST Generally, any interest paid to a Non-U.S. Holder of an Exchange Note that is not U.S. trade or business income will not be subject to U.S. federal income or withholding tax if the interest qualifies as "portfolio interest." Interest on the Exchange Notes will qualify as portfolio interest if (i) the Non-U.S. Holder does not actually or constructively own 10% or more of the total voting power of all voting stock of the Company and is not a 96 "controlled foreign corporation" with respect to which the Company is a "related person" within the meaning of the Code, and (ii) the beneficial owner, under penalties of perjury, certifies that the beneficial owner is not a U.S. person and such certificate provides the beneficial owner's name and address. The gross amount of payments to a Non-U.S. Holder of interest that do not qualify for the portfolio interest exemption and that are not U.S. trade or business income will be subject to U.S. withholding tax at the rate of 30%, unless a U.S. income tax treaty applies to reduce or eliminate withholding. U.S. trade or business income will be taxed at regular U.S. federal income tax rates rather than the 30% gross rate, and, if such Non-U.S. Holder is a foreign corporation, it may be subject to a branch profits tax equal to 30% (or lesser applicable treaty rate) of its U.S. effectively connected earnings and profits. To claim the benefit of a tax treaty or to claim exemption from withholding because the income is U.S. trade or business income, the Non-U.S. Holder must provide a properly executed Form 1001 or 4224 (or such successor forms as the IRS designates), as applicable, prior to payment of interest. These forms must be periodically updated. On October 6, 1997, the Treasury Department issued final regulations relating to withholding, information reporting and backup withholding that unify current certification procedures and forms and clarify reliance standards (the "Final Regulations"). The Final Regulations generally will be effective with respect to payments made after December 31, 1998. Under the Final Regulations, Form 1001 is replaced by Form W-8. Also under the Final Regulations, a Non-U.S. Holder who is claiming the benefits of a tax treaty may be required to obtain a U.S. taxpayer identification number and to provide certain documentary evidence issued by foreign governmental authorities to prove residence in the foreign country. Certain special procedures are provided in the Final Regulations for payments through qualified intermediaries. SALE, EXCHANGE OR REDEMPTION OF EXCHANGE NOTES Except as described below and subject to the discussion concerning backup withholding, any gain realized by a Non-U.S. Holder on the sale, exchange or redemption of an Exchange Note generally will not be subject to U.S. federal income tax, unless (i) such gain is U.S trade or business income or (ii) subject to certain exceptions, the Non-U.S. Holder is an individual who holds the Exchange Note as a capital asset and (A) is present in the United States for 183 days or more in the taxable year of the disposition and (B) meets certain other requirements. FEDERAL ESTATE TAX Exchange Notes held (or treated as held) by an individual who is a Non-U.S. Holder at the time of his or her death will not be subject to U.S. federal estate tax, provided that the individual did not actually or constructively, own 10% or more of the total voting power of all voting stock of the Company, and income on the Exchange Notes was not U.S. trade or business income. INFORMATION REPORTING AND BACKUP WITHHOLDING The Company must report annually to the IRS and to each Non-U.S. Holder any interest that is subject to U.S. withholding tax or that is exempt from withholding pursuant to a tax treaty or the portfolio interest exception. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides. The regulations provide that backup withholding and information reporting will not apply to payments of principal on the Exchange Notes by the Company to a Non-U.S. Holder, if the Holder certifies as to its non-U.S. status under penalties of perjury or otherwise establishes an exemption (provided that neither the Company nor its paying agent has actual knowledge that the Holder is a U.S. Holder or that the conditions of any other exemption are not, in fact, satisfied). The payment of the proceeds from the disposition of Exchange Notes to or through the United States office of any broker, U.S. or foreign, will be subject to information reporting and possible backup withholding unless the owner certifies as to its non-U.S. status under penalties of perjury or otherwise establishes an exception, provided 97 that the broker does not have actual knowledge that the holder is a U.S. Holder or that the conditions of any other exemption are not, in fact, satisfied. In the case of the payment of proceeds from the disposition of Exchange Notes to or through a non-U.S. office of a broker that is (i) a U.S. person, (ii) a "controlled foreign corporation" for U.S federal income tax purposes or (iii) a foreign person 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment (or for such part of the period that the broker has been in existence) is derived from activities that are effectively connected with the conduct of a U.S. trade or business), the regulations require information reporting on the payment, unless the broker has documentary evidence in its files that the owner is a Non-U.S. Holder and the broker has no actual knowledge to the contrary, but not backup withholding on the payment (absent actual knowledge that the payee is a U.S. Holder). Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be allowed as a refund or a credit against such Non- U.S. Holder's U.S. federal income tax liability, provided that the requisite procedures are followed. 98 PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired as a result of market-making activities or other trading activities and not acquired directly from the Company. The Company has agreed that for a period of 180 days after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until ___________________________, 1998, all dealers effecting transactions in the Exchange Notes may be required to deliver a prospectus. The Company will not receive any proceeds from any sale of Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act, and any profit on any such resale of Exchange Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the Expiration Date, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay the expenses incident to the Exchange Offer and to the Company's performance of, or compliance with, the Exchange Offer Registration Rights Agreement (other than commissions or concessions of any brokers or dealers) and will indemnify the Holders of the Notes against certain liabilities, including liabilities under the Securities Act, in connection with the Exchange Offer. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and persons controlling the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. EXPERTS The audited financial statements and schedules included in this Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm in giving said reports. 99 LEGAL MATTERS Certain legal matters with respect to the legality of the Exchange Notes offered hereby will be passed upon for the Company by Riordan & McKinzie, a Professional Corporation, Los Angeles, California. Certain principals and employees of Riordan & McKinzie are limited partners in a partnership which is a limited partner of an FS&Co. investment fund that owns a majority of Holding's (and indirectly the Company's) equity interests. 100 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- FINANCIAL STATEMENTS Report of Independent Public Accountants........................................................ F-2 Consolidated Balance Sheets as of December 27, 1996 and December 26, 1997....................... F-3 Consolidated Statements of Operations for the Years Ended December 29, 1995, December 27, 1996 and December 26, 1997......................................................................... F-4 Consolidated Statements of Stockholders' Equity for Years Ended December 29, 1995, December 27, 1996 and December 26, 1997......................................................... F-5 Consolidated Statements of Cash Flows for Years Ended December 29, 1995, December 27, 1996 and December 26, 1997......................................................................... F-6 Notes to Consolidated Financial Statements...................................................... F-7 Consolidated Balance Sheet as of March 27, 1998 (unaudited)..................................... F-14 Consolidated Statements of Operations for Quarters Ended March 28, 1997 and March 27, 1998 (unaudited)................................................................................... F-15 Consolidated Statements of Cash Flows for the Quarters Ended March 28, 1997 and March 27, 1998 (unaudited)................................................................................... F-16 Notes to Consolidated Financial Statements...................................................... F-17 PRO FORMA FINANCIAL STATEMENTS Pro Forma Consolidated Balance Sheet as of March 27, 1998....................................... P-1 Pro Forma Consolidated Statements of Operations for the Year Ended December 26, 1997 and the Quarter Ended March 27, 1998.................................................................. P-2 Notes to the Pro Forma Consolidated Financial Statements........................................ P-4
F-1 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 26, 1997 and December 27, 1996, and the related consolidated statements of operations, stockholder's equity and cash flows for the years ended December 26, 1997, December 27, 1996 , and December 29, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hudson Respiratory Care Inc. and subsidiaries as of December 26, 1997 and December 27, 1996, and the results of their operations and their cash flows for the years ended December 26, 1997, December 27, 1996 and December 29, 1995 in conformity with generally accepted accounting principles. Arthur Andersen LLP Orange County, California February 27, 1998 (except with respect to the matter discussed in Note 11, as to which the date is April 7, 1998) F-2 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 27, 1996 AND DECEMBER 26, 1997 (AMOUNTS IN THOUSANDS)
ASSETS 1996 1997 ------ ------- ------- CURRENT ASSETS: Cash and short-term investments............................ $ 1,420 $ 470 Accounts receivable, less allowance for doubtful accounts of $111 and $258 at December 27, 1996 and December 26, 1997, respectively........................................ 20,732 21,282 Inventories................................................ 14,017 16,613 Other assets............................................... 1,247 1,151 ------- ------- Total current assets...................................... 37,416 39,516 ------- ------- PROPERTY, PLANT AND EQUIPMENT, at cost: Land....................................................... 2,172 2,044 Buildings.................................................. 13,284 13,369 Leasehold improvements..................................... 1,315 1,322 Machinery and equipment.................................... 54,751 61,316 Furniture and fixtures..................................... 1,941 2,128 Construction in progress................................... 5,457 1,592 ------- ------- 78,920 81,771 Less--Accumulated depreciation and amortization............ 45,453 48,728 ------- ------- 33,467 33,043 ------- ------- OTHER ASSETS: Intangible assets, net..................................... 5,640 4,436 Other assets............................................... 387 559 ------- ------- 6,027 4,995 ------- ------- $76,910 $77,554 ======= ======= LIABILITIES AND STOCKHOLDER'S EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable to bank...................................... $ 4,000 $ 4,000 Accounts payable........................................... 3,854 3,842 Accrued liabilities........................................ 5,374 5,244 Management bonus........................................... -- 20,000 ------- ------- Total current liabilities................................. 13,228 33,086 ------- ------- NOTES PAYABLE TO BANK, net of current portion................ 24,146 16,250 ------- ------- ACCRUED EQUITY PARTICIPATION PLAN............................ 19,664 5,703 ------- ------- COMMITMENTS AND CONTINGENCIES (Note 4) STOCKHOLDER'S EQUITY: Common stock, no par value: Authorized--15,000,000 shares Issued and outstanding--14,468,720 shares at December 27, 1996 and December 26, 1997................ 3,789 3,789 Cumulative translation adjustment.......................... (197) (345) Retained earnings.......................................... 16,280 19,071 ------- ------- 19,872 22,515 ------- ------- $76,910 $77,554 ======= =======
The accompanying notes are an integral part of these consolidated balance sheets. F-3 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997 (AMOUNTS IN THOUSANDS)
1995 1996 1997 -------- ------- ------- NET SALES......................................... $ 86,825 $93,842 $99,509 COST OF SALES..................................... 47,582 49,405 51,732 -------- ------- ------- Gross profit...................................... 39,243 44,437 47,777 -------- ------- ------- OPERATING EXPENSES: Selling......................................... 8,283 8,961 9,643 Distribution.................................... 4,595 4,829 5,240 General and administrative...................... 9,769 11,277 11,456 Research and development........................ 2,064 2,253 1,845 -------- ------- ------- 24,711 27,320 28,184 -------- ------- ------- Income from operations before equity participation plan ............................................ 14,532 17,117 19,593 PROVISION FOR EQUITY PARTICIPATION PLAN AND BONUSES.......................................... (11,415) (8,249) (6,954) -------- ------- ------- Income from operations............................ 3,117 8,868 12,639 -------- ------- ------- OTHER INCOME AND (EXPENSES): Interest expense................................ (2,424) (2,177) (1,834) Other, net...................................... (811) 463 638 -------- ------- ------- (3,235) (1,714) (1,196) -------- ------- ------- Income (loss) before provision for income taxes... (118) 7,154 11,443 PROVISION FOR STATE INCOME TAXES.................. 280 73 150 -------- ------- ------- Net income (loss)................................. $ (398) $ 7,081 $11,293 ======== ======= ======= Pro forma net income (loss) assuming conversion to C corporation for income tax purposes (Note 5)... $ (111) $ 4,292 $ 6,866 ======== ======= =======
The accompanying notes are an integral part of these consolidated statements. F-4 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997 (DOLLAR AMOUNTS IN THOUSANDS)
COMMON STOCK ----------------- CUMULATIVE NUMBER TRANSLATION RETAINED OF SHARES AMOUNT ADJUSTMENT EARNINGS TOTAL ---------- ------ ----------- -------- ------- BALANCE, December 30, 1994..... 14,468,720 $3,789 $(204) $21,684 $25,269 Stockholder distributions.... -- -- -- (5,637) (5,637) Foreign currency translation loss (Note 1)............... -- -- (122) -- (122) Net loss..................... -- -- -- (398) (398) ---------- ------ ----- ------- ------- BALANCE, December 29, 1995..... 14,468,720 3,789 (326) 15,649 19,112 Stockholder distributions.... -- -- -- (6,450) (6,450) Foreign currency translation gain (Note 1)............... -- -- 129 -- 129 Net income................... -- -- -- 7,081 7,081 ---------- ------ ----- ------- ------- BALANCE, December 27, 1996..... 14,468,720 3,789 (197) 16,280 19,872 Stockholder distributions.... -- -- -- (8,502) (8,502) Foreign currency translation loss (Note 1)............... -- -- (148) -- (148) Net income................... -- -- -- 11,293 11,293 ---------- ------ ----- ------- ------- BALANCE, December 26, 1997..... 14,468,720 $3,789 $(345) $19,071 $22,515 ========== ====== ===== ======= =======
The accompanying notes are an integral part of these consolidated statements. F-5 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 29, 1995, DECEMBER 27, 1996 AND DECEMBER 26, 1997 (AMOUNTS IN THOUSANDS)
1995 1996 1997 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).............................. $ (398) $ 7,081 $ 11,293 Adjustments to reconcile net income (loss) to net cash provided by operating activities-- Depreciation and amortization................ 6,820 6,133 5,847 Gain on disposal of equipment................ (20) (872) (618) Increase in accounts receivable.............. (2,430) (3,503) (550) (Increase) decrease in inventories........... 1,777 (1,223) (2,596) (Increase) decrease in other current assets.. 1 (311) 96 Increase in other assets..................... (23) (152) (100) Increase (decrease) in accounts payable...... (283) 564 (12) Increase (decrease) in accrued liabilities... (920) 167 (130) Increase (decrease) in accrued equity participation plan.......................... 11,415 8,249 (13,961) Increase in management bonus accrual......... -- -- 20,000 -------- -------- -------- Net cash provided by operating activities.. 15,939 16,133 19,269 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment..... (5,850) (6,395) (4,659) Proceeds from sale of property, plant and equipment..................................... 33 1,058 1,068 Increase in notes receivable................... (18) (2) (67) Increase in cash surrender value of life insurance..................................... (5) (5) (5) Additions of intangible assets................. (248) (10) (10) Purchase of Artema (Note 9).................... -- (6,000) -- -------- -------- -------- Net cash used in investing activities...... (6,088) (11,354) (3,673) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable to bank............. (6,743) (4,000) (14,396) Borrowings on notes payable to bank............ 500 6,782 6,500 Stockholder distributions...................... (5,637) (6,450) (8,502) -------- -------- -------- Net cash used in financing activities...... (11,880) (3,668) (16,398) -------- -------- -------- Effect of exchange rate changes on cash.......... (122) 129 (148) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS..................................... (2,151) 1,240 (950) CASH AND SHORT-TERM INVESTMENTS, beginning of year............................................ 2,331 180 1,420 -------- -------- -------- CASH AND SHORT-TERM INVESTMENTS, end of year..... $ 180 $ 1,420 $ 470 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for-- Interest..................................... $ 2,441 $ 1,688 $ 1,969 ======== ======== ======== Income taxes................................. $ 155 $ 94 $ 243 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. F-6 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1997 1. COMPANY BACKGROUND Hudson Respiratory Care Inc. (Hudson or the Company), 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'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 operations are conducted from its primary facility in Temecula, California, facilities in Arlington Heights and Elk Grove, Illinois, and a facility in Ensenada, Mexico. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Principles of Consolidation The consolidated financial statements include the accounts of Hudson and subsidiaries, Industrias Hudson and Oxy Air LLC (Oxy). Hudson owns 79 percent and 99 percent of Industrias Hudson and Oxy, respectively. Hudson's sole stockholder owns the remaining 21 percent and 1 percent of Industrias Hudson and Oxy, respectively. Accordingly, the accompanying financial statements have been prepared on a consolidated basis assuming 100 percent ownership, since all of the issued and outstanding common shares are owned either directly or indirectly by the same stockholder. The minority interests in Industrias Hudson and Oxy not owned by Hudson are not material to the consolidated financial position or results of operations of the Company. All significant intercompany accounts and transactions have been eliminated. Hudson and subsidiaries are collectively referred to herein as the Company. b. Use of Estimates in the Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. c. Cash and Short-Term Investments The Company's policy is to invest cash in excess of operating requirements in income-producing short-term instruments. Short-term investments are stated at cost plus accrued interest, which approximates market value. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. d. Inventories Inventories are stated at the lower of cost or market. Effective January 1, 1996, the Company changed its method of pricing inventory from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. In accordance with APB Opinion No. 20, the Company has restated all prior periods to reflect the conversion to the FIFO method. The effect of the change was not material to the balance sheet or statement of operations. The change in method was made to improve comparability of the Company's financial statements and report inventory balances that more closely reflect the inventory's current cost. F-7 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At December 27, 1996 and December 26, 1997, inventories consisted of the following (amounts in thousands):
1996 1997 ------- ------- Raw materials.............................................. $ 3,962 $ 4,802 Work-in-process............................................ 4,531 4,681 Finished goods............................................. 5,524 7,130 ------- ------- $14,017 $16,613 ======= =======
Work-in-process and finished goods include raw materials, labor and overhead. Certain finished goods are purchased for resale and are not manufactured. e. Depreciation and Amortization Methods Depreciation of property, plant and equipment is provided using both the straight-line and declining-balance methods over the following estimated useful lives: Buildings..................................................... 31.5 years Leasehold improvements........................................ 31.5 years Machinery and equipment....................................... 5 to 7 years Furniture and fixtures........................................ 7 years Heaters....................................................... 5 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. f. Intangible Assets Amortization of intangible assets is provided using the straight-line method over the applicable amortization period. The following is a summary of the components of intangible assets as of fiscal 1996 and 1997 (amounts in thousands):
AMORTIZATION PERIOD 1996 1997 -------------- ------- ------- Covenant not-to-compete................... 5 to 7 years $ 6,525 $ 3,500 Patents................................... 10 years 3,183 3,183 Loan acquisition costs.................... Loan term 258 268 Goodwill.................................. 15 to 20 years 1,920 1,920 Other..................................... 5 to 20 years 233 133 -------------- ------- ------- 12,119 9,004 Less--Accumulated amortization............ (6,479) (4,568) ------- ------- $ 5,640 $ 4,436 ======= =======
g. Foreign Currency Translation The Company follows the principles of Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation", using the local currency as the functional currency of its operating subsidiaries. F-8 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. h. Fiscal Year-End The Company reports its operations on a 52-53 week fiscal year ending on the Friday closest to December 31. The fiscal years ended December 29, 1995, December 27, 1996, and December 26, 1997, were all comprised of 52 week years. i. Post-employment and Post-retirement Benefits The Company does not provide post-employment or post-retirement benefits to employees. Accordingly, SFAS No. 112, "Employers' Accounting for Post- employment Benefits", and SFAS No. 106, "Employers' Accounting for Post- retirement Benefits", have no impact on the Company's financial statements. j. Long-Lived Assets The Company adopted SFAS No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed of", on January 1, 1996. This standard requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of this standard did not have a material effect on the consolidated financial statements. k. New Accounting Pronouncements In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income". This Statement requires that all items that meet the definition of components of comprehensive income be reported in a financial statement for the period in which they are recognized. Components of comprehensive income include revenues, expenses, gains, and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. This Statement is effective for fiscal years beginning after December 15, 1997. Management believes that adoption of this Statement will not have a material effect on the Company's consolidated financial statements. In June 1997, FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This Statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Financial information is required to be reported on the same basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. This Statement is effective for fiscal years beginning after December 15, 1997. Management believes that the adoption of this Statement will not have a material effect on the Company's consolidated financial statements. l. Reclassifications Certain reclassifications have been made in the 1995 and 1996 statements to conform with the 1997 presentation. F-9 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. NOTES PAYABLE TO BANK The Company has a credit agreement with a bank which provides for borrowings of up to approximately $37,250,000. Total borrowings as of fiscal 1995, 1996 and 1997 were approximately $25,364,000, $28,146,000 and, $20,250,000 respectively. This agreement consists of two separate facilities which are summarized as follows: Revolving line of credit--maximum borrowings of $15,000,000 limited to 85 percent of qualified accounts receivable and 50 percent of qualified inventories, maturing on March 31, 2000. The agreement provides for the issuance of letters of credit, not to exceed the maximum borrowings nor to expire later than the maturity date, to beneficiaries designated by the Company, limited to $2,000,000 and a one year term. Interest on outstanding borrowings is at the Company's option of the bank's base rate plus one- quarter of one percent (8.75 percent at December 26, 1997) or a eurodollar rate plus one and three-quarters percent (7.47 percent at December 26, 1997). The agreement, as amended, also provides for a one-half of one percent per year facility fee on the difference of the maximum borrowings and the sum of the daily averages of the outstanding revolving credit loan and the issued and outstanding letters of credit during the period. Term loan--maximum borrowings of $22,250,000, maturing on March 31, 2000. The agreement, as amended, calls for quarterly principal payments of $1,000,000 with a final payment of $5,500,000 or the aggregate outstanding balance on March 31, 2000. Interest on the borrowings is at the bank's base rate plus one-half of one percent or a eurodollar rate plus two percent (7.72 percent at December 26, 1997). The agreement gives the bank a first security interest in all assets of the Company. The agreement also requires the Company to maintain certain financial ratios and financial covenants, as defined in the amendment, the most restrictive of which prohibit additional indebtedness and limits payments to the Company's stockholder, other than for income tax payments. As of December 26, 1997 the Company was in compliance with all covenants. As of December 26, 1997, future minimum principal payments on the aforementioned debt, in accordance with the amended agreement, are as follows (amounts in thousands):
FISCAL YEAR ENDING ----------- 1998............................................................ $ 4,000 1999............................................................ 5,000 2000............................................................ 11,250 ------- $20,250 =======
4. 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 26, 1997, the Company had future obligations under operating leases as follows (amounts in thousands):
FISCAL YEAR ENDING ----------- 1998............................................................ $ 941 1999............................................................ 921 2000............................................................ 335 ------ $2,197 ======
F-10 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Rental expense for all leases classified as operating leases was approximately $1,065,000, $1,106,000 and $1,132,000 in fiscal 1995, 1996 and 1997, respectively. The Company self-insures the majority of its medical benefit programs. Reserves for losses are established currently based upon estimated obligations. 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. 5. 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 and Industrias Hudson will file separate federal income tax returns for 1997. Under the S corporation election, the stockholder of Hudson includes her share of Hudson's taxable income on her individual federal and state income tax returns. Hudson's provision for income taxes and income taxes payable is limited to the California S corporation tax of 2.5 percent for 1995, and 1.5 percent for both 1996 and 1997. The provision for state income taxes consists of the following (amounts in thousands):
1995 1996 1997 ---- ----- ---- Current................................................... $280 $ 200 $ 74 Deferred.................................................. -- (127) 76 ---- ----- ---- $280 $ 73 $150 ==== ===== ====
As of December 26, 1997, the Company has recorded a net deferred tax asset of $76,000 primarily related to its Equity Participation Plan (see Note 7), which in management's opinion is more likely than not to be realized. The Company will become a C corporation upon consummation of the transaction discussed in Note 10. 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 40%, 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 conversion to C corporation status which will be reflected in the 1998 financial statements. 6. RELATED-PARTY TRANSACTIONS Amounts included in the consolidated financial statements with respect to transactions with companies controlled by officers, the stockholder or members of their immediate families are as follows (amounts in thousands):
1995 1996 1997 ------ ---- ------ Purchases............................................... $1,524 $557 $1,465 ====== ==== ====== Notes receivable........................................ $ 88 $ 91 $ 157 ====== ==== ======
F-11 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. DEFERRED COMPENSATION AND BENEFIT PLANS a. 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, $767,000 and $836,000 for the fiscal years ended 1995, 1996 and 1997, respectively. b. Deferred Compensation Effective December 1, 1994, the Company established a deferred compensation plan for certain key employees. As of December 27, 1996 and December 26, 1997 no material amount of compensation has been deferred. c. Equity Participation Plan Effective January 1, 1994, the Company's Board of Directors adopted the Equity Participation Plan, as amended (the Plan). This Plan provides certain key employees and independent contractors deferred compensation based upon the Company's value, as defined in the agreement. Benefits earned by participants are based upon a formula with a specified minimum benefit accruing each year for each participant. Benefits are accrued and charged to compensation in the year earned. Payments are subject to an installment period of five years with an annual maximum limit of $1,000,000. As of fiscal year ended 1995, 1996 and 1997 the Company has recorded $11,415,000, $19,664,000 and $5,703,000, respectively, related to accrued amounts earned by the Plan participants. In fiscal 1997, the Company declared bonuses totaling $20 million which will result in a corresponding decrease in amounts payable under the Plan. The effect of the bonuses is to accelerate the timing of payments to the participants. This management bonus accrual is included in current liabilities on the accompanying balance sheet. 8. MAJOR CUSTOMERS AND SALES BY GEOGRAPHIC REGION The Company sells respiratory care products to distributors and medical facilities throughout the United States and internationally. During 1995, 1996 and 1997, the Company had foreign sales of approximately $12,843,000, $16,077,000 and $19,008,000, respectively, which constituted approximately 15 percent, 17 percent and 19 percent of total sales, respectively. The Company's percentage of sales by geographic region for the fiscal years ended 1995, 1996 and 1997 were as follows:
1995 1996 1997 ----- ----- ----- Domestic............................................. 85.2% 82.8% 80.9% Europe............................................... 5.6 6.6 7.5 Pacific Rim (Japan, Southeast Asia, Australia/New Zealand)............................................ 4.6 5.7 5.7 Canada............................................... 2.3 1.9 1.8 Other international.................................. 2.3 3.0 4.1 ----- ----- ----- Total.............................................. 100.0% 100.0% 100.0% ===== ===== =====
For the fiscal years ended 1995, 1996 and 1997, the Company had sales of 31 percent, 32 percent and 30 percent, respectively, to one distributor. F-12 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. ACQUISITION During 1996, the Company acquired substantially all the assets of the Artema Medical AB corporation ("Artema") for a purchase price of $6,000,000. Artema engaged primarily in the business of manufacturing, marketing, and selling hygroscopic condenser humidifiers. The acquisition was accounted for as a purchase and the purchase price was allocated as follows (amounts in thousands): Covenant not-to-compete............................................ $3,500 Goodwill........................................................... 1,743 Machinery and equipment............................................ 757 ------ $6,000 ======
10. SUBSEQUENT EVENTS (UNAUDITED) In February 1998, the Company announced the intent to sell a majority of the Company pursuant to an agreement and plan of merger (the Recapitalization). Key components of the Recapitalization include: (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 senior subordinated notes (3) execution of a new term loan facility and revolving loan facility (4) repayment of existing indebtedness (5) payment of amounts due under the Equity Participation Plan (6) payment for common shares acquired from the existing shareholder; this shareholder will retain 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. The Company will also terminate the Equity Participation Plan and adopt a stock option plan and a stock purchase plan. Additionally, Hudson's sole shareholder, who owns the remaining 21 percent of Industrias Hudson, will transfer this interest to the Company in consideration of one dollar. 11. SUBSEQUENT EVENT--STOCK SPLIT The Company effected a 245:1 stock split concurrent with the Recapitalization. The stock split has been reflected in the stock amounts shown herein. F-13 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 27, 1998 (AMOUNTS IN THOUSANDS)
March 27, 1998 ----------- (UNAUDITED) ASSETS ------ CURRENT ASSETS: Cash and short-term investments.................................. $ 734 Accounts receivable, less allowance for doubtful accounts of $303............................................................ 18,741 Inventories...................................................... 15,938 Other assets..................................................... 920 ------- Total current assets............................................ 36,333 ------- PROPERTY, PLANT AND EQUIPMENT, at cost: Land............................................................. 2,044 Buildings........................................................ 13,369 Leasehold improvements........................................... 1,322 Machinery and equipment.......................................... 61,909 Furniture and fixtures........................................... 2,208 Construction in progress......................................... 1,620 ------- 82,472 Less--Accumulated depreciation and amortization.................. 49,915 ------- 32,557 OTHER ASSETS: Intangible assets, net........................................... 4,197 Other assets..................................................... 515 ------- 4,712 ------- $73,602 ======= LIABILITIES AND STOCKHOLDER'S EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable to bank............................................ $ 4,000 Accounts payable................................................. 2,470 Accrued liabilities.............................................. 5,006 ------- Total current liabilities....................................... 11,476 ------- NOTES PAYABLE TO BANK, net of current portion...................... 31,000 ------- ACCRUED EQUITY PARTICIPATION PLAN.................................. 7,302 ------- STOCKHOLDER'S EQUITY: Common stock, no par value: Authorized--15,000,000 shares Issued and outstanding--14,468,720 shares at March 27, 1998.............................................. 3,789 Cumulative translation adjustment................................ (464) Retained earnings................................................ 20,499 ------- 23,824 ------- $73,602 =======
The accompanying notes are an integral part of this consolidated balance sheet. F-14 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED ------------------- MARCH 28, MARCH 27, 1997 1998 --------- --------- (UNAUDITED) NET SALES.................................................. $23,987 $24,265 COST OF SALES.............................................. 11,970 13,026 ------- ------- Gross profit............................................... 12,017 11,239 ------- ------- OPERATING EXPENSES: Selling.................................................. 2,331 2,317 Distribution............................................. 1,261 1,449 General and administrative............................... 2,946 3,077 Research and development................................. 418 474 ------- ------- 6,956 7,317 ------- ------- Income from operations before equity participation plan, bonuses and other......................................... 5,061 3,922 PROVISION FOR EQUITY PARTICIPATION PLAN AND BONUSES........ 1,966 1,974 ------- ------- Income from operations..................................... 3,095 1,948 ------- ------- OTHER INCOME AND (EXPENSES): Interest expense......................................... (505) (419) Other, net............................................... 650 (8) ------- ------- 145 (427) ------- ------- Income before provision for income taxes................... 3,240 1,521 PROVISION FOR STATE INCOME TAXES........................... 45 23 ------- ------- Net income (loss).......................................... $ 3,195 $ 1,498 ======= ======= Pro forma net income (loss) assuming conversion to C corporation for income tax purposes (Note 3).............. $ 1,941 $ 911 ======= =======
The accompanying notes are an integral part of these consolidated statements. F-15 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
MARCH 28, MARCH 27, 1997 1998 --------- --------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................... $ 3,195 $ 1,498 Adjustments to reconcile net income to net cash provided by (used in) operating activities-- Depreciation and amortization.......................... 1,444 1,497 Gain on disposal of equipment.......................... (638) -- Decrease in accounts receivable........................ 3,947 2,541 (Increase) decrease in inventories..................... (1,131) 675 (Increase) decrease in other current assets............ (134) 231 (Increase) decrease in other assets.................... (162) 43 Decrease in accounts payable........................... (691) (1,221) Decrease in accrued liabilities........................ (374) (449) Increase in accrued equity participation plan.......... 1,966 1,974 Payment of management bonuses.......................... -- (20,375) ------- -------- Net cash provided by (used in) operating activities.. 7,422 (13,586) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment............... (112) (701) Proceeds from sale of property, plant and equipment...... 1,068 -- Increase in cash surrender value of life insurance....... (5) -- Additions of intangible assets........................... -- (70) ------- -------- Net cash provided by (used in) investing activities.. 951 (771) ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable to bank....................... (4,556) (6,250) Borrowings on notes payable to bank...................... -- 21,000 Stockholder distributions................................ (2,059) (10) ------- -------- Net cash provided by (used in) financing activities.. (6,615) 14,740 ------- -------- Effect of exchange rate changes on cash.................... 28 (119) ------- -------- NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS............ 1,786 264 CASH AND SHORT-TERM INVESTMENTS, beginning of quarter...... 1,420 470 ------- -------- CASH AND SHORT-TERM INVESTMENTS, end of quarter............ $ 3,206 $ 734 ======= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the quarter for: Interest............................................... $ 563 $ 690 ======= ======== Income taxes........................................... $ -- $ 12 ======= ========
The accompanying notes are an integral part of these consolidated statements. F-16 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 27, 1998 (UNAUDITED) 1. FINANCIAL STATEMENTS The condensed consolidated financial statements included herein have been prepared by the Company, without audit, and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position at March 27, 1998, and the results of operations and the cash flows for the three-month periods ended March 28, 1997 and March 27, 1998 pursuant to the rules and regulations of the Securities and Exchange Commission. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures in such financial statements are adequate to make the information presented not misleading, these consolidated financial statements should be read in conjunction with the Company's 1997 audited financial statements and the notes thereto included. The results of operations for the three-month periods ended March 28, 1997 and March 27, 1998 are not necessarily indicative of the results for a full year. 2. INVENTORIES At March 27, 1998, inventories consisted of the following (amounts in thousands): Raw materials................................ $ 4,658 Work-in-process.............................. 4,574 Finished goods............................... 6,706 ------- $15,938 =======
3. COMPREHENSIVE INCOME In June 1997, FASB issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". This Statement requires that all items that meet the definition of components of comprehensive income be reported in a financial statement for the period in which they are recognized. This Statement is effective for fiscal years beginning after December 15, 1997 and was adopted by the Company in the quarter ended March 27, 1998. The Company had comprehensive income for the three-month periods ended March 27, 1998 and March 28, 1997 as follows (amounts in thousands):
March 28, March 27, 1997 1998 --------- --------- Net income............................................ $3,195 $1,498 Other comprehensive income: Foreign currency translation gain (loss)............ 28 (119) ------ ------ Comprehensive income.................................. $3,223 $1,379 ====== ======
4. INCOME TAXES The Company became a C corporation upon consummation of the transaction discussed in Note 5. 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 40%, 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 which will be reflected in the June 1998 financial statements. 5. EQUITY PARTICIPATION PLAN PAYOUT In March 1998, the Company paid previously-accrued bonuses totaling $20 million, plus related payroll taxes. These payments were funded by additional borrowings under the existing credit facility. The provision for equity participation plan costs on an interim basis is based upon the expected provision for the year as a percentage of income before the provision for EPP costs. F-17 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. SUBSEQUENT EVENTS In April 1998, the Company consummated a plan pursuant to which a majority of the Company was sold in accordance with an agreement and plan of merger (the Recapitalization). Key components of the Recapitalization include: (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 (3) execution of a new term loan facility and revolving loan facility (4) repayment of existing indebtedness (5) payment of amounts due under the Equity Participation Plan (6) payment for common shares acquired from the existing shareholder; this shareholder will retain 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. The Company has terminated the Equity Participation Plan and will adopt a stock option plan and has adopted a stock purchase plan. Additionally, Hudson's sole shareholder, who owned the remaining 21 percent of Industrias Hudson, will transfer this interest to the Company in consideration of one dollar. The Company effected a 245:1 stock split concurrent with the Recapitalization. The stock split has been reflected in the stock amounts shown herein. F-18 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET MARCH 27, 1998 (in thousands)
ADJUSTMENTS (NOTE 2) ------------------------------------------ ACTUAL RECAPITALIZATION OTHER PRO FORMA ----------- -------------------- --------- ------------- ASSETS: Current assets Cash and short-term investments......................... $ 734 $ -- $ (38)(g) $ 696 Accounts Receivable, net................................ 18,741 -- 195 (g) 18,936 Inventories............................................. 15,938 -- 15,938 Other assets............................................ 920 -- (37)(g) 883 ------- --------- ----- -------- Total current assets.................................. 36,333 -- 120 36,453 ------- --------- ----- -------- Property, Plant & Equipment, net.......................... 32,557 -- (556)(g) 32,001 Intangibles and other assets.............................. 4,374 -- -- 4,374 Deferred income taxes..................................... -- 80,350(a) -- 80,350 Deferred debt costs....................................... 338 11,662(b) -- 12,000 Purchase price in excess of book value of net assets......................................... -- -- -- -- ------- --------- ----- -------- Total assets.......................................... $73,602 $ 92,012 $(436) $165,178 ======= ========= ===== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities Current portion of long-term debt....................... $ 4,000 $ (4,000)(c) -- $ -- Accounts payable........................................ 2,470 -- (5)(g) 2,465 Accrued liabilities..................................... 5,006 3,000 (d) (77)(g) 7,929 Management bonus........................................ -- -- (e) -- -- ------- --------- ----- -------- Total current liabilities............................. 11,476 (1,000) (82) 10,394 ------- --------- ----- -------- Existing long-term debt................................... 31,000 (31,000)(c) -- -- Bank facility............................................. -- 40,000 (c) -- 40,000 Senior subordinated notes................................. -- 115,000 (c) -- 115,000 Accrued Equity Participation Plan......................... 7,302 (7,302)(e) -- -- ------- --------- ----- -------- Total liabilities..................................... 49,778 115,698 (82) 165,394 ------ -------- ----- -------- Mandatorily redeemable preferred stock.................... -- 30,000(c) -- 30,000 ------- --------- ----- -------- Shareholders' equity Common stock............................................ 3,789 59,621(f) -- 63,410 Cumulative translation adjustment....................... (464) -- -- (464) Retained earnings (deficit)............................. 20,499 (113,307)(f) (354)(g) (93,162) ------- --------- ----- -------- Total shareholders' equity (deficit).................. 23,824 (53,686) (354) (30,216) ------- --------- ----- -------- Total liabilities and shareholders' equity............ $73,602 $ 92,012 $(436) $165,178 ======= ========= ===== ========
The accompanying notes are an integral part of this financial statement. P-1 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 26, 1997 (IN THOUSANDS)
ADJUSTMENTS (NOTE 3) -------------------------------------- PRO ACTUAL RECAPITALIZATION OTHER FORMA ---------- --------------------- --------- ----------- Net sales.............................................. $ 99,509 $ -- $ -- $ 99,509 Cost of sales.......................................... 51,732 -- -- 51,732 ---------- ---------- -------- ---------- Gross profit..................................... 47,777 -- -- 47,777 Operating expenses: Selling expenses..................................... 9,643 -- -- 9,643 Distribution expenses................................ 5,240 -- -- 5,240 General and administrative expenses.................. 11,456 -- (839)(c) 10,617 Research and development expenses.................... 1,845 -- -- 1,845 ---------- ---------- -------- ---------- Total operating expenses before equity participation plan...................... 28,184 -- (839) 27,345 ---------- ---------- -------- ---------- Operating income before equity participation plan...................... 19,593 -- 839 20,432 Provision for equity participation plan................ 6,954 (6,954)(a) -- -- ---------- ---------- ---------- ---------- Operating income................................... 12,639 6,954 839 20,432 ---------- ---------- ---------- ---------- Other (income) and expenses: Interest expense..................................... 1,834 13,265 (b) -- 15,099 Other (income)/expense............................... (638) -- 638 (d) -- ---------- ---------- ---------- ---------- Total other (income) and expenses.................. 1,196 13,265 638 15,099 ---------- ---------- ---------- ---------- Income before provision for income taxes........... 11,443 (6,311) 201 5,333 Provision for state income taxes....................... 150 1,903 (e) 80 (e) 2,133 ---------- ---------- ---------- ---------- Net income (loss).................................... 11,293 (8,212) 121 3,200 ---------- ---------- ---------- ---------- Preferred Stock Dividends.............................. -- 3,549 (f) -- 3,549 ---------- ---------- ---------- ---------- Net income available to common stock................. $11,293 $(11,763) $ 121 $ (349) ========== ========== ========== ==========
The accompanying notes are an integral part of this financial statement. P-2 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS QUARTER ENDED MARCH 27, 1998 (IN THOUSANDS)
ADJUSTMENTS (NOTE 3) --------------------------- PRO ACTUAL RECAPITALIZATION OTHER FORMA ----------- -------------------- -------- ------- Net sales................................................. $24,265 $ -- $ -- $24,265 Cost of sales............................................. 13,026 -- -- 13,026 ------- ------- ----- ------- Gross profit.......................................... 11,239 -- -- 11,239 Operating expenses: Selling expenses........................................ 2,317 -- -- 2,317 Distribution expenses................................... 1,449 -- -- 1,449 General and administrative expenses..................... 3,077 -- (172)(c) 2,905 Research and development expenses....................... 474 -- -- 474 Amortization of purchase price in excess of net book value........................................ -- -- -- -- Total operating expenses before equity ------- ------- ----- ------- participation plan................................ 7,317 -- (172) 7,145 Operating income before equity ------- ------- ----- ------- participation plan................................ 3,922 -- 172 4,094 Provision for equity participation plan................... 1,974 (1,974)(a) -- -- ------- ------- ----- ------- Operating income...................................... 1,948 1,974 172 4,094 ------- ------- ----- ------- Other (income) and expenses: Interest expense........................................ 419 3,355(b) -- 3,774 Other (income)/expense.................................. 8 -- -- 8 ------- ------- ----- ------- Total other (income) and expenses.................... 427 3,355 -- 3,782 ------- ------- ----- ------- Income before provision for income taxes............. 1,521 (1,381) 172 312 Provision for state income taxes.......................... 23 33(e) 69(e) 125 ------- ------- ----- ------- Net income (loss)....................................... 1,498 (1,414) 103 187 ------- ------- ----- ------- Preferred Stock Dividends................................. -- 863(f) -- 863 ------- ------- ----- ------- Net income available to common stock.................... $ 1,498 $(2,277) $ 103 $ (676) ======= ======= ===== =======
The accompanying notes are an integral part of this financial statement. P-3 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS MARCH 27, 1998 1. TRANSACTION In connection with the completion of an offering to sell $115.0 million 9% Senior Subordinated Notes due 2008 (the "Offering"), Hudson Respiratory Care Inc. (the "Company") consummated a recapitalization pursuant to an Agreement and Plan of Merger (the "Recapitalization"). Under the terms of the Recapitalization, River Acquisition Corp., a wholly-owned subsidiary of River Holding Corp. ("Holding"), merged with and into the Company, with the Company surviving as a majority-owned subsidiary of Holding. Pursuant to the Recapitalization, Holding contributed approximately $93.0 million in equity capital into the Company (the "Holding Equity Investment") and the current shareholder of the Company (the "Continuing Shareholder") retained common stock of the Company. The Holding Equity Investment is comprised of $63.0 million of common equity and $30.0 million of preferred equity and, following the Holding Equity Investment, Holding owns 80.8% of the outstanding Common Stock of the Company and the Continuing Shareholder owns 19.2% of the outstanding Common Stock. The common equity investment in Holding is comprised of a $55.0 million investment by affiliates of Freeman Spogli & Co. Incorporated ("FS&Co.") and $8.0 million by management of the Company. Upon consummation of the Recapitalization, FS&Co. beneficially owns approximately 87.3% of the outstanding common stock of Holding and management of the Company owns the remaining 12.7%. Preferred stock of the Company provides for dividends payable in cash commencing on the fifth anniversary of issuance and will be redeemable at the option of the holders thereof upon the occurrence of certain events constituting change in control of the Company. In addition, in connection with the Recapitalization the Company has made payments to certain employees of $88.3 million under the Equity Participation Plan. The Company also entered into an agreement (the "New Credit Facility") that provides a $40.0 million secured term loan facility (the "Term Loan Facility"), which was funded in connection with the consummation of the Recapitalization, and a $60.0 million revolving loan facility (the "Revolving Loan Facility") which is available for the Company's future capital requirements and to finance acquisitions. The Pro Forma Consolidated Financial Statements give effect to the Offering and the Recapitalization as if these transactions occurred as of March 27, 1998 for purposes of the consolidated balance sheet, and as of the beginning of the period for purposes of the consolidated statements of operations. The Pro Forma Consolidated Financial Statements do not give effect to any transactions other than the Offering, the Recapitalization and those discussed in the accompanying notes. The objective of this pro forma financial information is to show what the significant effects on the historical financial information might have been had the transaction occurred at an earlier date. However, the Pro Forma Consolidated Financial Statements are not necessarily indicative of the results of operations or related effects on financial position that would have been attained had the above-mentioned transaction actually occurred earlier. The Recapitalization also provides for additional payments of up to an aggregate of $5.7 million payable to the Continuing Shareholder and participants in the Equity Participation Plan upon achievement by the Company of certain operating performance targets for fiscal 1998. This amount will be recorded when and if earned. No recognition of the contingent payments is provided in these pro forma financial statements. The historical Consolidated Financial Statements and accompanying notes, included elsewhere in this Prospectus, should be read in conjunction with these financial statements and the accompanying notes thereto. P-4 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 27, 1998 2. PRO FORMA CONSOLIDATED BALANCE SHEET ASSUMPTIONS The pro forma adjustments reflecting the transaction described in Note 1, and the application of those adjustments to the historical amounts, were made under the following assumptions: (a) Reflects the deferred tax asset for the difference between assigned values and tax bases of certain assets and liabilities. (b) Reflects the portion of transaction and other related expenses which will be attributable to the Recapitalization, net of the elimination of the historical unamortized debt financing costs. The Company will record an extraordinary loss on the extinguishment of the existing debt related to the write-off of unamortized deferred finance fees of $338,000. This extraordinary item is excluded from the pro forma statement of operations due to its non-recurring nature. (c) The pro forma adjustments which reflect the financing and repayment of existing long-term debt of the Company are as follows (amounts in thousands): Repayment of existing debt--current portion........................................ $ (4,000) ------------ Long-term debt Repayment of existing debt--long-term portion.................................... $ (31,000) New Credit Facility.............................................................. 40,000 Senior subordinated notes........................................................ 115,000 ------------ Total debt......................................................................... $ 124,000 ============ Issuance of mandatorily redeemable preferred stock................................. $ 30,000 ============
(d) Reflects the transaction tax liability related to Section 338(h)(10) of the Internal Revenue Code. (e) Reflects the payment of accrued liabilities related to the Equity Participation Plan. See Note 7 to the historical financial statements. (f) The pro forma adjustments which reflect the consideration paid for a portion of the Continuing Shareholder's common stock and the Common Stock Investment are as follows (amounts in thousands):
Common Stock: Common Stock Investment......................................................... $ 63,000 Par value of a portion of Continuing Shareholder's common stock................. (3,379) ------------ Total............................................................................. $ 59,621 Retained earnings (deficit): ============ Consideration paid for a portion of Continuing Shareholder's common stock......... $ (131,685) Consideration paid for par value of a portion of Continuing Shareholder's common stock...................................................................... 3,379 Deferred tax asset................................................................ 80,350 Provision for Equity Participation Plan in 1998................................... (61,013) Other............................................................................. (4,338) ------------ Total............................................................................. $ (113,307) ============
(g) Reflects the elimination of assets and liabilities related to OxyAir since OxyAir will be transferred to the Continuing Shareholder. P-5 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARCH 27, 1998 3. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ASSUMPTIONS The pro forma adjustments reflecting the transaction described in Note 1, and the application of those adjustments to the historical amounts, were made under the following assumptions: (a) An additional compensation charge of approximately $60.6 million will be recorded in fiscal 1998 pursuant to the Equity Participation Plan and concurrent with the Recapitalization. The net adjustment reflects the elimination of the Equity Participation Plan since the Plan terminated upon the Recapitalization. See "Management--Equity Participation Plan." (b) The pro forma adjustments to interest expense and amortization of deferred financing fees reflect the following (amounts in thousands):
DECEMBER 26, MARCH 27, 1997 1998 ------------- --------- Elimination of interest expense on existing debt............................... $(1,834) $ (419) Interest expense on bank facility at an assumed composite interest rate of 8.00%..................................................................... 3,200 800 Interest expense on Senior Subordinated Notes at an assumed interest rate of 9.125%................................................................. 10,494 2,623 Amortization of deferred finance fees.......................................... 1,405 351 ------- ------ Total.......................................................................... $13,265 $3,355 ======= ======
(c) The pro forma adjustments to general and administrative expense reflect the following (amounts in thousands):
DECEMBER 26, MARCH 27, 1997 1998 ------------- ---------- Elimination of Continuing Shareholder salary, bonus and fringe benefits (1)................................................................ $(455) $ (87) Elimination of expenses related to OxyAir (2).................................. (384) (85) ----- ----- Total.......................................................................... $(839) $(172) ===== =====
______________________ (1) The Company will not continue to pay Continuing Shareholder salary, bonus and related fringe benefits. The adjustment is to eliminate such expenses. (2) Reflects the elimination of expense related to OxyAir since OxyAir will be transferred to the Continuing Shareholder. (d) Reflects the elimination of the non-recurring gain on sale of the Company's Orange Park, Florida facility. (e) Reflects the income tax effect of the net changes described above, using an effective rate of 40%. Concurrent with the Recapitalization, the Company will become a C corporation for income tax purposes. (f) Reflects pay-in-kind preferred stock dividends at 11.50% due semi-annually. 4. USE OF ESTIMATES IN THE PRO FORMA FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. P-6 ================================================================================ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ----------------- TABLE OF CONTENTS
PAGE ---- Summary................................ 1 Risk Factors........................... 11 Use of Proceeds........................ 19 Capitalization......................... 20 The Exchange Offer..................... 21 Selected Historical and Pro Forma Consolidated Financial Information.... 28 Management's Discussion and Analysis of Financial Condition and Results of Operations................. 31 Business............................... 39 Management............................. 48 Security Ownership of Certain Beneficial Owners..................... 52 Certain Transactions................... 52 Description of New Credit Facility..... 54 Description of the Exchange Notes...... 56 Description of Other Securities........ 87 Certain U.S. Federal Income Tax Consequences.......................... 94 Plan of Distribution................... 99 Experts................................ 99 Legal Matters.......................... 100 Index to Consolidated Financial Statements............................ F-1 Pro Forma Consolidated Financial Statements............................ P-1
================================================================================ ================================================================================ $115,000,000 Hudson Respiratory Care Inc. 9 1/8% Senior Subordinated Notes due 2008 Dated _________, 1998 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Pursuant to Section 317 of the General Corporation Law of California (the "California Corporation Law"), Article V of the Amended and Restated Certificate of Incorporation of the Registrant, as amended, a copy of which is filed as Exhibit 3.1 to this Registration Statement (the "Certificate of Incorporation"), and Article IV, Section 4.01 of the Bylaws of the Registrant, a copy of which is filed as Exhibit 3.2 to this Registration Statement (the "Bylaws"), provide that the Registrant shall indemnify and hold harmless to the fullest extent authorized by the California Corporation Law any person made a party or threatened to be made a party to or involved in any proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Registrant or is or was serving at the request of the Registrant as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred or suffered by such person in connection therewith if that person acted in good faith and in a manner the person reasonably believed to be in the best interests of the Registrant, and that the Registrant may advance to any such person expenses incurred in defending any such proceeding prior to final disposition thereof. Article IV of the Bylaws permits the Registrant to maintain insurance to protect itself and any director, officer, employee or agent or another corporation, partnership, joint venture, trust, or other enterprise against any such foregoing expense, liability or loss, whether or not the Registrant would have the power to indemnify such person against such expense, liability or loss under the California Corporation Law. Reference is made to the Registration Agreement (attached as Exhibit 4.3 to this Registration Statement) which provides for indemnification by the Participants (as defined therein) of the Registrant, its directors and officers and each person controlling the Registrant, but only with reference to information relating to such Participant furnished to the Registrant in writing by such Participant expressly for use in any registration statement or prospectus. Insofar as indemnification for liabilities under the Securities Act of 1933 may be permitted with respect to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. The foregoing discussion of the Certificate of Incorporation and the California Corporation Law is not intended to be exhaustive and is qualified in its entirety by the Certificate of Incorporation and the relevant provisions of the California Corporation Law. II-1 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
Exhibit Number Description - ------ ----------- 1.1 Purchase Agreement dated April 2, 1998 among Hudson Respiratory Care Inc. ("Hudson RCI"), River Holding Corp. ("Holding"), Salomon Brothers Inc and BT Alex. Brown Incorporated. 2.1 Amended and Restated Merger Agreement dated March 15, 1998 among Holding, River Acquisition Corp., Hudson RCI and the shareholders of Hudson RCI. 3.1 Amended and Restated Articles of Incorporation of Hudson RCI, as amended to date. 3.2 Bylaws of Hudson RCI. 4.1 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 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). 4.3 Registration Agreement dated April 7, 1998 among Hudson RCI, Holding, Salomon Brothers Inc and BT Alex. Brown Incorporated. 5.1 Opinion of Riordan & McKinzie as to the legality of securities registered hereunder. 10.1 Credit Agreement dated as of April 7, 1998 among Hudson RCI, Holding, and lenders party thereto, Salomon Brothers Inc. as arranger, advisor and syndication agent, and Bankers Trust Company ("Bankers Trust") as administrative agent and collateral agent. 10.2 Security Agreement dated as of April 7, 1998 between Hudson RCI and Bankers Trust. 10.3 Pledge Agreement dated as of April 7, 1998 between Holding and Bankers Trust. 10.4 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 Holding Guarantee Agreement dated as of April 7, 1998 between Holding and Bankers Trust. 10.6 Indemnity, Subrogation and Contribution Agreement dated as of April 7, 1998 among Hudson RCI, Holding and Bankers Trust. 10.7 Shareholders Agreement dated April 7, 1998 among Holding, The Helen Hudson Lovaas Separate Property Trust U/D/T dated July 17, 1997, 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 Stock Subscription Agreement dated April 7, 1998 between Holding and River Acquisition Corp. 10.9 Employment Agreement dated April 7, 1998 between Hudson RCI and Richard W. Johansen. 10.10 Employment Agreement dated April 7, 1998 between Hudson RCI and Jay R. Ogram. 10.11 Employment Agreement dated April 7, 1998 between Hudson RCI and Lougene Williams. 10.12 Employment Agreement dated April 7, 1998 between Hudson RCI and Brian W. Morgan. 12.1 Statement re Computation of Earnings to Fixed Charges Ratio. 21.1 Subsidiaries of Hudson RCI. 23.1 Consent of Riordan & McKinzie (contained in Exhibit 5.1). 23.2 Consent and Report on Schedule of Arthur Andersen LLP. 24.1 Power of Attorney (included on the signature pages hereof). 25.1 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of United States Trust Company of New York. 27.1 Financial Data Schedule. 99.1 Form of Letter of Transmittal with respect to the Exchange Offer.
II-2
Exhibit Number Description - ------ ----------- 99.2 Form of Notice of Guaranteed Delivery with respect to the Exchange Offer.
(b) FINANCIAL STATEMENT SCHEDULE Schedule I - Valuation and Qualifying Accounts and Reserves. No other schedules have been included because the information required to be set forth therein is not applicable. ITEM 22. UNDERTAKINGS The undersigned Registrant hereby undertakes as follows: 1. To provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. 2. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 3. To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. 4. To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this Registration Statement when it became effective. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Temecula, California, on June 5, 1998. HUDSON RESPIRATORY CARE INC. By: /s/ Jay R. Ogram ------------------------------------- Jay R. Ogram Chief Financial Officer and Secretary POWER OF ATTORNEY AND SIGNATURES KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard W. Johansen and/or Jay R. Ogram his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he 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 Act of 1933, this Registration Statement has been signed below by the following person in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ Richard W. Johansen Chief Executive Officer June 5, 1998 - ----------------------- and Director (Principal Executive Officer) Richard W. Johansen /s/ Jay R. Ogram Chief Financial Officer and Secretary June 5, 1998 - ----------------------- (Principal Financial Officer) Jay R. Ogram /s/ Helen Hudson Lovaas Director June 5, 1998 - ----------------------- Helen Hudson Lovaas /s/ Ronald P. Spogli Director June 5, 1998 - ----------------------- Ronald P. Spogli /s/ Charles P. Rullman Director June 5, 1998 - ----------------------- Charles P. Rullman /s/ Jon D. Ralph Director June 5, 1998 - ----------------------- Jon D. Ralph
II-4 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Board of Directors of Hudson Respiratory Care Inc.: We have audited in accordance with generally accepted accounting standards, the financial statements of HUDSON RESPIRATORY CARE INC. (a California corporation) and subsidiaries included in this registration statement and have issued our report thereon dated February 27, 1998. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index above is the responsibility of the company's management and is presented for purposes of complying with 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 the basic 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. ARTHUR ANDERSEN LLP Orange County, California February 27, 1998 S-1 HUDSON RESPIRATORY CARE INC. SCHEDULE I - VALUATION AND QUALIFYING ACCOUNTS (Amounts in thousands)
Balance at Beginning of Charges to Balance at End Period Expenses Write-offs of Period ------------ ---------- ---------- -------------- Description - ----------- For the Year Ending December 31, 1997: - ----------------- Allowance for doubtful accounts receivable $ (111) $ (182) $ 35 $ (258) ========== ========= ====== ========== For the Year Ending December 31, 1996 - ----------------- Allowance for doubtful accounts receivable $ (106) $ (40) $ 35 $ (111) ========== ========= ====== ========== For the Year Ending December 31, 1995: - ----------------- Allowance for doubtful accounts receivable $ (90) $ (99) $ 83 $ (106) ========== ========= ====== ==========
S-2 EXHIBIT INDEX
Exhibit Number Description - ------ ----------- 1.1 Purchase Agreement dated April 2, 1998 among Hudson Respiratory Care Inc. ("Hudson RCI"), River Holding Corp. ("Holding"), Salomon Brothers Inc and BT Alex. Brown Incorporated. 2.1 Amended and Restated Merger Agreement dated March 15, 1998 among Holding, River Acquisition Corp., Hudson RCI and the shareholders of Hudson RCI. 3.1 Amended and Restated Articles of Incorporation of Hudson RCI, as amended to date. 3.2 Bylaws of Hudson RCI. 4.1 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 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). 4.3 Registration Agreement dated April 7, 1998 among Hudson RCI, Holding, Salomon Brothers Inc and BT Alex. Brown Incorporated. 5.1 Opinion of Riordan & McKinzie as to the legality of securities registered hereunder. 10.1 Credit Agreement dated as of April 7, 1998 among Hudson RCI, Holding, and lenders party thereto, Salomon Brothers Inc. as arranger, advisor and syndication agent, and Bankers Trust Company ("Bankers Trust") as administrative agent and collateral agent. 10.2 Security Agreement dated as of April 7, 1998 between Hudson RCI and Bankers Trust. 10.3 Pledge Agreement dated as of April 7, 1998 between Holding and Bankers Trust. 10.4 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 Holding Guarantee Agreement dated as of April 7, 1998 between Holding and Bankers Trust. 10.6 Indemnity, Subrogation and Contribution Agreement dated as of April 7, 1998 among Hudson RCI, Holding and Bankers Trust. 10.7 Shareholders Agreement dated April 7, 1998 among Holding, The Helen Hudson Lovaas Separate Property Trust U/D/T dated July 17, 1997, 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 Stock Subscription Agreement dated April 7, 1998 between Holding and River Acquisition Corp. 10.9 Employment Agreement dated April 7, 1998 between Hudson RCI and Richard W. Johansen. 10.10 Employment Agreement dated April 7, 1998 between Hudson RCI and Jay R. Ogram. 10.11 Employment Agreement dated April 7, 1998 between Hudson RCI and Lougene Williams. 10.12 Employment Agreement dated April 7, 1998 between Hudson RCI and Brian W. Morgan. 12.1 Statement re Computation of Earnings to Fixed Charges Ratio. 21.1 Subsidiaries of Hudson RCI. 23.1 Consent of Riordan & McKinzie (contained in Exhibit 5.1). 23.2 Consent and Report on Schedule of Arthur Andersen LLP. 24.1 Power of Attorney (included on the signature page hereof). 25.1 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of United States Trust Company of New York. 27.1 Financial Data Schedule. 99.1 Form of Letter of Transmittal with respect to the Exchange Offer. 99.2 Form of Notice of Guaranteed Delivery with respect to the Exchange Offer.
EX-1.1 2 PURCHASE AGREEMENT DATED 4-2-98 EXHIBIT 1.1 EXECUTION COPY HUDSON RESPIRATORY CARE INC. $115,000,000 9 1/8% Senior Subordinated Notes due 2008 RIVER HOLDING CORP. 300,000 Shares of 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010 PURCHASE AGREEMENT New York, New York April 2, 1998 Salomon Smith Barney Salomon Brothers Inc BT Alex. Brown Incorporated c/o Salomon Brothers Inc Seven World Trade Center New York, New York 10048 Ladies and Gentlemen: Hudson Respiratory Care Inc., a California corporation (the "Company") proposes to issue and sell to the several initial purchasers named in Schedule A hereto (the "Purchasers"), $115,000,000 aggregate principal amount of the Company's 9 1/8% Senior Subordinated Notes due 2008 (the "Notes"). The Notes are to be issued under an indenture (the "Indenture") dated as of April 7, 1998, among the Company, River Holding Corp., a Delaware corporation ("Holding") and United States Trust Company of New York, as trustee (the "Trustee"). In addition, Holding proposes to issue and sell to the Purchasers 300,000 shares of Holding's 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010, $.01 par value per share (the "Holding Preferred Stock"). The Holding Preferred Stock is exchangeable at Holding's option, subject to certain conditions, in whole but not in part, for either (a) the Company's 11 1/2% Subordinated Exchange Debentures due 2010 (the "Company Exchange Debentures") or (b) the Company's 11 1/2% Senior PIK Preferred Stock due 2010 (the "Company Preferred Stock" and, 2 together with the Notes, the Holding Preferred Stock and the Company Exchange Debentures, the "Securities"). The sale of the Notes and the Holding Preferred Stock to you will be made without registration of the Securities under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(2) thereof. You have advised the Company and Holding that you will make an offering of the Notes and the Holding Preferred Stock purchased by you hereunder in accordance with Section 4 hereof as soon as you deem advisable after the execution and delivery of this Agreement. In connection with the sale of the Notes and the Holding Preferred Stock, the Company and Holding have prepared a preliminary offering memorandum, dated March 19, 1998, relating to the offering of the Notes and a preliminary offering memorandum, dated March 19, 1998, relating to the offering of the Holding Preferred Stock (collectively, the "Preliminary Memorandum"), and a final offering memorandum, dated April 2, 1998, relating to the offering of the Notes and a final offering memorandum, dated April 2, 1998, relating to the offering of the Holding Preferred Stock (collectively, the "Final Memorandum"). Each of the Preliminary Memorandum and the Final Memorandum sets forth certain information concerning the Company, Holding and the Securities. The Company and Holding, jointly and severally, hereby confirm that they have authorized the use of the Preliminary Memorandum and the Final Memorandum, and any amendment or supplement thereto, in connection with the offer and sale of the Notes and the Holding Preferred Stock by the Purchasers. Unless stated to the contrary, all references herein to the Final Memorandum are to the Final Memorandum at the Execution Time (as defined below) and are not meant to include any amendment or supplement thereto subsequent to the Execution Time. The holders of the Securities will be entitled to the benefits of the Registration Agreement dated the Closing Date, between the Company, Holding and the Purchasers (the "Registration Agreement"). Capitalized terms used herein without definition have the respective meanings assigned to them in the Final Memorandum. 3 1. Representations and Warranties. The Company and Holding, jointly ------------------------------- and severally, represent and warrant to, and agree with, the Purchasers as set forth below in this Section 1. (a) The Preliminary Memorandum, at the date thereof, did not contain any untrue statement of a material fact or omit to state any material fact (other than pricing terms and other financial terms for the Securities intentionally left blank) necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Final Memorandum, at the date hereof, does not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that no -------- ------- representation or warranty is made as to the information contained in or omitted from the Preliminary Memorandum or the Final Memorandum, or any amendment or supplement thereto, in reliance upon and in conformity with information furnished in writing to the Company and Holding by or on behalf of the Purchasers specifically for inclusion therein, it being understood that the only such information is that described in Section 8(b) hereof. (b) Neither the Company nor Holding has taken nor will take, directly or indirectly, any action prohibited by Regulation M under the Exchange Act of 1934, as amended (the "Exchange Act"), in connection with the offering of the Securities. (c) None of the Company, Holding, any of their respective Affiliates (as defined in Rule 501(b) of Regulation D under the Securities Act ("Regulation D")), or any person acting on their behalf, has (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the Securities in a manner that would require the registration of the Securities under the Securities Act or (ii) engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer or sale of the Securities in the United States. 4 (d) The Securities satisfy the eligibility requirements of Rule 144A(d)(3) under the Securities Act. (e) None of Holding, the Company, any of their respective Affiliates or any person acting on their behalf has engaged in any directed selling efforts with respect to the Securities, and each of them has complied with the offering restrictions requirement of Regulation S ("Regulation S") under the Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S. (f) Neither Holding nor the Company is an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"), without taking account of any exemption arising out of the number of holders of the Company's or Holding's securities. (g) Holding and the Company have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of organization, with full corporate power and authority to own or lease, as the case may be, their properties and conduct their business as described in the Final Memorandum, and are duly qualified to do business as foreign corporations and are in good standing under the laws of all jurisdictions in which their ownership or lease of property or the conduct of their business requires such qualification except where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect (as defined below). Each of the Company and Holding has full corporate power and authority to enter into this Agreement, the Registration Agreement, the Amended and Restated Merger Agreement dated as of March 15, 1998, among Holding, River Acquisition Corp., the Company and the shareholders of the Company (the "Merger Agreement"), the Credit Agreement dated as of the Closing Date among the Company, Holding, Salomon Smith Barney Inc, as arranger, and the Bankers Trust Company, as administrative agent (the "New Credit Facility"), the Indenture, the Indenture governing the Company Exchange Debentures (the "Exchange Indenture") and the Securities and to perform the transactions contemplated 5 hereby and thereby (the "Transactions"). This Agreement and the Registration Agreement have been duly authorized, executed and delivered by Holding and the Company. The execution and delivery of the Merger Agreement, the New Credit Facility, the Indenture and the Exchange Indenture have been duly authorized by the Company and Holding and, when duly executed and delivered by the parties thereto (assuming the due authorization, execution and delivery of the Indenture and the Exchange Indenture by the Trustee), each of the Merger Agreement, the New Credit Facility, the Indenture and the Exchange Indenture will constitute a valid and binding obligation of the Company and Holding, enforceable against the Company and Holding, as applicable, in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity) and to Sections 500 et seq. of the California Corporations Code (the "Code") regarding distributions. The term "Subsidiary" means Industrias Hudson, S.A. de C.V. (h) All the outstanding shares of capital stock of Holding and the Company have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise set forth in the Final Memorandum, as of the Closing Date, all outstanding shares of capital stock of the Company are owned by Holding and, as of the Closing Date, all outstanding ownership interests of the Subsidiary will be owned by the Company free and clear of any perfected security interest and any other security interests, claims or encumbrances, except for security interests, claims and encumbrances under the New Credit Facility. (i) (i) The Notes have been duly and validly authorized for issuance and sale by the Company to the Purchasers, and upon execution and delivery of the Indenture, and when the Notes are issued, authenticated and delivered in accordance with the Indenture and paid for in accordance with the terms of this Agreement, the Notes will constitute valid and binding obligations of the Company and Holding enforceable against the Company and Holding in accordance with their terms and entitled 6 to the benefits of the Indenture, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). (ii) The Holding Preferred Stock has been duly and validly authorized for issuance and sale by Holding to the Purchasers, and when the Holding Preferred Stock has been delivered and paid for in accordance with the terms of this Agreement, the Holding Preferred Stock will be validly issued, fully paid and nonassessable; and the issuance of the Holding Preferred Stock is not subject to preemptive or other similar rights. (iii) The Company Preferred Stock has been duly and validly authorized for issuance in exchange for the Holding Preferred Stock by the Company; and when the Company Preferred Stock, if issued, is delivered by the Company in exchange for the Holding Preferred Stock, such Company Preferred Stock will be validly issued, fully paid and nonassessable; and the issuance of the Company Preferred Stock will not be subject to preemptive or other similar rights. (iv) The Company Exchange Debentures have been duly authorized for issuance in exchange for Holding Preferred Stock by the Company; and upon execution and delivery of the Exchange Indenture, and, when the Company Exchange Debentures are issued and authenticated in accordance with the Exchange Indenture and delivered in exchange for the Holding Preferred Stock, the Company Exchange Debentures will constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms and entitled to the benefits of the Exchange Indenture, subject to applicable bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium, and similar laws affecting creditors' rights and remedies generally and to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity) and Sections 500 et seq. of the Code. 7 (j) The Securities conform, in all material respects, to the description thereof contained in the Preliminary Memorandum and Final Memorandum. (k) The execution, delivery and performance of this Agreement, the Registration Agreement, the Merger Agreement, the New Credit Facility, the Indenture, the Exchange Indenture, the Notes, the Holding Preferred Stock, the Company Exchange Debentures and the Company Preferred Stock by the Company and Holding, as applicable, and the consummation of the Transactions, will not conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, (i) the articles of incorporation, by-laws or other organizational documents of the Company, Holding or the Subsidiary, (ii) any material statute, rule or regulation applicable to the Company, Holding or the Subsidiary (other than California Corporations Code Sections 500 et seq.) or any order of any governmental agency or body or any court having jurisdiction over the Company, Holding or the Subsidiary or any of their respective properties, (iii) any agreement or instrument relating to borrowed money to which the Company, Holding or the Subsidiary is a party or by which the Company, Holding or the Subsidiary is bound or to which any of their respective properties is subject or (iv) any other material agreement or instrument to which the Company, Holding or the Subsidiary is a party or by which the Company, Holding or the Subsidiary is bound or to which any of their respective properties is subject, except in the cases of clauses (iii) or (iv) for conflicts, breaches, violations or defaults which would not reasonably be expected to have a Material Adverse Effect. Assuming the Securities are sold as described in this Agreement, no consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body which has not already been obtained is required for the execution and delivery of this Agreement, the Registration Agreement, the Merger Agreement, the New Credit Facility, the Indenture or the Securities or for the consummation of the Transactions, except for compliance with state securities or blue sky laws and the Securities Act and Trust Indenture Act in connection with the Registration Rights Agreement. 8 (l) Except as disclosed in the Final Memorandum, (i) there are no legal or governmental actions, suits or proceedings pending or, to the best of Holding's or the Company's knowledge, threatened to which Holding, the Company, or the Subsidiary is, or to the best of Holding's or the Company's knowledge, is threatened to be made a party or of which property owned or leased by the Company, Holding or the Subsidiary is or, to the best of Holding's or the Company's knowledge, is threatened to be made the subject, which actions, suits or proceedings could, individually or in the aggregate, have a material adverse effect on the condition (financial or otherwise), properties, business, results of operations or prospects of Holding, the Company and their Subsidiaries, taken as a whole, or materially and adversely affect the ability of the Company and Holding to perform their respective obligations under this Agreement, the Registration Agreement, the Merger Agreement, the New Credit Facility, the Indenture or the Securities or to consummate the Transactions (a "Material Adverse Effect"), and (ii) no labor disturbance by the employees of Holding, the Company, or the Subsidiary exists or, to the best of Holding's or the Company's knowledge is imminent, in either case which could have a Material Adverse Effect. Neither Holding, the Company, nor any of their Subsidiaries is a party or subject to the provisions of any material injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body. (m) Neither Holding nor the Company has paid or agreed to pay to any person any compensation for soliciting another to purchase any securities of Holding or the Company (except as contemplated by this Agreement). (n) Upon the closing of the purchase and sale of the Notes and the Holding Preferred Stock and the application of the proceeds therefrom, all of the Company's obligations under the Second Amended and Restated Credit Agreement between the Company and the lenders named therein dated April 28, 1995, as amended (the "1995 Credit Agreement"), will be permanently satisfied and discharged and the 1995 Credit Agreement will be terminated. 9 (o) The Company and the Subsidiary are conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which they are conducting business, including, without limitation, the Food, Drug and Cosmetic Act (the "FDC Act") and the regulations of the Food and Drug Administration ("FDA") and all applicable environmental laws and regulations, except where the failure to be so in compliance would not have a Material Adverse Effect. (p) Neither Holding, the Company nor the Subsidiary (i) is in violation of its charter, by-laws or other constituent documents or (ii) is in default in any material respect, and no event has occurred which, with notice or lapse of time or both, would constitute such default, in the due performance or observance of any term, covenant or condition contained in any material indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject which violation or default would cause a Material Adverse Effect. (q) There are no defects in title to the owned properties or encumbrances upon the leased properties of the Company and the Subsidiary or the assets or facilities used by the Company and the Subsidiary, except any such defects that are in the ordinary course of business of the Company or such Subsidiary which, individually or in the aggregate, have a Material Adverse Effect. (r) Each of the Company and its Subsidiaries owns or possesses adequate rights to use all material patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses and know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) necessary for the conduct of its business, except where the failure to own or possess such rights would not have a Material Adverse Effect, and has no reason to believe that the conduct of its business will conflict with any such rights of others which is reasonably likely to have a Material Adverse Effect, and has not received any notice of any claim of 10 conflict with any such rights of others which is reasonably likely to have a Material Adverse Effect. (s) (i) The consolidated financial statements with respect to Holding and the Company included in the Final Memorandum present fairly the consolidated financial position of Holding, and its consolidated Subsidiaries and the Company and its consolidated Subsidiary, as applicable, as of the dates shown and their results of operations and cash flows for the periods shown, and such consolidated financial statements have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis. (ii) The pro forma financial statements of Holding and the Company included in the Final Memorandum are based upon reasonable assumptions for presenting the significant effects of the Transactions, give appropriate effect to those assumptions, and reflect the proper application of those adjustments to the historical consolidated financial statement amounts in the consolidated financial statements of Holding and the Company, as applicable. Such pro forma financial statements comply in form in all material respects with the applicable accounting requirements of the Exchange Act and the related published rules and regulations that would apply to the Final Memorandum if the Final Memorandum were a prospectus included in a registration statement on Form S-1 under the Securities Act. (t) On the Closing Date (after giving effect to the issuance of the Notes and the Holding Preferred Stock and the consummation of the Transactions) each of Holding and the Company will be Solvent. As used in this paragraph, the term "Solvent" means, with respect to a particular ------- date, that on such date (i) the aggregate fair value or present fair salable value of the assets of Holding and the Company, as applicable, is not less than its total existing debts and liabilities (including identified contingent liabilities) as they become absolute and matured in the normal course of business, (ii) Holding and the Company are able to pay their debts and other liabilities, contingent obligations and commitments as they mature and become due in the normal course of business and (iii) Holding and the Company do not have an 11 unreasonably small amount of capital with which to conduct their business. In computing the amount of such contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. (u) Since the date of the latest audited consolidated financial statements of the Company and Holding included in the Final Memorandum, there has been no material adverse change, nor to the Company's and Holding's knowledge any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of Holding, the Company and their Subsidiaries taken as a whole, and, except as disclosed in the Final Memorandum, since the date of the latest audited consolidated financial statements of the Company and Holding included in the Final Memorandum, there has been no dividend or distribution of any kind declared, paid or made by the Company or Holding on any class of its capital stock. (v) Assuming the accuracy of the representations and warranties contained in Section 4, it is not necessary in connection with the offer, sale and delivery of the Notes and Preferred Stock in the manner contemplated by this Agreement and the Final Memorandum to register the Securities under the Securities Act or to qualify the Indenture or the Exchange Indenture under the Trust Indenture act of 1939, as amended (the "Trust Indenture Act"). (w) The Company and Holding have agreed to permit the Securities to be designated Portal eligible securities, will pay the requisite fees related thereto and have provided all necessary information to the National Association of Securities Dealers, Inc., in order to ensure that the Securities are designated Portal eligible securities. (x) The Company has preliminary determined that the computer hardware and software used by the Company and the Subsidiary are and will be able to process all date information prior to and after December 31, 1999 12 without any errors, aborts, delays or other interruptions in operations arising from the inability of computer hardware and software to recognize and properly execute date sensitive function involving certain dates prior to and any dates after December 31, 1999 (the "Year 2000 Problem") which could reasonably be expected to result in a Material Adverse Effect. 2. Purchase and Sale. Subject to the terms and conditions and in ------------------ reliance upon the representations and warranties herein set forth, the Company agrees, to sell to the Purchasers and each Purchaser agrees severally and not jointly, to purchase from the Company the principal amount of Notes set forth opposite each Purchaser's name in Schedule I hereto, at a purchase price of 97.0% of the principal amount thereof, plus accrued interest, if any, from April 7, 1998, to the Closing Date. Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, Holding agrees to sell to the Purchasers and each Purchaser agrees, severally and not jointly, to purchase from Holding the number of shares of Holding Preferred Stock set forth opposite each Purchaser's name in Schedule I hereto at a purchase price of $96.50 per share, plus accrued dividends, if any, with respect to the Preferred Stock from April 7, 1998, to the Closing Date. 3. Delivery and Payment. Delivery of and payment for the Notes and --------------------- the Holding Preferred Stock shall be made at 10:00 AM, New York City time, on April 7, 1998, or such later date as the Purchasers may agree or as provided in Section 9 hereof (such date and time of delivery and payment for the Notes and the Holding Preferred Stock being herein called the "Closing Date"). Delivery of the Notes and the Holding Preferred Stock shall be made to the Purchasers against payment by the Purchasers of the respective purchase prices thereof to or upon the order of the Company and Holding, as applicable, by wire transfer in Federal (same day) funds to U.S. dollar accounts previously designated by the Company and Holding, as applicable. In the event that the Merger has not been consummated at the time such funds are transferred by the Purchasers, such accounts shall be segregated from the other accounts of the Company and Holding and each of the Company and Holding hereby agrees that until the Merger has been declared effective by the Secretary of State of the State of California such funds shall not be withdrawn from such accounts or commingled with 13 other funds of the Company or Holding. Delivery of the Notes and the Holding Preferred Stock shall be made at the office of Cravath, Swaine & Moore ("Counsel for the Purchasers"), 825 Eighth Avenue, New York, New York. Certificates for the Notes and the Holding Preferred Stock shall be registered in such names and in such denominations as the Purchasers may request not less than two full business days in advance of the Closing Date. The Company and Holding agree to have the Notes and the Holding Preferred Stock available for inspection, checking and packaging by the Purchasers in New York, New York, not later than 1:00 PM on the business day prior to the Closing Date. 4. Offering of Securities. Each Purchaser (i) acknowledges that the ----------------------- Securities have not been registered under the Securities Act and may not be offered or sold except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act or pursuant to an effective registration statement under the Securities Act and (ii) severally and not jointly, represents and warrants to and agrees with the Company and Holding that: (a) It has not offered or sold, and will not offer or sell, any Securities except (i) to those it reasonably believes to be qualified institutional buyers (as defined in Rule 144A under the Securities Act) and that, in connection with each such sale, it has taken or will take reasonable steps to ensure that the purchaser of such Securities is aware that such sale is being made in reliance on Rule 144A or (ii) in accordance with the restrictions set forth in Exhibit A hereto. (b) Neither it nor any person acting on its behalf has made or will make offers or sales of the Securities in the United States by means of any form of general solicitation or general advertising (within the meaning of Regulation D) in the United States, except pursuant to a registered public offering, whether an exchange offer or shelf registration, as provided in the Registration Agreement. 14 5. Agreements. The Company and Holding jointly and severally agree ----------- with the Purchasers that: (a) The Company and Holding will furnish to the Purchasers and Cravath, Swaine & Moore, without charge, as many copies of the Final Memorandum and any supplements or amendments thereof or thereto as the Purchasers may reasonably request, and will pay the expenses of printing or other production of all documents relating to the offerings. (b) Neither the Company nor Holding will amend or supplement the Final Memorandum without the prior consent of the Purchasers. (c) If at any time prior to the completion of the sale of the Securities by the Purchasers, any event occurs as a result of which the Final Memorandum, as then amended or supplemented, would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it shall be necessary to amend or supplement the Final Memorandum to comply with the Exchange Act or the rules thereunder or other applicable law, the Company and Holding promptly will notify the Purchasers of the same and, subject to paragraph (b) of this Section 5, will prepare and provide to the Purchasers pursuant to paragraph (a) of this Section 5 an amendment or supplement which will correct such statement or omission or effect such compliance. (d) The Company and Holding will arrange for the qualification of the Securities for sale under the laws of such U.S. jurisdictions as the Purchasers may designate and will maintain such qualifications in effect so long as required for the sale of the Securities provided that Company and Holding will not be obligated to qualify as foreign corporations or to execute a general consent to service of process in any jurisdiction or to take any other action that would subject them to general service of process or taxation in any jurisdiction in which they are not otherwise subject. The Company and Holding will promptly advise the Purchasers of the receipt by them of any notification with respect to the suspension of the 15 qualification of any Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. (e) Neither the Company nor Holding will, nor will either of them permit any of their respective Affiliates to, resell any Securities which constitute "restricted securities" under Rule 144 that have been reacquired by any of them. (f) None of the Company, Holding, nor any of their respective Affiliates, or any person acting on their behalf will, directly or indirectly, make offers or sales of any security, or solicit offers to buy any security, under circumstances that would require the registration of the Securities under the Securities Act. (g) None of the Company, Holding nor any of their respective Affiliates or any person acting on their behalf will engage in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer or sale of the Securities in the United States, except pursuant to a registered public offering, whether an exchange offer or shelf registration, as provided in the Registration Agreement. (h) So long as any of the Securities are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, the Company and Holding will, during any period in which it is not subject to and in compliance with Section 13 or 15(d) of the Exchange Act, provide to each holder of such restricted securities and to each prospective purchaser (as designated by such holder) of such restricted securities, upon the request of such holder or prospective purchaser, any information required to be provided by Rule 144A(d)(4) under the Securities Act. The information provided pursuant hereto will not, at the date thereof, contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. This covenant is intended to be for the benefit of the holders, and the prospective purchasers 16 designated by such holders, from time to time of such restricted securities. (i) None of the Company, Holding, any of their respective Affiliates, or any person acting on their behalf will engage in any directed selling efforts with respect to the Securities except pursuant to a registered public offering as provided in the Registration Agreement and each of them will comply with the offering restrictions requirement of Regulation S. Terms used in this paragraph have the meanings given to them by Regulation S. (j) The Company and Holding will cooperate with the Purchasers and use their reasonable best efforts to permit the Securities to be eligible for clearance and settlement through The Depository Trust Company. (k) The Company and Holding hereby agree to permit the Securities to be designated Portal eligible securities, will pay the requisite fees related thereto and have been advised by The Portal Market that the Securities have or will be designated Portal eligible securities in accordance with the rules and regulations of the National Association of Securities Dealers, Inc. (l) Neither Holding nor the Company will take, directly or indirectly, any action prohibited by Regulation M under the Exchange Act, in connection with the offering of the Securities. (m) Neither Holding nor the Company will, until 90 days following the Closing Date, without the prior written consent of Salomon Brothers Inc, offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce the offering of, or file a registration statement for, any debt securities or capital stock which is preferred as to payment of dividends, or as to distribution upon liquidation, over any other class of capital stock issued or guaranteed by Holding or the Company ("preferred stock") (other than (i) the Securities and (ii) pursuant to a registered public offering as provided in the Registration Agreement). (n) Holding and The Company will apply the net proceeds from the sale of the Securities sold by them 17 substantially in accordance with the statements under the caption "Use of Proceeds" in the Final Memorandum. (o) Immediately following consummation of the Merger, the Company will file with the Secretary of State of the State of California a certificate of amendment relating to the Certificate of Determination for the Mirror Preferred Stock in the form previously agreed to by the Purchasers. The Company will not agree to any modification in the economic or other material terms of such certificate of amendment without the consent of a majority of holders of the Holding Preferred Stock. (p) In the event that the Merger has not been consummated within three business days following consummation of the offering and sale of the Notes and Holding Preferred Stock, the Company and Holding will redeem the Notes and Holding Preferred Stock in accordance with the terms of the Indenture and the Certificate of Designation governing the Holding Preferred Stock. 6. Conditions to the Obligations of the Purchasers. The obligations ------------------------------------------------ of the Purchasers to purchase the Securities shall be subject to the accuracy of the representations and warranties on the part of the Company and Holding contained herein at the date and time that this Agreement is executed and delivered by the parties hereto (the "Execution Time") and the Closing Date, to the accuracy of the statements of the Company or Holding made in any certificates pursuant to the provisions hereof, to the performance by the Company and Holding of their respective obligations hereunder and to the following additional conditions: (a) The Company and Holding shall have caused Riordan & McKinzie, counsel for the Company and Holding, to have furnished to the Purchasers their opinion dated the Closing Date and addressed to the Purchasers, to the effect that: (i) Holding and the Company have been duly incorporated and are validly existing as corporations in good standing under the laws of the State of Delaware and California, respectively, with full corporate power and 18 authority to own or lease, as the case may be, their properties and conduct their business as described in the Final Memorandum; (ii) the authorized equity capitalization of Holding and of the Company effective upon the consummation of the Recapitalization is as set forth in the Final Memorandum; (iii) the information contained in the Final Memorandum under the headings "Description of Senior Credit Facility" and "Certain Federal Income Tax Considerations", fairly summarizes the matters therein described in all material respects and the information contained in the Final Memorandum under the heading "Risk Factors --- Fraudulent Conveyance and Distribution Limitation Considerations" relating to Sections 500 et seq. of the California Corporations Code fairly summarizes the possible consequences of the violation of these sections to holders of Securities; (iv) the Indenture and the Exchange Indenture conform as to form in all material respects with the requirements of the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and the rules and regulations of the Commission applicable to an indenture which is qualified thereunder; (v) provided the Securities are sold in the manner contemplated by the Purchase Agreement and Final Memorandum, no consent, approval, authorization or order of, or filing or registration with, any court or governmental agency or body is required for the execution, delivery and performance of this Agreement, the Indenture, the Exchange Indenture, the Registration Agreement and the Securities or for the consummation of the Transactions contemplated thereby, except such as may be required under the blue sky or securities laws of any jurisdiction and such other approvals (specified in such opinion) as have been obtained and except such as may be required under the Securities Act and the Trust Indenture Act with respect to the 19 Registration Agreement and the transactions contemplated thereunder; (vi) except as set forth in the Final Memorandum, none of the issue and sale of the Securities, the execution and delivery of this Agreement, the Registration Agreement, the Merger Agreement, the New Credit Facility, the Indenture, or the Exchange Indenture, the fulfillment of the terms hereof or thereof or the consummation of the transactions contemplated thereby will conflict with, result in a breach or violation of, or constitute a default under any law (other than California Corporations Code (S)(S) 500 et seq. as to which such counsel may express no opinion) or the charter or by-laws of Holding or the Company or the terms of any material indenture or other material agreement or instrument identified in an officer's certificate as material to the Company and to which Holding or the Company or the Subsidiary is a party or bound or any judgment, order or decree, identified in an officer's certificate, of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over Holding or the Company; (vii) Holding and the Company have full corporate right, power and authority to execute and deliver the Securities, the Registration Agreement, the Merger Agreement, the New Credit Facility, the Indenture, the Exchange Indenture and this Agreement and to perform their respective obligations thereunder; and all corporate action required to be taken for the due and proper authorization, execution and delivery of the Indenture, the Exchange Indenture, the Merger Agreement, the New Credit Facility, the Securities, the Registration Agreement and this Agreement and for the consummation of the transactions contemplated thereby has been duly and validly taken; (viii) the Merger Agreement has been duly authorized, executed and delivered by Holding, the Company and River Acquisition Corp., and constitutes a legal, valid and binding instrument 20 enforceable against Holding, the Company and River Acquisition Corp. in accordance with its terms (subject, as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting creditors' rights generally from time to time in effect); (ix) the New Credit Facility has been duly authorized, executed and delivered by Holding and the Company and constitutes a legal, valid and binding instrument enforceable against Holding and the Company in accordance with its terms (subject, as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting creditors' rights generally from time to time in effect); (x) this Agreement and the Registration Agreement have been duly authorized, executed and delivered by the Company and Holding; (xi) the Indenture has been duly authorized, executed and delivered, and constitutes a legal, valid and binding instrument enforceable against the Company and Holding in accordance with its terms (subject, as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting creditors' rights generally from time to time in effect); the Notes are in the form contemplated by the Indenture and have been duly authorized and executed by the Company and, when authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Purchasers pursuant to this Agreement, will be duly and validly issued and outstanding and will constitute legal, valid and binding obligations of the Company and Holding entitled to the benefits of the Indenture and enforceable in accordance with their terms (subject, as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting creditors' rights generally from time to time in effect); and the statements set forth under the heading "Description of Notes" in the Final Memorandum, insofar as such statements purport to summarize certain provisions of the 21 Notes and the Indenture, provide a fair summary of such provisions in all material respects; (xii) the Holding Preferred Stock has been duly and validly authorized by Holding and when the Holding Preferred Stock has been delivered by Holding, countersigned by the Transfer Agent, and paid for in accordance with the terms of this Agreement the Holding Preferred Stock will be validly issued, fully paid and nonassessable; to such counsel's knowledge, the issuance of the Holding Preferred Stock is not subject to preemptive or other similar rights; and the statements set forth under the heading "Description of the Holding Preferred Stock" in the Final Memorandum, insofar as such statements purport to summarize certain provisions of the Holding Preferred Stock, provide a fair summary of such provisions in all material respects. (xiii) the Company Preferred Stock has been duly and validly authorized by the Company; and the statements set forth under the heading "Description of the Company Exchange Securities" in the Final Memorandum, insofar as such statements purport to summarize certain provisions of the Company Preferred Stock, provide a fair summary of such provisions; (xiv) each of the Company Exchange Indenture and the Company Exchange Debentures have been duly and validly authorized by the Company; and the statements set forth under the heading "Description of the Exchange Securities--Company Exchange Debentures" in the Final Memorandum, insofar as such statements purport to summarize certain provisions of the Company Exchange Debentures and the Company Exchange Indenture, provide a fair summary of such provisions; (xv) to such counsel's knowledge (without independent investigation), there is no pending or threatened action or suit or judicial, arbitral or other administrative proceeding to which Holding, the Company or any of their Subsidiaries is a party or of which any property or assets of Holding, the Company or any of their Subsidiaries 22 is the subject that, singly or in the aggregate, questions the validity of this Agreement, the Registration Agreement, the Indenture, the Securities, the Transactions or any action taken or to be taken pursuant hereto or thereto; (xvi) assuming the accuracy of the representations and warranties and compliance with the agreements contained herein, no registration of the Securities under the Securities Act is required, and no qualification of the Indenture or the Exchange Indenture under the Trust Indenture Act is necessary, for the offer, sale and delivery of the Securities in the manner contemplated by this Agreement; and (xvii) neither Holding nor the Company is an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"), without taking account of any exemption arising out of the number of holders of the Company's or Holding's securities. Such counsel shall also state that such counsel has participated in conferences with officers and other representatives of the Company and Holding, representatives of the independent public accountants for the Company and Holding and representatives of the Initial Purchasers at which the contents of the Final Memorandum and related matters were discussed. Such counsel shall state that although such counsel has made no independent check or verification of the accuracy, completeness or fairness of the statements made in the Final Memorandum (except as set forth in paragraphs (ii), (iii), (xi), (xii), (xiii) and (xiv) above) on the basis of the foregoing (relying as to materiality to a large extent upon the statements of officers and other representatives of the Company and Holding) no facts have come to such counsel's attention that have caused such counsel to believe that the Final Memorandum as of its date and as of the Closing Date contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion on the financial statements or 23 other financial and statistical data included in the Final Memorandum). In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the State of California and the federal laws of the United States to the extent they deem proper and specified in such opinion, upon the opinion of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the purchasers and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of Holding and the Company and public officials, copies of which shall be provided to the Purchasers. Such counsel may deliver the opinions relating to the Merger Agreement and the New Credit Facility set forth in paragraphs 6(vii), 6(viii), 6(ix) and 6(x) above by delivering letters dated the Closing Date permitting the Purchasers to rely upon separate opinion letters dated the Closing Date rendered to the parties to the Merger Agreement and the New Credit Facility and containing substantially similar opinions. All references in this Section 6(a) to the Final Memorandum shall be deemed to include any amendment or supplement thereto at the Closing Date. (b) The Company and Holding shall have caused Hyman, Phelps & McNamara, P.C., special regulatory counsel for the Company and Holding, to have furnished to the Purchasers their opinion dated the Closing Date and addressed to the Purchasers, to the effect that the information and disclosure contained in the Final Memorandum under the headings "Risk Factors--Government Regulation" and "Business--Government Regulation and Environmental Matters", is accurate and complete in all material respects, insofar as such information and disclosure relate to Food and Drug Administration law, legal matters and compliance requirements. Such counsel shall also state that, with respect to the other information and disclosure contained in the Final Memorandum not specified above, they have no reason to believe that at the Execution Time the Final Memorandum contained an untrue statement of a material 24 fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or that the Final Memorandum includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. All references in this Section 6(b) to the Final Memorandum shall be deemed to include any amendment or supplement thereto at the Closing Date. (c) The Purchasers shall have received from Cravath, Swaine & Moore such opinion or opinions, dated the Closing Date, with respect to the issuance and sale of the Securities, the Final Memorandum (as amended or supplemented at the Closing Date) and other related matters as the Purchasers may reasonably require, and the Company and Holding shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (d) The Company and Holding shall have furnished to the Purchasers certificates of the Company and of Holding, signed by the President and Chief Financial Officer of the Company and the President or Vice President and an Assistant Secretary of Holding, dated the Closing Date, to the effect that the signers of such certificate have examined the Final Memorandum, any amendment or supplement to the Final Memorandum and this Agreement and the Registration Agreement and that: (i) the representations and warranties of the Company and of Holding in this Agreement and the Registration Agreement are true and correct in all material respects on and as of the Closing Date with the same effect as if made on the Closing Date, and the Company and Holding have complied in all material respects with all the agreements and satisfied all the conditions on their part to be performed or satisfied hereunder or thereunder at or prior to the Closing Date; and (ii) since the date of the most recent financial statements included in the Final Memorandum, there has been no material adverse 25 change in the condition (financial or otherwise), properties, business, results of operations or prospects of the Company, Holding or any of their respective Subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as disclosed in the Final Memorandum (exclusive of any amendment or supplement thereto). (e) At the Execution Time and at the Closing Date, the Holding and Company shall have caused Arthur Andersen LLP to have furnished to the Purchasers a letter or letters, dated respectively as of the Execution Time and as of the Closing Date, in form and substance satisfactory to the Purchasers, confirming that they are independent accountants within the meaning of the Securities Act and the Exchange Act and the applicable rules and regulations thereunder and Rule 101 of the Code of Professional Conduct of the American Institute of Certified Public Accountants (the "AICPA") and stating in effect that: (i) in their opinion the audited financial statements of Holding and the Company and the audited pro forma financial statements of the Company included in the Final Memorandum and reported on by them, and the unaudited pro forma financial statements of Holding included in the Final Memorandum, comply in form in all material respects with the applicable accounting requirements of the Exchange Act and the related published rules and regulations that would apply to the Final Memorandum if the Final Memorandum were a prospectus included in a registration statement on Form S-1 under the Securities Act; (ii) on the basis of a reading of the unaudited pro forma financial statements of Holding included in the Final Memorandum; carrying out certain specified procedures; inquiries of certain officials of Holding and the Company who have responsibility for financial and accounting matters; and proving the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in such unaudited pro forma financial statements, nothing came to their attention which causes them to believe that the 26 pro forma adjustments have not been properly applied to the historical amounts in the compilation of such statements. (iii) based upon the procedures detailed in such letter with respect to the period subsequent to the date of the latest audited financial statements included in the Final Memorandum, including the reading of the minutes and inquiries of certain officials of Holding and of the Company who have responsibility for the financial and accounting matters and certain other limited procedures requested by the Purchasers and described in detail in such letter, nothing has come to their attention that causes them to believe that: (A) with respect to the period subsequent to December 26, 1997, there were any changes, at a specified date not more than five business days prior to the date of the letter, in the total debt of Holding, the Company and any of their Subsidiaries or capital stock of Holding or the Company or decreases in the stockholders' equity of Holding or the Company or decreases in working capital of Holding, the Company, and any of their Subsidiaries, as compared with the amounts shown on the December 26, 1997 consolidated balance sheet included in the Final Memorandum, or for the period from December 26, 1997, to such specified date there were any decreases, as compared with the corresponding period in the preceding year in total revenues, net income before income taxes, net income or EBITDA, as defined in the Indenture, except in all instances for changes or decreases set forth in such letter, in which case the letter shall be accompanied by an explanation by Holding or the Company, as the case may be, as to the significance thereof unless said explanation is not deemed necessary by the Purchasers; or (B) the information included under the heading "Selected Historical Financial Data" 27 is not in conformity with the disclosure requirements of Regulation S-K that would apply to the Final Memorandum if the Final Memorandum were a prospectus included in a registration statement on Form S-1 under the Securities Act; and (iii) they have performed certain other specified procedures as a result of which they determined that certain information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of Holding, the Company or any of their Subsidiaries) set forth in the Final Memorandum, including the information set forth under the captions "Summary", "Risk Factors", "Use of Proceeds", "Capitalization" "Selected Historical Financial Data", "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Business", "Management", "Description of Senior Credit Facility" and "Description of the Notes" in the Final Memorandum, agrees with the accounting records of Holding, the Company, or any of their Subsidiaries, excluding any questions of legal interpretation. All references in this Section 6(e) to the Final Memorandum shall be deemed to include any amendment or supplement thereto at the date of the letter. (f) Subsequent to the Execution Time or, if earlier, the dates as of which information is given in the Final Memorandum, there shall not have been (i) any change or decrease specified in the letter or letters referred to in paragraph (e)(iii)(A)of this Section 6 or (ii) any change, or any development involving a prospective change, in or affecting the business or properties of the Company, Holding or any of their respective Subsidiaries the effect of which, in any case referred to in clause (i) or (ii) above, is not disclosed in the Final Memorandum and is, in the judgment of the Purchasers, so material and adverse as to make it impractical or inadvisable to market the Securities as contemplated by the Final Memorandum. 28 (g) Subsequent to the Execution Time, there shall not have been (i) any decrease in the rating of any of the Securities or any other debt securities or preferred stock of the Company or Holding by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Securities Act) or (ii) any notice given of any intended or potential decrease in any such rating or that such organization has under surveillance or review (other than any such notice with positive implications of a possible upgrading) its rating of any of the Securities or any other debt securities or preferred stock of the Company or Holding. (h) On or prior to the Closing Date, the Registration Agreement shall have been executed substantially in the form hereto delivered to you and shall have been delivered to you and the Trustee. (i) Each of the New Credit Facility and the Merger Agreement shall have been executed and delivered by the parties thereto. The terms of the New Credit Facility and the Merger Agreement shall be reasonably satisfactory to the Purchasers, and the Purchasers shall have received executed copies of the New Credit Facility and the Merger Agreement and all other documents and agreements entered into and received in connection therewith certified by the Secretary of the Company as being true, complete and correct. There shall exist at and as of the Closing Date (after giving effect to the Transactions) no condition that would constitute a default (or an event that with notice or lapse of time, or both, would constitute a default) under the New Credit Facility. (j) The Purchasers shall have received evidence, reasonably satisfactory to them, that (A) the merger of River Acquisition Corp. with and into the Company shall have been consummated in accordance with the terms of the Merger Agreement, (B) the initial funding shall have occurred under the New Credit Facility, (C) Freeman Spogli & Co. and certain members of the Company's management shall have made a $61.5 million equity investment in Holding and (D) the Company shall have issued shares of its 11 1/2% Senior PIK Preferred Stock due 2010 ("Mirror Preferred Stock") having an aggregate liquidation preference of $30.0 million to Holding on the terms described in the Final Memorandum 29 and otherwise reasonably satisfactory to the Purchasers. Notwithstanding the foregoing, the condition set forth in clause (A) above shall be deemed to have been satisfied if the Purchasers have not received evidence of the consummation of the Merger solely as a result of differences in time zones in connection with the processing of the certificate of merger relating to the Merger by the Secretary of State of the State of California. (k) Prior to the Closing Date, the Company and Holding shall have furnished to the Purchasers such further information, certificates and documents as the Purchasers may reasonably request. If any of the conditions specified in this Section 6 shall not have been fulfilled in all material respects when and as provided in this Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to the Purchasers and Counsel for the Purchasers, this Agreement and all obligations of the Purchasers hereunder may be canceled at, or at any time prior to, the Closing Date by the Purchasers. Notice of such cancelation shall be given to the Company and to Holding in writing or by telephone confirmed in writing. The documents required to be delivered by this Section 6 will be delivered at the office of Counsel for the Purchasers, 825 Eighth Avenue, New York, New York, on the Closing Date. 7. Reimbursement of Expenses. If the sale of the Securities provided -------------------------- for herein is not consummated because any condition to the obligations of the Purchasers set forth in Section 6 hereof is not satisfied or because of any refusal, inability or failure on the part of the Company or Holding to perform any agreement herein or comply with any provision hereof, in each case other than by reason of a default by the Purchasers, the Company or Holding will reimburse the Purchasers upon demand for all reasonable out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the proposed purchase and sale of the Securities. 30 8. Indemnification and Contribution. (a) The Company and Holding --------------------------------- agree, jointly and severally, to indemnify and hold harmless each Purchaser, each director, officer, employee and agent of any Purchaser and each other person, if any, who controls any Purchaser within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Memorandum, the Final Memorandum or any information provided by the Company or Holding to any holder or prospective purchaser of Securities pursuant to Section 5(h), or in any amendments thereof or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, -------- ------- that the Company and Holding will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made in the Preliminary Memorandum or the Final Memorandum, or in any amendment thereof or supplement thereto, in reliance upon and in conformity with written information furnished to the Company or Holding by or on behalf of the Purchasers specifically for inclusion therein, it being understood that the only such information is that described in Section 8(b); provided further, however, ---------------- ------- that the indemnity agreement contained in this Section 8(a) shall not inure to the benefit of any indemnified party to the extent that it is determined by a final, non-appealable judgment that (i) the Preliminary Memorandum contained an untrue statement of a material fact or omitted to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, (ii) the sale to the person asserting any such losses, claims, damages or 31 liabilities was an initial resale of the Securities by any Purchaser, (iii) any such loss, claim, damage or liability of such indemnified party results from the fact that there was not sent or given to such person, at or prior to the written confirmation of the sale of such Securities to such person, a copy of any revised Preliminary Memorandum, the Final Memorandum or the Final Memorandum as amended or supplemented, and the Company had previously furnished copies thereof to such Purchaser and (iv) the revised Preliminary Memorandum, the Final Memorandum or the Final Memorandum as amended or supplemented corrected such untrue statement or omission. This indemnity agreement will be in addition to any liability that the Company and Holding may otherwise have. (b) Each Purchaser severally and not jointly agrees to indemnify and hold harmless the Company, Holding, their directors and officers, and each other person, if any, who controls the Company or Holding within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Company and Holding to the Purchasers, but only with reference to written information relating to the Purchasers furnished to the Company or Holding by or on behalf of the Purchasers specifically for inclusion in the Preliminary Memorandum or the Final Memorandum (or in any amendment thereof or supplement thereto). This indemnity agreement will be in addition to any liability which the Purchasers may otherwise have. The Company and Holding acknowledge that the statements set forth in the last paragraph of the cover page and under the heading "Plan of Distribution" in the Preliminary Memorandum and the Final Memorandum (or in any amendment or supplement thereto) constitute the only information furnished in writing by or on behalf of the Purchasers for inclusion in the Preliminary Memorandum or the Final Memorandum (or in any amendment thereof or supplement thereto). (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such 32 failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to participate therein, and to the extent it may wish, to assume the defense thereof with counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be satisfactory to -------- ------- the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel, if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party; provided that the indemnifying party shall not be responsible for the expenses of more than one separate counsel (in addition to one local counsel in each relevant jurisdiction) in any one action. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each 33 indemnified party from all liability arising out of such claim, action, suit or proceeding. An indemnified party will not, without the prior written consent of the indemnifying party, which consent will not be unreasonably withheld, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 8 is unavailable to or insufficient to hold harmless an indemnified party for any reason (other than as provided in paragraph (a)), the Company, Holding and the Purchasers agree to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which the Company, Holding and the Purchasers may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company and Holding on the one hand and by the Purchasers on the other from the offering of the Securities; provided, however, that in no case shall the -------- ------- Purchasers be responsible for any amount in excess of the purchase discount or commission applicable to the Securities purchased by such the Purchasers hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Company, Holding and the Purchasers shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and Holding on the one hand and of the Purchasers on the other in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company and Holding shall be deemed to be equal to the total net proceeds from the offering of the Securities (before deducting expenses), and benefits received by the Purchasers shall be deemed to be equal to the total purchase discounts and commissions, in each case as set forth on the cover page of the Final Memorandum. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the Company or Holding on the one hand or the Purchasers on the other. The Company, Holding and the Purchasers agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to 34 above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person who controls a Purchaser within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and each director, officer, employee and agent of a Purchaser shall have the same rights to contribution as such Purchaser, and each person who controls the Company or Holding within the meaning of either the Securities Act or the Exchange Act and each officer and director of the Company or Holding shall have the same rights to contribution as the Company or Holding, subject in each case to the applicable terms and conditions of this paragraph (d). 9. Default by a Purchaser. If either Purchaser shall fail to ----------------------- purchase and pay for any of the Securities agreed to be purchased by such Purchaser hereunder and such failure to purchase shall constitute a default in the performance of its or their obligations under this Agreement, the remaining Purchaser shall be obligated severally to take up and pay for (in the proportion which the amount of Securities set forth opposite its name in Schedule I hereto bears to the aggregate amount of Securities set forth opposite the name of the remaining Purchaser) the Securities that the defaulting Purchaser agreed but failed to purchase; provided, however, that in the event that the aggregate -------- ------- amount of Securities that the defaulting Purchaser agreed but failed to purchase shall exceed 10% of the aggregate principal amount of Securities set forth in Schedule I hereto, the remaining Purchaser shall have the right to purchase all, but shall not be under any obligation to purchase any, of the Securities, and if the non-defaulting Purchaser does not purchase all the Securities, this Agreement will terminate without liability to the non-defaulting Purchaser, the Company or Holding. In the event of a default by either Purchaser as set forth in this Section 9, the Closing Date shall be postponed for such period, not exceeding seven days, as the Purchasers shall determine in order that the required changes in the Final Memorandum or in any other documents or arrangements may be effected. Nothing contained in this Agreement shall relieve any defaulting Purchaser of its liability, if any, to the Company, Holding or the non-defaulting Purchaser for damages occasioned by its default hereunder. 35 10. Termination. This Agreement shall be subject to termination in ------------ the absolute discretion of the Purchasers, by notice given to the Company and to Holding prior to delivery of and payment for the Securities, if prior to such time (i) trading in securities generally on the New York Stock Exchange shall have been suspended or limited or minimum prices shall have been established on such Exchange, (ii) a banking moratorium shall have been declared either by Federal or New York State authorities or (iii) there shall have occurred any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war or other calamity or crisis the effect of which on financial markets of the United States is such as to make it, in the judgment of the Purchasers, impracticable or inadvisable to proceed with the offering or delivery of the Securities as contemplated by the Final Memorandum. 11. Representations and Indemnities to Survive. The respective ------------------------------------------- agreements, representations, warranties, indemnities and other statements of the Company, Holding or their respective officers and of the Purchasers set forth in this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Purchasers, the Company, Holding or any of the officers, directors or controlling persons referred to in Section 8 hereof, and will survive delivery of and payment for the Securities. The provisions of Sections 7 and 8 hereof shall survive the termination or cancelation of this Agreement. 12. Notices. All communications hereunder will be in writing and -------- effective only on receipt, and, if sent to the Purchasers, will be mailed, delivered or sent by fax and confirmed to them, care of Salomon Brothers Inc, at 388 Greenwich Street, New York, New York, 10013; or, if sent to Holding or the Company, will be mailed, delivered or telegraphed and confirmed to it at 27711 Diaz Road, P.O. Box 9020, Temecula, CA 92589-9020. 13. Successors. This Agreement will inure to the benefit of and be ----------- binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 8 hereof, and, except as expressly set forth in Section 5(h) hereof, no other person will have any right or obligation hereunder. 14. APPLICABLE LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED --------------- IN ACCORDANCE WITH THE LAWS OF THE 36 STATE OF NEW YORK (WITHOUT REGARD TO THE CONFLICT OF LAW PROVISIONS THEREOF). 15. Business Day. For purposes of this Agreement, "business day" ------------- means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in The City of New York, New York are authorized or obligated by law, executive order or regulation to close. 16. Counterparts. This Agreement may be executed in one or more ------------- counterparts, each of which will be deemed to be an original, but all such counterparts will together constitute one and the same instrument. 37 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this Agreement and your acceptance shall represent a binding agreement between the Company, Holding and the Purchasers. Very truly yours, HUDSON RESPIRATORY CARE, INC. by /s/ Richard W. Johansen __________________________________ Name: Richard W. Johansen Title: President and Chief Executive Officer by /s/ Jay R. Ogram __________________________________ Name: Jay R. Ogram Title: Chief Financial Officer RIVER HOLDING CORP. by /s/ Charles P. Rullman __________________________________ Name: Charles P. Rullman Title: President The foregoing Agreement is hereby confirmed and accepted as of the date first above written. SALOMON BROTHERS INC BT ALEX. BROWN INCORPORATED By: SALOMON BROTHERS INC By: /s/ H. Allen Bouch _____________________ Name: H. Allen Bouch Title: Director For themselves and the other Purchaser named in Schedule I to the foregoing Agreement EX-2.1 3 AMENDED & RESTATED MERGER AGREEMENT DATED 3-15-98 EXHIBIT 2.1 AMENDED AND RESTATED MERGER AGREEMENT BETWEEN RIVER HOLDING CORP., RIVER ACQUISITION CORP., HUDSON RESPIRATORY CARE INC. AND THE SHAREHOLDERS OF HUDSON RESPIRATORY CARE INC. March 15, 1998 AMENDED AND RESTATED MERGER AGREEMENT THIS AMENDED AND RESTATED MERGER AGREEMENT (the "Agreement") is made this 15 day of March, 1998, by and among River Holding Corp., a Delaware corporation (the "Investor"), River Acquisition Corp., a California corporation and wholly-owned subsidiary of the Investor ("Newco"), Hudson Respiratory Care Inc., a California corporation (the "Company") the Helen Lovaas Separate Property Trust U/D/T dated 7/17/97 ("Lovaas") and the Helen Lovaas Trust No. 1 U/D/T dated 11/10/97 (the "Trust"). Lovaas and the Trust are collectively referred to herein as the "Shareholders." RECITALS A. The Shareholders own all of the outstanding shares of common stock of the Company. B. The Company manufactures disposable respiratory care and anesthesia products and equipment. C. The Boards of Directors of Newco, the Investor and the Company deem advisable and in the best interests of their respective stockholders the merger of Newco with and into the Company (the "Merger") upon the terms and conditions set forth herein and in accordance with the Corporations Code of the State of California (the "Corporations Code") (the Company and Newco being hereinafter sometimes referred to as the "Constituent Corporations" and the Company, following the effectiveness of the Merger, being hereinafter sometimes referred to as the "Surviving Corporation"); D. The Boards of Directors of the Investor, Newco and the Company have approved the Merger, upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the representations, warranties and covenants, and subject to the conditions, herein set forth, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.01 Defined Terms. The following words shall have the following meanings ------------- when used in this Agreement: "Agreed Purchase Price" shall mean $233,600,000 plus any Contingent Payment --------------------- payable pursuant to Section 2.13 hereof. 1 "Arthur Anderson" shall mean the accounting firm Arthur Anderson LLP (or --------------- any successor thereto resulting from a merger or other business combination involving Arthur Anderson LLP). If at any time Arthur Anderson LLP (or its successor) shall cease to exist or shall otherwise refuse or be unable to perform the services described in this Agreement as being provided by Arthur Anderson, then the term Arthur Anderson shall be deemed to refer to any other accounting firm as may be selected by Lovaas with Investor's reasonable consent. "Balance Sheet Date" shall mean December 26, 1997. ------------------ "Closing" shall have the meaning specified in Section 2.02. ------- "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- "Company Transaction Expense Schedule" shall mean the schedule submitted to ------------------------------------ Investor by Lovaas five (5) business days prior to the Closing reflecting the fees and expenses of the Company and the Shareholders in connection with the transactions contemplated by this Agreement, including but not limited to the Incentive Payments as described on Exhibit A attached hereto, the Ruiz Consulting Fee, and legal, accounting and investment banking fees. "Contingent Payment" shall have the meaning specified in Section 2.13. ------------------ "Current Assets" shall consist of the current assets as shown on the -------------- December 26, 1997 Balance Sheet or the Final Balance Sheet, as the case may be, excluding any deferred tax assets, and without giving effect to the transactions contemplated by this Agreement, which balance sheets shall each be prepared in accordance with GAAP (except as otherwise indicated in Schedule 3.05 hereto). 2 "Current Liabilities" shall consist of the current liabilities as shown on ------------------- the December 26, 1997 Balance Sheet or the Final Balance Sheet, as the case may be, without giving effect to (i) the transactions contemplated by this Agreement, (ii) the accruals related to the expenses associated with the transactions contemplated by this Agreement (to the extent that such expenses are included on the Company Transaction Expense Schedule) or (iii) tax liabilities relating to obligations payable in connection with an election under section 338(h)(10) of the Code), which balance sheets shall each be prepared in accordance with GAAP (except as otherwise indicated in Schedule 3.05 hereto). "Damages" shall have the meaning specified in Section 8.01. ------- "Debt Schedule" shall mean the schedule submitted to Investor by Lovaas at ------------- least five (5) business days prior to the Closing, which schedule shall set forth the principal amount of all of the Company's indebtedness for borrowed money, plus accrued but unpaid interest and any prepayment penalties thereon through to and including the Effective Date, which indebtedness, accrued interest and any prepayment penalties to be paid by the Surviving Corporation pursuant to Section 2.09(a) hereof as of the Effective Date. "December 26, 1997 Balance Sheet" shall have the meaning specified in ------------------------------- Section 3.05. "Effective Date" shall have the meaning specified in Section 2.03. -------------- "Environmental Laws" shall have the meaning specified in Section 3.22. ------------------ 3 "EPP Liabilities" shall mean all liability of the Company to make payments --------------- to EPP Participants pursuant to the EPP Plan including all amounts payable to retired or other former employees under the EPP Plan. "EPP Participants" shall mean the individual participants under the EPP ---------------- Plan. "EPP Plan" shall mean the Hudson Respiratory Care Inc. Equity Participation -------- Plan as established and maintained by the Company pursuant to the 1994 Amendment and Restatement of the Hudson Respiratory Care Inc. Equity Participation Plan (the "Plan Document") as such Plan Document has been amended prior to the date hereof or may in the future be amended in the manner provided in Exhibit A hereto. "EPP Schedule" shall mean the schedule submitted to Investor by Lovaas at ------------ least five (5) business days prior to the Closing, which schedule shall set forth the lump sum amount of the EPP Liability that will be payable to each EPP Participant as of the completion of the Closing. "Exchange Shares" shall mean the 3,739,435 shares of the Company's common --------------- stock held of record by the Trust and 9,229,285 shares of the Company's common stock held of record by Lovaas, after giving effect to the stock split described in section 2.06(a) hereof, which are each to be exchanged for the Price Per Share in the Merger in accordance with the provisions of Article II hereof. "Final Balance Sheet" shall mean a balance sheet of the Company as of the ------------------- Effective Date prepared in accordance with GAAP (except as otherwise indicated in Schedule 3.05 hereto). 4 "Final Balance Sheet Date" shall mean the Effective Date. ------------------------ "Final Balance Sheet Tax Liabilities" shall mean all Pre-Acquisition Tax ----------------------------------- Liabilities set forth in the account for the accrued taxes payable or similar account in the Final Balance Sheet and thus taken into account in determining the Final Working Capital. "Final Purchase Price" shall mean the Pro Forma Purchase Price as adjusted -------------------- pursuant to Section 2.12(a). "Final Working Capital" shall mean Current Assets, exclusive of Oxy Air, --------------------- less Current Liabilities, exclusive of EPP Liabilities, Oxy Air Liabilities and the current portion of Long-Term Debt or other debt reflected on the Debt Schedule, in each case as reflected in the Final Balance Sheet. "GAAP" shall mean United States generally accepted accounting principles as ---- applied on a consistent basis throughout the three year period ended December 26, 1997. "Hazardous Materials" shall have the meaning specified in Section 3.22. ------------------- "Indebtedness" shall mean (i) obligations for borrowed money (including ------------ overdrafts), (ii) reimbursement obligations in respect of any letter of credit or instruments serving a similar function (whether secured or unsecured), (iii) obligations representing the deferred purchase price of property other than accounts payable arising in connection with purchases in the ordinary course of business, (iv) interest rate swaps, currency swaps, reverse repurchase agreements and similar instruments, (v) any guarantee in respect of any obligations of another person, and (vi) capital lease and sale leaseback arrangements. 5 "Independent Accounting Firm" shall mean Ernst & Young or another --------------------------- nationally recognized independent accounting firm jointly selected by Lovaas and Investor. If such parties cannot agree on such accounting firm, the accounting firm will be selected as follows: Lovaas and Investor shall each submit the name of a nationally recognized independent accounting firm and the "Independent Accounting Firm" shall mean the firm selected by lot from these two firms. "Intangible Personal Property" shall have the meaning specified in Section ---------------------------- 3.10. "Investor Tax Liabilities" shall mean, without duplication, each and all of ------------------------ (i) the Final Balance Sheet Tax Liabilities, (ii) Tax Liabilities attributable to that portion of a Straddle Period following the Effective Date, (iii) Tax Liabilities attributable to Post-Acquisition Taxable Periods, and (iv) Tax Liabilities for which the Shareholders are not liable under Section 8.06 (ii) hereof. "Investor Transaction Expenses" shall mean the fees and expenses of the ----------------------------- Investor and Newco in connection with the transactions contemplated by this Agreement. "Investor Transaction Expense Schedule" shall mean the schedule submitted ------------------------------------- to the Shareholders five (5) business days prior to the Closing reflecting the Investor Transaction Expenses. "Licenses" shall have the meaning specified in Section 3.14. -------- "Long-Term Debt" shall mean the consolidated long-term debt of the Company, -------------- determined in accordance with GAAP less current installments of such long-term debt. 6 "Material Adverse Effect" shall mean changes, developments or occurrences ----------------------- which, individually or in the aggregate, have or reasonably can be expected to have a material adverse effect on the assets, earnings, liabilities, prospects, business, operations or financial condition or operating results of the Company and the Subsidiary, taken as a whole. "Merger" shall have the meaning specified in Section 2.01. ------ "New Debt" shall mean the indebtedness, consisting of short term and long -------- term debt which as of the date of this Agreement is estimated as approximately $167,500,000, that will be borrowed by the Company as of the Effective Date to pay the Pro Forma Purchase Price and the Investor Transaction Expenses. "New Debt Schedule" shall mean the written schedule of New Debt that will ----------------- be furnished by Investor to Lovaas not less than five (5) business days prior to the Closing and on which Investor shall specify each category of New Debt (revolving, short term and long term), the amount thereof and the lender(s) thereof. "New Preferred Stock" shall mean the shares of preferred stock of the ------------------- Company to be issued on the Effective Date in exchange for the shares of preferred stock of Newco, which preferred stock will have the rights, preferences and privileges agreed to by the parties hereto. "Outstanding Shares" shall mean 59,056 shares of common stock of the ------------------ Company before giving effect to the stock split described in Section 2.06(a) hereof which represents the total number of shares outstanding as of the date of this Agreement. 7 "Oxy Air" shall mean Oxy Air LLC, a Delaware limited liability company that ------- is wholly-owned by the Company as of the date of this Agreement. "Oxy Air Liabilities" shall mean any Indebtedness of Oxy Air. ------------------- "Post-Acquisition Taxable Period" shall mean a taxable period of the ------------------------------- Company that begins after the Effective Date. "Pre-Acquisition Tax Liability" shall mean a Tax Liability of the Company ----------------------------- for or with respect to any Pre-Acquisition Taxable Period or any Straddle Period to the extent allocable to the period ending on the Effective Date. "Pre-Acquisition Taxable Period" shall mean a taxable period of the Company ------------------------------ that ends on or before the Effective Date. "Price Per Share" means an amount equal to: --------------- (A) the Pro Forma Purchase Price less (i) the aggregate amount shown on the Debt Schedule, (ii) the aggregate amount shown on the EPP Schedule; and (iii) the aggregate amount shown on the Company Transaction Expense Schedule divided by ---------- (B) the number of Exchange Shares. 8 "Pro Forma Purchase Price" shall mean the Agreed Purchase Price as adjusted ------------------------ pursuant to Section 2.12(b). "Pro Forma Working Capital" shall mean Current Assets, exclusive of Oxy ------------------------- Air, less Current Liabilities, exclusive of EPP Liabilities, Oxy Air Liabilities and the current portion of Long-Term Debt or other debt reflected on the Debt Schedule, in each case as reflected in the Pre-Closing Balance Sheet prepared pursuant to Section 2.12(b). "Real Property" shall have the meaning specified in Section 3.12. ------------- "Retained Shares" shall mean 1,500,000 shares of the Company's common stock --------------- held of record by Lovaas, after giving effect to the stock split described in Section 2.06(a) hereof. "Ruiz Consulting Agreement" shall mean that certain Employment Termination ------------------------- and Consulting Agreement between Hudson Respiratory Care Inc. and Richard K. Ruiz dated as of December 31, 1996, as it may be amended. "Ruiz Consulting Fee" shall mean the Consulting Fee that shall become ------------------- payable, upon completion of the Closing, to Richard K. Ruiz pursuant to the Ruiz Consulting Agreement. "Shareholder Tax Liabilities" shall mean the U.S. federal and state income --------------------------- tax liabilities imposed on or against the Shareholders with respect to the Company's income pursuant to the provisions of Sections 1361 et seq. of the Code and comparable provisions of state income tax laws. "Straddle Period" shall mean a taxable period of the Company that includes --------------- but does not end on the Effective Date. 9 "Subsidiary" means Industrias Hudson, S.A. de C.V., a Mexican corporation ---------- in which the Company owns a 79% equity interest on the date hereof and will own a 100% equity interest prior to the Effective Date. "Surviving Corporation" shall have the meaning specified in Recital C --------------------- hereof. "Tax" or "Taxes" shall mean all taxes, including, without limitation, all -------------- net income, gross receipts, sales, use, withholding, payroll, employment, social security, unemployment, excise and property taxes, plus applicable penalties and interest thereon. "Tax Liabilities" shall mean all liabilities for Taxes. --------------- "Tax Proceeding" shall mean any audit or other examination, or any judicial -------------- or administrative proceeding, relating to liability for or refunds or adjustments with respect to Taxes. "Tax Return" shall mean all reports and returns required to be filed with ---------- respect to Taxes. 1.02 Additional Terms. In addition to the foregoing, other capitalized ---------------- terms used in this Agreement shall have the meanings given to such terms where they first appear herein. ARTICLE II TRANSFER OF SHARES 2.01 The Merger. Upon the terms and conditions hereinafter set forth and ---------- in accordance with the California Corporations Code (the "Corporations Code"), at the Effective Date (as defined in Section 2.03), Newco shall be merged with and into the Company (the 10 "Merger") and thereupon the separate existence of Newco shall cease, and the Company, as the Surviving Corporation, shall continue to exist under and be governed by the Corporations Code. 2.02 Closing; Filing. A closing shall be held at the offices of Gibson, --------------- Dunn & Crutcher LLP, 4 Park Plaza, Irvine, CA 92614 or such other place as the parties shall agree, for the purpose of confirming the satisfaction or waiver, as the case may be, of the conditions set forth in Articles VI and VII of this Agreement (the "Closing") on the later of April 14, 1998 or the second business day after satisfaction or waiver of the conditions set forth in Articles VI and VII; provided, however, that if all of the conditions set forth in Articles VI and VII have been satisfied or waived prior to April 14, 1998, Investor may select an earlier date for the Closing, upon five (5) business days notice to Lovaas. Immediately thereafter, Newco and the Company will cause an agreement of merger, in substantially the form of Exhibit D attached hereto (the "Agreement of Merger"), to be executed and filed with the Secretary of State of the State of California. 2.03 Effective Date of the Merger. The Merger shall become effective ---------------------------- immediately upon the filing of the Agreement of Merger with the Secretary of State of the State of California in accordance therewith. The date and time of such filing is herein sometimes referred to as the "Effective Date." 2.04 Articles of Incorporation and Bylaws. Upon the effectiveness of the ------------------------------------ Merger, the Articles of Incorporation of the Company shall be the Articles of Incorporation of the Surviving Corporation, (amended to increase the number of authorized shares of capital stock, 11 create and authorize the New Preferred Stock and effect a stock split), and the Bylaws of the Company as in effect on the Effective Date shall be the Bylaws of the Surviving Corporation. 2.05 Directors and Officers. The persons who are directors of Newco ---------------------- immediately prior to the Effective Date (plus any directors of the Company designated by Newco) and the officers of the Company (plus any officers of Newco designated by Newco) shall, after the Effective Date and in accordance with the Agreement of Merger, serve as the directors and officers, respectively, of the Surviving Corporation, in each case such directors and officers to serve until their successors have been duly elected and qualified in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation. 2.06 Conversion. ---------- (a) Prior to the Effective Date, the Company and the Shareholders shall take all action necessary to amend the Company's Articles of Incorporation to (i) increase its authorized common stock to 15 million shares, (ii) create a class of preferred stock with two million authorized shares, (iii) authorize 600,000 shares of New Preferred Stock and (iv) effect a 245 to 1 stock split with respect to the 59,056 Outstanding Shares. (b) Investor covenants that (i) it will contribute to Newco $10.00 for each share of the common stock of Newco issued to Investor and $100.00 (less any underwriting fees paid by Investor to a non-affiliate of Investor in connection with the sale and placement of such preferred stock) for each share of the preferred stock of Newco issued to Investor, (ii) at least 5,500,000 shares of Newco's common stock shall be issued to Investor and remain outstanding immediately prior to the Effective Date and (iii) at least 650,000 shares of common stock of the Surviving Corporation shall be purchased by Investor immediately following the Effective Date at a purchase price of $10.00 per share. 12 (c) At the Effective Date, by virtue of the Merger and without any action on the part of the holders thereof: (i) Each issued and outstanding Exchange Share shall be automatically converted into the right to receive the Price Per Share in cash, to be paid as set forth in Section 2.08 below. (ii) Each issued and outstanding share of the common stock of Newco shall be converted into one (1) validly issued, fully-paid and nonassessable share of common stock of the Surviving Corporation, and each issued and outstanding share of preferred stock of Newco shall be converted into one (1) validly issued, fully-paid and nonassessable share of New Preferred Stock of the Surviving Corporation. (iii) The Retained Shares shall remain outstanding. 2.07 Closing of the Transfer Books. At the Effective Date, the stock ----------------------------- transfer books of the Company shall be closed, and no transfer of shares of common stock of the Company shall thereafter be made. 2.08 Surrender of Certificates. ------------------------- (a) The Company. Each of the Shareholders shall deliver at the ----------- Closing certificates evidencing all of the Exchange Shares to be canceled pursuant to Section 2.06. Upon the surrender for exchange of such certificates, together with such documents of transfer, duly completed and properly executed, as reasonably requested by Investor, each Shareholder shall be paid at the Closing, by wire transfer of immediately available funds, the 13 amount of cash to which such Shareholder is entitled hereunder, and such certificates shall forthwith be canceled. (b) Newco. The Investor, as the sole stockholder of Newco, shall, ----- upon surrender to the Surviving Corporation of certificates representing the common stock, $.01 par value, of Newco and the preferred stock, $.01 par value, of Newco, receive certificates representing the number of shares of common stock of the Surviving Corporation into which the common stock of Newco shall have been converted and the number of shares of New Preferred Stock into which the preferred stock of Newco shall have been converted, each pursuant to Section ------- 2.06(c)(ii) hereof. - ----------- 2.09 Additional Payments on the Effective Date. On the Effective Date, ----------------------------------------- the Surviving Corporation shall pay: (a) by wire transfer of immediately available funds, the aggregate amount of indebtedness, inclusive of principal and interest accrued through the Effective Date, as set forth in the Debt Schedule to the parties and in accordance with the instructions as specified in the Debt Schedule; (b) to the EPP Participants the EPP Liability payable to such EPP Participants as set forth in the EPP Schedule, with the Surviving Corporation to make payment of the EPP Liabilities by wire transfer of immediately available funds to the EPP Participants in accordance with instructions as specified in the EPP Schedule; and (c) to the parties specified in the Company Transaction Expense Schedule the fees and expenses reflected in the Company Transaction Expense Schedule, with the Surviving Corporation to make payment of such fees and expenses by wire transfer of 14 immediately available funds or by check delivered at the Effective Date, whichever may be applicable as specified in the Company Transaction Expense Schedule, provided, however, Incentive Payments may be made following the Effective Date solely to the extent provided for under Section 5.01(b). 2.10 Effect of Merger. On and after the Effective Date, the Surviving ---------------- Corporation shall possess all the rights, privileges, powers and franchises of a public as well as of a private nature, and be subject to all the restrictions, disabilities and duties of each of the Constituent Corporations; and all singular rights, privileges, powers and franchises of each of the Constituent Corporations, and all property, real, personal and mixed, and all debts due to either of the Constituent Corporations on whatever account, as well for stock subscriptions and all other things in action or belonging to each of the Constituent Corporations, shall be vested in the Surviving Corporation; and all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of the Constituent Corporations, and the title to any real estate vested, by deed or otherwise, in either of the Constituent Corporations shall not revert or be in any way impaired; but all rights of creditors and all liens upon any property of either of the Constituent Corporations shall be preserved unimpaired, and all debts, liabilities and duties of the Constituent Corporations shall thenceforth attach to the Surviving Corporation and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by it. 2.11 Further Assurances. If at any time after the Effective Date the ------------------ Surviving Corporation shall consider or be advised that any further deeds, assignments or assurances in 15 law or any other acts are necessary, desirable or proper (a) to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation, the title to any property or right of the Constituent Corporations acquired or to be acquired by reason of, or as a result of, the Merger, or (b) otherwise to carry out the purposes of this Agreement, the Constituent Corporations agree that the Surviving Corporation and its proper officers and directors shall and will execute and deliver all such deeds, assignments and assurances in law and do all acts necessary, desirable or proper to vest, perfect or confirm title to such property or right in the Surviving Corporation and otherwise to carry out the purposes of this Agreement, and that the proper officers and directors of the Constituent Corporations and the proper officers and directors of the Surviving Corporation are fully authorized in the name of the Constituent Corporations or otherwise to take any and all such action. 2.12 Working Capital Adjustment. -------------------------- (a) The Agreed Purchase Price will be adjusted, by increasing or decreasing the amount thereof pursuant to the following provisions of this Section 2.12 (the "Working Capital Adjustment"). If the Final Working Capital is less than $26,750,000 (the "Minimum Working Capital"), the Pro Forma Purchase Price shall be reduced by, and the Shareholders shall pay to the Surviving Corporation, an amount equal to the difference between the Minimum Working Capital and the Final Working Capital. In the event that the Final Working Capital is greater than $29,500,000 (the "Maximum Working Capital"), the Pro Forma Purchase Price shall be increased by, and the Surviving Corporation shall pay to the Shareholders, an amount equal to the difference between the Final Working Capital and the Maximum Working Capital. Amounts equal to or greater than the Minimum Working Capital 16 and equal to or less than the Maximum Working Capital shall be referred to as the "Working Capital Range." The Working Capital Adjustment shall be payable as set forth below. (b) In an effort to reduce the amount of the Working Capital Adjustment after the Effective Date, a pro forma Working Capital Adjustment shall initially be calculated 5 days prior to the Closing (the "Pro Forma Working Capital Adjustment") based on the most recently available balance sheet (the "Pre-Closing Balance Sheet"), which shall be subject to Investor's review and approval, which approval shall not be unreasonably withheld. The Pro Forma Working Capital Adjustment shall be determined as follows: the Agreed Purchase Price shall be increased or decreased, as applicable, to the extent that the Pro Forma Working Capital as reflected in the Pre-Closing Balance Sheet is greater than or less than, as the case may be, the Working Capital Range. (c) No later than 60 days following the Effective Date, the Company shall prepare and deliver to Lovaas and Investor a draft Final Balance Sheet that has been audited by Arthur Anderson. During the 15 days after delivery of the draft Final Balance Sheet, Lovaas and Investor and their respective representatives and accountants shall have the right to review, audit and approve the draft Final Balance Sheet and the calculation of the Final Working Capital. Lovaas and Investor and their respective representatives and accountants shall have the right to review all workpapers of Arthur Anderson used in auditing the draft Final Balance Sheet and Lovaas and her representatives and accountants shall have full access to the books and records of the Company for the purpose of verifying the accuracy and fairness of the draft Final Balance Sheet. If neither party objects to the draft Final Balance Sheet within 17 such 15-day period, it shall be deemed acceptable to and binding upon the parties and Arthur Anderson shall issue an audited Final Balance Sheet with an unqualified opinion. (d) If either Lovaas or Investor has any objections to the draft Final Balance Sheet, such party will deliver a detailed statement describing their objections to the other party within 15 days after receiving the draft Final Balance Sheet. Investor and Lovaas will use reasonable efforts to resolve any such objections themselves. If the parties do not obtain a final resolution within 30 days after a party has received the statement of objections, however, the remaining objections will be resolved by the Independent Accounting Firm within 15 days of the expiration of the 30 day period and Arthur Anderson shall then issue an audited Final Balance Sheet with an unqualified opinion. The fees and expenses incurred by the Independent Accounting Firm shall be paid half by the Shareholders and half by the Surviving Corporation. (e) Any excess or shortfall of the Final Working Capital with respect to the Pro Forma Working Capital shall be paid by the Surviving Corporation or Shareholders, as the case may be, within ten (10) days following (i) the expiration of the 15-day comment period without objection as provided in Section 2.12(c) hereof or (ii) the final resolution of any dispute over the Final Balance Sheet as described in Section 2.12(d) hereof, whichever may be appropriate. 2.13 Contingent Payments. ------------------- (a) In the event that the Surviving Corporation's EBITDA before EPP (as defined below) for fiscal 1998 is at least $31,600,000, then the Surviving Corporation shall pay an additional aggregate amount equal to $5,700,000 (the "Contingent Payment"), with such amount payable as follows: $2,479,500 payable to Lovaas, $826,500 payable to the 18 Trust and $2,394,000 payable to the individuals set forth on Schedule 2.13 (the "Participating Employees") in the respective amounts set forth on Schedule 2.13. At the Surviving Corporation's option, the Contingent Payment shall be paid in cash in immediately available funds or pursuant to a three-year payment schedule (with principal and interest payable in 36 equal monthly installments and prepayable at any time without penalty), together with interest at the rate of 8% per annum. EBITDA before EPP shall mean the Surviving Corporation's earnings before depreciation and amortization, interest expense and income tax expense and before charges related to the EPP Plan and the payment of special 1997 bonuses, not giving effect to any acquisitions by the Surviving Corporation during fiscal 1998. (b) No later than 60 days following the end of fiscal 1998, the Surviving Corporation shall prepare and deliver to the Shareholders and the Participating Employees the Surviving Corporation's draft financial statements for fiscal 1998 (the "1998 Financial Statements") as audited by the Surviving Corporation's accountants, together with a calculation of EBITDA before EPP. During the 15 days after delivery of the draft 1998 Financial Statements, the Shareholders and the Participating Employees and their respective representatives and accountants shall have the right to review the draft 1998 Financial Statements and the calculation of EBITDA before EPP solely for the purpose of determining whether the Contingent Payment is payable. The Surviving Corporation will use its best efforts to make available to the Shareholders and the Participating Employees and their respective representatives and accountants all workpapers of the Surviving Corporation's accountants used in auditing the draft 1998 Financial Statements and the Shareholders and the Participating Employees and their respective representatives and accountants shall have full access to the books and records of the Surviving Corporation for the purpose of verifying the 19 accuracy of the draft 1998 Financial Statements and the calculation of EBITDA before EPP. If the Shareholders and the Participating Employees do not object to the draft 1998 Financial Statements or the calculation of EBITDA before EPP within such 15-day period, it shall be deemed acceptable to and binding upon the parties. (c) If the Shareholders or the Participating Employees have any objections to the draft 1998 Financial Statements or the calculation of EBITDA before EPP, such parties will deliver a detailed statement describing their objections to the Surviving Corporation within 15 days after receiving the draft 1998 Financial Statements and the calculation of EBITDA before EPP. The Surviving Corporation and such parties will use reasonable efforts to resolve any such objections themselves. If the parties do not obtain a final resolution within 5 days after the Surviving Corporation has received the statement of objections, however, the remaining objections will be resolved by the Independent Accounting Firm within 10 days of the expiration of the 5-day period. The fees and expenses incurred by the Independent Accounting Firm shall be paid half by the Shareholders and Participating Employees and half by the Surviving Corporation. (d) The Contingent Payment shall be paid by the Surviving Corporation in accordance with Section 2.13(a) beginning ten (10) days following (i) the expiration of the 15-day comment period without objection as provided in Section 2.13(b) hereof or (ii) the final resolution of any dispute over the 1998 Financial Statements or the calculation of EBITDA before EPP as described in Section 2.13(c) hereof, whichever may be appropriate. (e) For all Tax purposes, the Contingent Payments to the Shareholders shall be treated as additional purchase price consideration and the Contingent 20 Payments to the Participating Employees shall be treated as participation payments under the EPP Plan. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS The Shareholders, jointly and severally, represent and warrant to Investor that at as of the date of this Agreement: 3.01 Organization. Good Standing and Authority. The Company is a ----------------------------------------- corporation duly organized, validly existing and in good standing under the laws of the State of California. The Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the Country of Mexico. Each of the Company and the Subsidiary has full power and authority to carry on its business as it is now conducted, and is entitled to own, lease or operate the properties and assets it now owns, leases or operates. Each of the Company and the Subsidiary is qualified to do business and has all required and appropriate licenses in each jurisdiction in which its failure to obtain or maintain such qualification or licensing (i) would have a Material Adverse Effect or (ii) would result in a material breach of any of the other representations, warranties or covenants set forth in this Agreement. Each of this Agreement and the Noncompetition Agreement has been duly executed and delivered by the Shareholders and the Company, has been authorized by all necessary corporate action of the Shareholders and the Company and constitutes a legal, valid and binding obligation of the Shareholders and the Company, enforceable against each of them in accordance with its terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors rights generally. Except as 21 described in Exhibit A or as set forth on Schedule 3.01, the Company does not own, directly or indirectly, legally or beneficially, any shares of capital stock or any equity interest in, or otherwise control, any corporation, partnership, joint venture or other entity or business other than the Subsidiary. 3.02 Ownership of Shares and Power to Transfer. All of the ----------------------------------------- Outstanding Shares have been duly authorized and are validly issued and outstanding, fully paid and nonassessable. The number of Outstanding Shares owned by each Shareholder is set forth on Schedule 3.02 hereto. Except as set forth in Schedule 3.02, neither the Shareholders nor the Company have granted, issued or agreed to grant or issue any other equity interests in the Company (other than the Outstanding Shares), and there are no outstanding options, warrants, preemptive rights, subscription rights, securities or similar rights of any kind that are convertible into or exchangeable for or any other commitments of any character relating to the Outstanding Shares or any other equity interests of the Company. The Shareholders have good and valid title to, and sole record and beneficial ownership of, the Outstanding Shares set forth opposite such Shareholder's name on Schedule 3.02, free and clear of any claims, liens, pledges, options, security interests, trusts, encumbrances or other rights or interests of any person, and the Shareholders have the absolute and unrestricted right, power, authority and capacity to transfer the Exchange Shares at the Closing and this Agreement constitutes a legal, valid and binding obligation of the Shareholders enforceable against each of them in accordance with its terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors rights generally. The Outstanding Shares constitute all outstanding shares of capital stock of the Company. All dividends, distributions and redemptions made or to be made by the Company with respect to its equity interests have complied or will comply with applicable law. 22 3.03 Consents and Approvals of Governmental Authorities. Except as set -------------------------------------------------- forth in Schedule 3.03 hereto, no consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority by the Shareholders, the Company or the Subsidiary is required in connection with the execution, delivery and performance of this Agreement and the Noncompetition Agreement by the Shareholders or the Company and the consummation by the Shareholders or the Company of the transactions contemplated hereby. 3.04 Agreement not a Breach. Except as set forth on Schedule 3.04, the ---------------------- execution of this Agreement and the Noncompetition Agreement by the Shareholders or the Company and the fulfillment, performance and compliance with the terms and provisions of this Agreement and the Noncompetition Agreement by the Shareholders or the Company will not (i) conflict with or result in a breach of any provision of the Company's Articles of Incorporation or Bylaws or any organizational document of a Shareholder or the Subsidiary, (ii) conflict with, violate or result in a breach of the terms, conditions or provisions of, or constitute a default (or event which upon provision of notice or lapse of time or both would become such a default) or result in the acceleration of any obligation under, or result in the cancellation or modification of, or permit termination of, any agreement, lease, license, note, contract or instrument to which the Shareholders, the Company or the Subsidiary is a party or by which any of them is bound; (iii) accelerate, or constitute an event entitling the holder of any Indebtedness of the Company or the Subsidiary to accelerate the maturity of any such Indebtedness, permit subordination of any such Indebtedness of the Company or the Subsidiary to any other Indebtedness of the Company or the Subsidiary to which the Company or the Subsidiary was not already subordinated; (iv) conflict with or violate the provisions of any law or any 23 judgment, decree, order, arbitration award, regulation or rule of any court or governmental authority or any covenant or restriction binding upon the Company or the Subsidiary; (v) violate or result in the modification, termination or loss of any permit, license or other authorization applicable to the Company or the Subsidiary; or (vi) result in the creation of any lien, charge or encumbrance upon any equity interest in or assets of the Company or the Subsidiary under any agreement or instrument to which the Shareholders, the Company or the Subsidiary are a party or by which the Shareholders, the Company or the Subsidiary are bound, unless any such matter set forth in items (ii) - (v) above would not result in a Material Adverse Effect. 3.05 Financial Statements. Attached hereto as Schedule 3.05 is the -------------------- unaudited consolidated balance sheet of the Company as of December 26, 1997 (the "December 26, 1997 Balance Sheet") and related statements of income and cash flow for the twelve month period then ended (the "Unaudited 1997 Financial Statements"). The audited consolidated balance sheet of the Company as of December 26, 1997 and related statements of income and cash flow for the twelve month period then ended (the "Audited 1997 Financial Statements") to be delivered to Investor prior to the Effective Date will not differ in any material respect from the Unaudited 1997 Financial Statements. The Shareholders have also delivered to Investor the audited consolidated balance sheets of the Company as of December 27, 1996 and December 29, 1995, and related statements of income and cash flow for the respective twelve month periods then ended (collectively, with the Unaudited 1997 Financial Statements and, when delivered, the Audited 1997 Financial Statements, the "Financial Statements"). Except as set forth in Schedule 3.05 hereto, the Financial Statements (i) were prepared in accordance with the books and records of the Company; (ii) were prepared in accordance with the Company's accounting policies and principles and are in accordance with GAAP in a manner consistent 24 with the Company's historic accounting practices applied on a consistent basis except as set forth on Schedule 3.05 (except that the 1997 Financial Statements are unaudited and therefore do not have certain notes otherwise required by GAAP and may be subject to certain immaterial audit adjustments); and (iii) present fairly the financial position and results of operations of the Company at the dates and for the periods covered thereby. Schedule 3.05 sets forth a true and complete list of all of the Indebtedness of the Company and the Subsidiary (excluding capital lease obligations) as of the Balance Sheet Date. 3.06 Absence of Certain Changes. Except as set forth in Exhibit A and -------------------------- Schedule 3.06, since January 1, 1997, there has not been: (a) Any Material Adverse Effect; (b) Any increase in the compensation paid or payable by the Company or the Subsidiary, other than in the ordinary course of business and consistent with past practices, to any of its consultants who were paid in excess of $100,000 in the calendar year ended December 31, 1997 or officers; (c) Any recapitalization in respect of the equity interests in the Company or any direct or indirect redemption, purchase or other acquisition of any such equity interest or any agreement to do any of the foregoing; (d) Any issuance, transfer, sale or pledge by the Company or the Subsidiary of its capital stock or any other equity interest or of any commitments, options, warrants, rights or privileges under which the Company or the Subsidiary is or may become obligated to issue any shares of its capital stock or any other equity interest; 25 (e) Any liability, commitment or obligation incurred by the Company or the Subsidiary (excluding intercompany transactions), except such as may have been incurred or entered into in the ordinary course of business and consistent with past practices; (f) Any loan, capital contribution, or advance made or agreed to be made by the Company or the Subsidiary (excluding intercompany transactions), nor has the Company or the Subsidiary become liable or agreed to become liable as a guarantor with respect to any obligation of a third party; (g) Any waiver by the Company or the Subsidiary of any right or rights of material value or any payment, direct or indirect, of any material debt, liability or other obligation before the same became due in accordance with its terms other than in the ordinary course of business and consistent with past practice; (h) Any adoption, amendment or entering into by the Company or the Subsidiary of any bonus, profit sharing, stock option, pension, retirement, severance, deferred compensation or other employee benefit plan or agreement other than in the ordinary course of business and consistent with past practice; (i) Any amendment to the Company's or the Subsidiary's Articles of Incorporation or Bylaws; (j) Any amendment, cancellation or termination of any contract, license or other instrument or arrangement material to the Company or the Subsidiary other than in the ordinary course of business and consistent with past practice; 26 (k) Any failure to repay any material obligation of the Company or the Subsidiary when due; (1) Any transaction entered into or committed to be entered into between the Company or the Subsidiary, on one hand, and any Related Party (as defined in Section 3.26) on the other hand; (m) Any material change in the accounting methods, practices or policies followed by the Company (other than as required by GAAP), any material increase in reserves or any material revaluation of any of the Company's or the Subsidiary's assets from those in effect during the past three fiscal years; (n) Except for the purchase, replacement or disposition of assets in the ordinary course of business, any purchase or other acquisition of, or any sale, lease, disposition of, mortgage, pledge or subjection to any lien or encumbrance on, any material property or assets, whether tangible or intangible, of the Company or any agreement to do any of the foregoing; (o) Payment or declaration of any dividend or other distribution in respect of any shares of the Company's capital stock, or any incurrence of any obligation to make any such dividend or distribution; or (p) Any agreement or commitment to do any of the foregoing. 3.07 Taxes. ----- (a) S Corporation Status. -------------------- 27 (i) S Corporation Defined. As used herein the term "S --------------------- corporation" means, with respect to any specified period, a corporation that has in effect throughout such period a valid election under Section 1362(a) of the Code to be an S corporation which is, and whose shareholders are, subject to the tax treatment provided for under the provisions of Sections 1361 et seq. of the Code. (ii) S Corporation Status. The taxable year of the Company -------------------- for federal and state income tax purposes is the 52-53 week year ending on the Friday that is on or immediately before December 31 of each year. The Company made a valid election to be taxed as an S Corporation on or before December 31, 1986, and for all periods of the Company commencing on and after November 1, 1987, for federal tax purposes the Company was and is an S corporation. For all periods with respect to which the Company has been an S corporation, for federal tax purposes the Company's Tax Returns have been prepared and filed on a basis consistent with its status as an S corporation. (iii) State S Corporation Treatment. In Schedule 3.07(a) ----------------------------- hereto there is a true and complete list of each state in which the Company and the Shareholders are treated, for such state's income and/or franchise tax purposes, in a manner comparable to the federal tax treatment of a S corporation and its shareholders. For purposes of this representation, the state tax treatment shall be deemed comparable to that of a S corporation if the state's income or franchise tax on the corporation's net income is eliminated or materially reduced and such net income (net of state corporate taxes, if any) is treated as taxable to the shareholders whether or not distributed thereto. Schedule 3.07(a) also specifies, for each such state listed therein, the period during which the Company has been subject to such comparable S corporation state tax treatment. 28 (b) Tax Returns. Tax Payments and Tax Audits. Except as set ---------------------------------------- forth in Schedule 3.07(b) hereto, the Company has (i) timely filed or caused to be timely filed all Tax Returns of the Company required to be filed as of the date hereof (after giving effect to any extension of time to file such Tax Returns) and (ii) paid, when due, all taxes as shown to be due and payable on said Tax Returns. Except as set forth in Schedule 3.07(b) hereto, all such previously-filed Tax Returns were complete and accurate in all material respects when filed, and as of the date hereof no additional Tax Liabilities for periods covered by such previously-filed Tax Returns have been assessed on or proposed to the Company. With respect to each such Tax Return, Schedule 3.07(b) hereto also specifies (A) each such Tax Return that (1) is currently being audited by a Tax authority, or (2) as to which the Company has received a written and/or oral notice from a Tax authority that such Tax authority intends to commence an audit or examination of such Tax Return, and (B) each such Tax Return as to which the Company has given its consent to waive or extend the applicable statute of limitations for such Tax Return or the assessment of Taxes required to be reported thereon. The Company has either delivered to Investor or made available for inspection by Investor or its representatives or agents complete and correct copies of all Tax audit reports and statements of Tax deficiencies with respect to any delinquent Tax assessed against or agreed to by the Company for all taxable periods commencing on or after January 1, 1993, for which audit reports or statements of deficiencies have been received by the Company. As used herein the term "Company" shall be deemed in each place to refer also to the Subsidiary. (c) Unpaid Taxes. The Pre-Acquisition Tax Liabilities of the ------------ Company and the Subsidiary (whether imposed before or after Closing and whether imposed 29 upon filing of a Tax return or as a result of an audit or examination) which are unpaid as of the close of business on the Effective Date will not exceed the reserves for Tax Liabilities as set forth in the account for accrued taxes payable or similar account included in the Final Balance Sheet Tax Liabilities and taken into account in the Working Capital Adjustment under Section 2.12 hereof. Attached hereto as Schedule 3.07(c) is a schedule of the accruals for taxes included in the Company's Unaudited 1997 Financial Statements. (d) Tax Sharing Agreements. Neither the Company nor the ---------------------- Subsidiary is a party to any tax-sharing or tax-indemnity agreement and has not otherwise assumed the Tax Liability of any other person under contract. (e) Section 481 Adjustments. The Company has not agreed, nor is ----------------------- it required to make, any adjustment under Code Section 481(a) by reason of a change in accounting method or otherwise. (f) U.S. Real Property Holding Corporation. The Company is not -------------------------------------- and has never been a United States real property holding corporation as defined in Section 897(c)(2) of the Code. (g) No Liens. None of the assets of the Company or the -------- Subsidiary are subject to any liens in respect of Taxes (other than for current Taxes not yet due and payable). (h) No Closing Agreements. The Company has not executed or --------------------- entered into any closing agreement pursuant to Section 7121 of the Code, or any predecessor provisions thereof or any similar provision of state Tax law. 30 (i) No Section 1374 Liability. The Company will not be subject ------------------------- to any Tax liability with respect to any net recognized built-in gain under Section 1374 of the Code. 3.08 Collective Bargaining Agreements and Employee Benefits. Except as ------------------------------------------------------ described in Schedule 3.08, the Company is not involved in any labor discussion with any unit or group seeking to become the bargaining unit for any of its employees, nor has any such unit or group notified the Shareholders or the Company of an intention to commence any organizational activities among the employees of the Company. Schedule 3.08 contains a listing of (i) each collective bargaining agreement and other labor agreement to which the Company is a party or by which it is bound, (ii) each employment, consulting, severance, deferred compensation, bonus and any other employee benefit plan or agreement providing for compensation or other benefits to employees (including officers), or independent contractors, individually or as a group, to which the Company is a party or by which it is bound; (iii) each "employee pension benefit plan" as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974 ("ERISA") and not exempted under Section 4(b) or 201 of ERISA maintained by the Company or to which the Company is required to contribute, including any multiemployer pension plan; and (iv) each "employee welfare benefit plan" as defined in Section 3(1) of ERISA maintained by the Company or to which the Company contributes or is required to contribute, including any multiemployer welfare plan, and each other plan under which "fringe benefits" (including, without limitation, profit-sharing, bonus, stock option, stock purchase, stock bonus, dependent care assistance, excess benefit, incentive, salary continuation, and other compensation arrangements, vacation plans or programs, severance benefits, sick leave plans or 31 programs, dental or medical plans or programs, and related or similar benefits) are afforded to employees of, or otherwise required to be provided by, the Company. All plans, programs and arrangements described in clauses (ii), (iii), and (iv) of the previous sentence shall be referred to as "Benefit Plans." The Company has either delivered to Investor or made available for inspection by Investor or its representatives or agents a true and complete copy of each Benefit Plan and any related funding agreements (e.g., trust agreements or insurance contracts), including all amendments (and Schedule 3.08 includes a description of any such amendment that is not in writing), the current draft of the Summary Plan Description and Summary of Material Modifications (if applicable) of each Benefit Plan, the most recent Internal Revenue Service determination letter (if applicable) for each Benefit Plan, which determination letter reflects all amendments that have been made to the plan, and the two (2) most recent Form 5500s that were filed on behalf of the Benefit Plan, including the actuarial report (if applicable). The Company has complied in all material respects with all applicable laws, rules and regulations relating to employment, including those relating to wages, hours, collective bargaining and the payment and withholding of taxes and other sums as required by appropriate governmental authorities. Except as set forth in Schedule 3.08, all Benefit Plans in effect at any time since inception of the Company are now, and have always been, established, maintained and operated in accordance, in all material respects, with all applicable laws (including, but not limited to, ERISA and the Code) and all regulations and interpretations thereunder and in accordance with their plan documents. The Internal Revenue Service has issued a favorable determination letter with respect to each Benefit Plan that is intended to qualify under Section 401(a) of the Code, and no event has occurred (either before or after the date of the letter) that would disqualify the plan. Except as set forth in Schedule 3.08, there is no unfunded liability for vested or non-vested benefits under any funded Benefit Plan, and all 32 contributions required to be made to or with respect to each Benefit Plan and all costs of administering each Benefit Plan have been completely and timely paid, and all such costs are fully deductible. With respect to each Benefit Plan that is subject to Title IV of ERISA, no liability or obligation to the PBGC has been incurred or is expected except for insurance premiums under Section 4007 of ERISA, and all insurance premiums incurred or accrued up to and including the Effective Date have been or will be timely paid by the Company; and no amount is, and as of the Effective Date no amount will be, due or owing from the Company to any "multiemployer plan" (as defined in Section 3(37) of ERISA) on account of any withdrawal therefrom, and the value, determined on a termination basis using the actuarial assumptions stated in the plan, of all accrued and ancillary benefits (whether or not vested) under each such plan did not exceed, as of the most recent valuation date, and will not exceed as of the Effective Date, the then current fair market value assets of the plan, arid there is no accumulated funding deficiency (within the meaning of Code Section 4971), whether or not such deficiency has been waived. The Company does not have any liability to any Multiemployer Plans in the event of a complete withdrawal therefrom, as of the close of the most recent plan year of the Multiemployer Plan ended prior to the date hereof. There has been no prohibited transaction as described in Section 406 of ERISA and Section 4975 of the Code with respect to any employee benefit plan. No Benefit Plan provides medical or death benefits to any former employees (including retirees) of the Company, other than benefits required to be provided under Section 490B of the Code. For purposes of this Section 3.08 and only with respect to this Section, the term "Company" shall include any entity that is aggregated with the Company under Code Section 414. To the Shareholders' knowledge, there is no liability of the Company under any insurance policy or similar arrangement procured in connection with any 33 Benefit Plan in the nature of a retroactive rate adjustment or loss sharing arrangement. There are no investigations, proceedings, or lawsuits or other claims (other than routine claims for benefits under the plan and qualified domestic relations orders) pending against or involving any Benefit Plan, or any Fiduciary of such plan (within the meaning of Section 3(21)(A) of ERISA) brought on behalf of any participant, beneficiary, or Fiduciary thereunder, nor, to the Shareholders' knowledge, is there any reasonable basis for any such claim. The Company has no intention or commitment, whether legally binding or not, to create any additional Benefit Plan, or to modify or change any existing Benefit Plan so as to increase benefits to participants or the cost of maintaining the plan. Other than as required by law, the benefits under all Benefit Plans have not been, and will not be increased subsequent to the date documents are provided to Investor. Except as provided in Schedule 3.08, none of the Benefit Plans or employment contracts with the Company provide any benefits that become payable solely as a result of the consummation of this transaction. None of the persons performing services for the Company have been improperly classified as independent contractors, leased employees, or as being exempt from the payment of wages for overtime. The EPP Liabilities constitute all liabilities and obligations of the Company under the EPP Plan. 3.09 Litigation. Except as set forth on Schedule 3.09, there is no ---------- pending, or to the knowledge of the Shareholders, threatened, claim, suit, arbitration proceeding, governmental (including, without limitation, foreign) proceeding or investigation or other proceeding of any character against any Shareholder, the Company or the Subsidiary that could reasonably be expected to have a Material Adverse Effect or prevent, hinder or delay consummation of the transactions contemplated by this Agreement, declare the same unlawful, or cause the rescission thereof. There are no judgments, decrees, injunctions or orders of any court or governmental authority against the Company, the Subsidiary or any Shareholder (which affect 34 the Company) which could reasonably be expected to have a Material Adverse Effect. There is no pending claim against the Company or the Subsidiary which could reasonably be expected to have a Material Adverse Effect (i) on account of product warranties, (ii) with respect to the sale by the Company or the Subsidiary of allegedly defective or inferior products or (iii) with respect to any Trademark, Copyright or Patent and, to the knowledge of the Shareholders, there is no such threatened claim or event which may give rise to any such claim. 3.10 Licenses of Intangible Personal Property. There is listed in ---------------------------------------- Schedule 3.10 all material licenses or similar agreements or arrangements to which the Company or the Subsidiary is a party either as licensee or licensor for any item of intangible personal property ("Intangible Personal Property") and except as set forth on Schedule 3.10: (a) No proceedings have been instituted or are pending or, to the knowledge of the Shareholders, threatened which challenge the rights of the Company or the Subsidiary in any material respect in and to any of such Intangible Personal Property or any license thereof; and (b) There are no pending or, to the knowledge of the Shareholders, threatened claims, demands or proceedings, restricting the right of the Company or the Subsidiary to use, charging the Company or the Subsidiary with infringement of, or making any other claim with respect to, any of such Intangible Personal Property or any license thereof which, if adversely determined, could reasonably have a Material Adverse Effect. 3.11 Insurance. Schedule 3.11 sets forth a true and correct list of all --------- insurance policies of any nature whatsoever maintained by the Company or the Subsidiary pertaining to 35 the business of the Company or the Subsidiary. The Company or the Subsidiary maintains, with responsible insurance carriers, fire, worker's compensation, property and general liability insurance. Such policies and binders are in full force and effect through the Effective Date and, except as otherwise set forth on Schedule 3.11, such policies, or other policies covering the same risks, have been in full force and effect, without gaps, continuously for the past five (5) years. Copies of all such policies have been made available to Investor for its inspection. Neither the Company nor the Subsidiary is in default under any of such policies or binders, and, to the knowledge of the Shareholders, neither has failed to give any notice or to present any claim under any such policy or binder in a due and timely fashion. 3.12 Real Property. There is listed in Schedule 3.12: (i) a description ------------- of each parcel of real property owned by the Company or the Subsidiary (the "Fee Real Property"), (ii) a listing of each lease of real property under which the Company or the Subsidiary is a lessee, lessor, sublessee or sublessor, as so designated therein (the "Leased Real Property" and together with the Fee Real Property, the "Real Property"), and (iii) all options to acquire, sell or lease any real property interests to which the Company or the Subsidiary is a party. The Real Property constitutes all of the real property interests owned, leased or occupied in whole or in part by the Company or the Subsidiary. Except as indicated in Schedule 3.12: (a) The Company has beneficial ownership of and good and marketable title in fee simple to the Fee Real Property free and clear of all mortgages, liens, encumbrances, leases, equities, security interests, pledges conditional sale agreements, title retention agreements, claims, charges, easements, licenses, rights-of-way, covenants, conditions, restrictions, options and adverse or equitable claims or rights whatsoever (collectively, "Liens"), except for liens, if any, for property taxes not yet due and other items 36 which do not and will not impair, in any material respect, the usefulness to the Company, or the value or the marketability, of any such Fee Real Properties ("Permitted Liens"), individually, or in the aggregate; (b) All material leases, easements and other real property interests held by the Company or the Subsidiary are valid and subsisting free and clear of all Liens other than Permitted Liens and neither the Company nor the Subsidiary, and to the Shareholders' knowledge, each other party thereto, is in material default thereunder. The Company has either delivered to Investor or made available for inspection by Investor or its representatives or agents true, correct and complete copies of each of the foregoing documents; (c) Neither the Shareholders, the Company nor the Subsidiary has received any notice, or is aware, that any of the buildings, structures or other material improvements erected on the Real Property owned or leased by the Company or the Subsidiary, or the present use thereof, (i) does not conform in all material respects with all applicable laws (or does not constitute a legal nonconforming use), ordinances, regulations or other laws and applicable deed restrictions, or (ii) materially encroaches on property of others; (d) Neither the Shareholders, the Company nor the Subsidiary have received notice from any municipal body or other public authority requiring work to be done or improvements to be made upon any of the Real Property and have no knowledge of the enactment or adoption of any ordinance or resolution by any such body or authority authorizing work or improvements for which any of the Real Property may be assessed; and 37 (e) All of the improvements situated on any of the Real Property are in good operating condition and are adequate and suitable for the purposes for which they are presently being used. 3.13 Material Contracts. Schedule 3.13 sets forth, as of the date hereof, ------------------ whether written or oral, a true and correct list of: (a) Each contract between the Company or the Subsidiary and any party to whom the Company or the Subsidiary provides products or services which involves more than $150,000 in consideration for any twelve month period; and (b) Each contract (except for real property leases, insurance contracts and employment or personnel-related agreements) between the Company or the Subsidiary and any party to whom the Company or the Subsidiary is obligated to pay more than $150,000 in consideration for any twelve month period. (c) Each contract, agreement and commitment, whether or not fully performed, pursuant to which the Company or the Subsidiary has acquired or disposed of a material portion of its business or assets at any time since December 31, 1995; (d) Each agreement containing covenants not to compete on the part of the Company or the Subsidiary or otherwise restricting the ability of the Company or the Subsidiary in any material way to engage in its business and each confidentiality agreement to which the Company or the Subsidiary is a party; (e) Each note, mortgage, indenture, letter of credit, guarantee, performance bond, sale-leaseback agreement and any other agreement or instrument for or 38 relating to any lending or borrowing (including assumed debt) entered into by the Company or the Subsidiary or pursuant to which any properties or assets of the Company or the Subsidiary are pledged or mortgaged as collateral; and (f) Any other executory contracts and agreements which are material to the Company and the Subsidiary considered as a whole (except for real property leases, insurance contracts and employment or personnel-related agreements). The contracts and agreements which are required to be identified in Schedule 3.13 pursuant to subsections (a) and (b) above are hereinafter referred to as the "Material Contracts." True and complete copies of each Material Contract have either been delivered to Investor by the Company or made available by Company for inspection by Investor or its representatives or agents. Except as set forth in Schedule 3.13: (i) Each of the Material Contracts is a valid, binding and enforceable agreement of the Company or the Subsidiary, as the case may be, and, to the knowledge of the Shareholders, the other parties thereto and will, subject to the receipt of consents set forth on Schedules 3.03 and 3.18, continue to be valid, binding and enforceable immediately after the Effective Date, subject to equitable defenses to specific performance and injunctive relief; (ii) As of the date hereof, the Shareholders have no reason to believe that the Company or the Subsidiary, as the case may be, will not be able to fulfill in all material respects all of their respective obligations under the Material Contracts which remain to be performed after the date hereof; 39 (iii) There has not occurred any material breach or default (or event which upon provision of notice or lapse of time or both would become such a breach or default) under any of the Material Contracts on the part of the Company or the Subsidiary, as the case may be; and (iv) To the knowledge of the Shareholders, there does not exist any event that, with the giving of notice or the lapse of time or both, would constitute a material breach of or a material default under such Material Contract by any party other than the Company or the Subsidiary, as the case may be, and neither the Company nor the Subsidiary has received or given notice of any such breach, default or event. 3.14 Governmental Permits and Licenses. Schedule 3.14 contains a true and --------------------------------- complete list of the governmental permits, licenses, franchises and other certificates and authorizations (the "Licenses") that are required for and are material to the operation of the business conducted by the Company and the Subsidiary as such business is now conducted. Except as set forth on Schedule 3.14, all of such Licenses are, and as of the Effective Date will be, valid and in full force and effect and the continuing validity and effectiveness of such Licenses will not be affected by the Merger. The Company has provided, or prior to the Effective Date will provide, Investor with true, correct and complete copies of each License listed in Schedule 3.14. Except as set forth on Schedule 3.14, the Company and the Subsidiary are and have been in compliance in all material respects with all material conditions or requirements of such Licenses, and neither the Company, the Subsidiary nor the Shareholders have been notified by any governmental (including any foreign governmental) or licensing authority that any governmental or licensing authority intends to cancel, terminate or modify any of such Licenses. 40 3.15 Management Personnel. Schedule 3.15 contains a true and complete -------------------- list of the names of and current salaries, bonuses and other monetary benefits paid to or accrued by all management employees of the Company and the Subsidiary who earned in excess of $100,000 in the calendar year ended December 31, 1997. 3.16 Banking Facilities. Schedule 3.16 contains a true and complete list ------------------ of: (a) Each bank, savings and loan or other institution in which the Company has a deposit, custodial, trust or similar account or safety deposit or lock box account and the numbers and types of the accounts or safety deposit boxes maintained by the Company at such institutions; and (b) The names of all persons authorized to draw on each such account or to have access to any such safety deposit or lock box facility, together with a description of any limitations on such authority of each such person with respect thereto. 3.17 Compliance with Law. Except as set forth on Schedule 3.17 hereto, ------------------- the conduct of business by each of the Company or the Subsidiary has not violated and does not violate in any material respect any federal, state, local or foreign laws, statutes, ordinances, rules, regulations, decrees, orders, permits or other similar items in force on the date hereof including, without limitation, federal, state, municipal and foreign (a) laws and regulations affecting the protection of the health and safety of employees, (b) laws and regulations affecting equal employment opportunity and (c) laws and regulations affecting the manufacture, sale and distribution of medical devices, equipment and supplies. There are no unresolved notices of deficiency or charges of violation brought or, to the knowledge of the 41 Shareholders, threatened against the Company or the Subsidiary, including under any federal, state, local or foreign regulation or otherwise, which individually or in the aggregate will have a Material Adverse Effect, or interfere with the maintenance or reissuance of any of the Licenses held by the Company or the Subsidiary, and there are no facts or circumstances known to the Shareholders that would constitute a reasonable basis on which any such proceedings, notices or actions may be instituted, issued or brought hereafter. 3.18 Consents of Non-Governmental Third Parties. Except as set forth in ------------------------------------------ Schedule 3.18 hereto, no consent, waiver or approval of any party to a Material Contract is necessary for the execution and delivery of this Agreement and the Noncompetition Agreement or the consummation by the Shareholders or the Company of the transactions contemplated hereby. 3.19 Brokers Commission or Finder's Fee. Neither the Company nor the ---------------------------------- Shareholders have retained any broker or finder (other than Salomon Smith Barney) or agreed to become obligated to pay any fee or commission to any broker or finder (other than fees and commissions payable to Salomon Smith Barney pursuant to that certain agreement (the "Salomon Engagement Letter") dated as of September 3, 1997, between the Company and Salomon Smith Barney) for or on account of the transactions contemplated by this Agreement. The payment of fees and commissions to Salomon Smith Barney will be paid by the Surviving Corporation pursuant to Section 2.09(c) above. 3.20 No Undisclosed Liabilities. The Company and the Subsidiary do not -------------------------- have, and as of the Effective Date will not have, any liabilities, obligations or commitments (whether absolute, accrued, known or unknown, contingent or otherwise) matured or unmatured (herein "Liabilities") except (i) Liabilities which are adequately reflected or fully reserved against in the December 26, 1997 Balance Sheet, (ii) Liabilities which have been incurred in the ordinary 42 course of business and consistent with past practice since the Balance Sheet Date, (iii) Liabilities disclosed in Exhibit A or in the Schedules hereto and (iv) Liabilities arising under contracts or other agreements which because of the dollar amount involved are not required to be listed in the Schedules hereto (collectively, the "Known Liabilities"). 3.21 Title to Assets. The Company and the Subsidiary have good and --------------- marketable title to all of their respective assets (real, personal or mixed, tangible and intangible). Except as set forth on Schedule 3.21, none of the Company's or the Subsidiary's assets is subject to any mortgage, deed of trust, pledge, lien, security interest, encumbrance, claim or charge of any kind or character except (i) liens for taxes or other amounts not yet due and payable, and (ii) liens and encumbrances which in the aggregate do not materially impair the usefulness or value of such assets. 3.22 Environmental Matters. --------------------- (a) For the purposes of this Agreement, the term "Environmental Laws" shall mean all federal, state, local and foreign environmental protection, occupational, health and safety or similar laws, ordinances, restrictions, licenses, rules, regulations and permit conditions, including, but not limited to, the Federal Water Pollution Control Act, Resource Conservation & Recovery Act, Clean Air Act, Comprehensive Environmental Response, Compensation and Liability Act, Emergency Planning and Community Right to Know, Occupational Safety and Health Act and other federal, state, local or foreign laws of similar effect, each as amended, and the term "Hazardous Materials" shall mean any hazardous or toxic substances, wastes or materials, defined as such or governed by any applicable Environmental Law. 43 (b) Except as disclosed on Schedule 3.22, (i) the Company has not received any notices, directives, violation reports, actions or claims from or by (1) any federal, state, local or foreign governmental agency concerning the Company or the Subsidiary and any Environmental Laws or (2) any person alleging that, in connection with Hazardous Materials, conditions at the Real Properties of the Company or the Subsidiary or any real property interest previously owned, leased, occupied or operated by the Company or the Subsidiary (the "Sites") have resulted in or caused or threatened to result in or cause injury or death to any person or damage to any property, including without limitation, damage to natural resources, and to the Shareholders' knowledge, no such notices, directives, violation reports, actions, claims, assessments or allegations exist; (ii) neither the Company nor the Subsidiary does currently or did previously lease, operate or own any Sites that are listed or, to the knowledge of the Shareholders, are threatened to be listed on a "Superfund" List or with respect to which, there is any pending or, to the knowledge of the Shareholders, threatened proceeding or investigation under any Environmental Law; (iii) throughout the period of ownership and/or operation of any of the Sites by the Company or the Subsidiary, the Company or the Subsidiary has operated and continues to operate the Sites in material compliance with all Environmental Laws; (iv) no underground storage tanks either are or, to the Shareholders' knowledge, have been located at any of the Sites; (v) to the knowledge of the Shareholders, there has been no spill, discharge, release, contamination or cleanup of or by any Hazardous Materials used, generated, treated, stored, disposed of or handled by the Company or the Subsidiary at the Sites or otherwise and to the Shareholders' knowledge, no spill, discharge or release or contamination or cleanup of or by Hazardous Materials has occurred on or to the Sites by any third party; (vi) neither the Company nor the Subsidiary has used, generated, treated, stored, disposed of, handled, transported or released any Hazardous Material in a manner which would give rise to any 44 liability under any Environmental Laws; and (vii) neither the Company nor the Subsidiary has released any other person from any claim under any Environmental Law nor waived any rights or defenses concerning any environmental conditions at any Sites or in connection with the Company's or the Subsidiary's use, ownership and/or operation of its assets and properties. The Company has either delivered to Investor or made available for inspection by Investor or its representatives or agents copies of all environmental audits or similar studies or reports prepared by or at the direction of the Company regarding any of the Sites. 3.23 Authorized and Outstanding Capital Stock. The authorized capital ---------------------------------------- stock of the Company consists of 1,000,000 shares of common stock, $.01 par value per share, of which 59,056 shares have been issued and are outstanding. 3.24 Intellectual Property Matters. ----------------------------- (a) Schedule 3.24 hereto sets forth a complete list of all trademarks, trade names, product identifiers and/or trade dresses of any type whatsoever which are presently used in the business of the Company (the "Trademarks"). Except as set forth on Schedule 3.24, (a) each of the Trademarks is valid and registered in the name of the Company on the Principal Register of the United States Patent and Trademark Office and in the foreign countries indicated thereon, (b) as of the date hereof, to the Shareholders' knowledge there is no infringement of the Trademarks by others, (c) the use of the Trademarks in the business of the Company (as the business is now being conducted by the Company) does not result in any material infringement of the rights of others in the United States, and the Shareholders have no knowledge of any such claim as to any Trademarks registered in the foreign countries identified on Schedule 3.24, (d) the Company is the sole and legal owner of the Trademarks in 45 the countries indicated on Schedule 3.24 and in all other jurisdictions in which the Company uses any Trademark and, as of the date hereof, has no knowledge of any claim by any other person that such other person is the legal owner of such Trademarks, and (e) the Company has not granted any license or right to use any Trademark to any other person. (b) Schedule 3.24 hereto sets forth a complete list of all patents, patent applications, inventions, invention disclosures of any type whatsoever which are presently used in the business of the Company (the "Patents"). Except as set forth on Schedule 3.24, (a) each of the Patents is valid and registered in the name of the Company in the United States Patent and Trademark Office and in the foreign countries indicated thereon, (b) as of the date hereof, to the Shareholders' knowledge there is no infringement of the Patents by others, (c) the use of the Patents in the business of the Company (as the business is now being conducted by the Company) does not result in any material infringement of the rights of others in the United States, and the Shareholders have no knowledge of any such claim as to any Patents registered in the foreign countries identified on Schedule 3.24, (d) the Company is the sole and legal owner of the Patents in the countries indicated on Schedule 3.24 and in all other jurisdictions in which the Company uses any Patent and, as of the date hereof; has no knowledge of any claim by any other person that such other person is the legal owner of such Patents, and (e) the Company has not granted any license or right to use any Patent to any other person. (c) Schedule 3.24 hereto sets forth a complete list of all copyrights of any type whatsoever which are presently used in the business of the Company (the "Copyrights"). Except as set forth on Schedule 3.24, (a) each of the Copyrights is valid and registered in the name of the Company in the United States Copyright Office and in the foreign 46 countries indicated thereon, (b) as of the date hereof, to the Shareholders' knowledge there is no infringement of the Copyrights by others, (c) the use of the Copyrights in the business of the Company (as the business is now being conducted by the Company) does not result in any material infringement of the rights of others in the United States, and the Shareholders have no knowledge of any such claim as to any Copyrights registered in the foreign countries identified on Schedule 3.24, (d) the Company is the sole and legal owner of the Copyrights in the countries indicated on Schedule 3.24 and in all other jurisdictions in which the Company uses any Copyright and, as of the date hereof; has no knowledge of any claim by any other person that such other person is the legal owner of such Copyrights, and (e) the Company has not granted any license or right to use any Copyright to any other person. (d) The Company has obtained a written agreement from each and every employee of the Company which provides that each such employee will maintain the confidentiality of trade secrets and/or proprietary information of the Company. 3.25 Inventory. All of the Company's inventory and supplies held for sale --------- or use in connection with operating the business of the Company (the "Inventory") was purchased or manufactured in the ordinary course of business and is owned by the Company, free and clear of all liens, security interests and encumbrances except as set forth on Schedule 3.25. The Inventory is maintained on the financial records of the Company using historical valuation methods and practices consistent with those used in preparing the Unaudited 1997 Financial Statements and in accordance with GAAP. The Company's current inventory consists of items of a quality which are saleable in the ordinary course of business at prevailing prices. Since January 1, 1997, the Company has continued to replenish its Inventory in the ordinary course 47 of business consistent with past practice, and has not made any material change in its Inventory policies or procedures. 3.26 Transactions with Affiliates. Except as set forth on Schedule 3.26, ---------------------------- no officer, director, employee or shareholder of the Company nor any member of any such person's immediate family or any entity in which any of the foregoing has an interest (collectively, a "Related Party") is presently, or within the last year has been, a party to any transaction or arrangement with the Company, including, without limitation, any contract, lease or other agreement (a) providing for the furnishing of services (other than as an officer, director or employee) or assets by, (b) providing for the rental of real property from, or (c) otherwise requiring payments to (other than for (i) dividends or distributions to any shareholder in his or her capacity as such or (ii) compensation to any officer, director or employee in his or her capacity as such) such Related Party. Each such transaction shown on Schedule 3.26 is on terms no less favorable to the Company than could be obtained from an unaffiliated third party, except as set forth on Schedule 3.26. 3.27 Accounts Receivable. All accounts receivable of the Company that are ------------------- reflected on the December 26, 1997 Balance Sheet or the Final Closing Balance Sheet, (collectively, the "Accounts Receivable") represented or will represent valid obligations arising from sales actually made or services actually performed in the ordinary course of business. Unless paid prior to the Effective Date, the Accounts Receivable are or will be as of the Effective Date current and collectible net of the respective reserves shown on the December 26, 1997 Balance Sheet or the Final Closing Balance Sheet (which reserves are adequate and calculated consistent with past practice and, in the case of the reserve as the Effective Date, will not represent a material adverse change in the composition of such Accounts Receivable in terms 48 of aging). Subject to such reserves, each of the Accounts Receivable either has been or will be collected in full, without any set-off. Neither the Shareholders nor the Company have received notice of any contest, claim, or right of set-off, other than returns in the ordinary course of business, under any contract with any obligor of an Accounts Receivable relating to the amount or validity of such Accounts Receivable. Schedule 3.27 contains a true and complete list of all Accounts Receivable as of the date of the December 26, 1997 Balance Sheet, which list sets forth the aging of such Accounts Receivable. Schedule 3.27 contains a list of all customers who have received extended payment terms (over 30 days) since January 1, 1997. 3.28 Various Relationships. Except as set forth on Schedule 3.28, neither --------------------- the Shareholders nor the Company have received notice that any of the Company's material customers, distributors or suppliers intends to cease retaining, purchasing from, selling to or dealing with the Company in the matter in which such transactions have previously occurred or that any such customer, distributor or supplier intends to alter in any significant respect the amount of such retention, purchases or sales or the extent of dealings with the Company. None of the Company's material customers, distributors and suppliers has, since January 1, 1997, decreased materially its purchases, services or supplies to the Company. 3.29 Labor Matters. Neither the Company nor the Subsidiary is a party to ------------- any labor agreement with respect to its employees with any labor organization, union, group or association and there are no employee unions (nor any other similar labor or employee organizations). In the past five years, neither the Company nor the Subsidiary has experienced any attempt by organized labor or its representatives to make it conform to demands of organized labor relating to its employees or to enter into a binding agreement with organized 49 labor that would cover the employees of the Company or the Subsidiary. There is no labor strike, slow-down or other work stoppage pending or, to the Shareholders' knowledge, threatened against the Company or the Subsidiary. The Company and the Subsidiary are in compliance in all material respects with all applicable laws respecting employment practices, employee health, safety or welfare, employee documentation, terms and conditions of employment and wages and hours and is not and has not engaged in any unfair labor practice. There is no unfair labor practice charge or complaint against the Company or the Subsidiary pending before the National Labor Relations Board or any other domestic or foreign governmental agency arising out of the conduct of its business. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF INVESTOR Newco and Investor, jointly and severally, represent and warrant to the Shareholders that as of the date of this Agreement: 4.01 Organization and Corporate Authority; Binding Obligation. Investor -------------------------------------------------------- and Newco are each corporations duly organized, validly existing and in good standing under the laws of their respective states of incorporation, and each of Newco and Investor has full corporate power and authority to carry on its business as it is now conducted, and is entitled to own, lease or operate the properties and assets it now owns, leases or operates. Each of Newco and Investor is qualified to do business, is in good standing and has all required and appropriate licenses in each jurisdiction in which its failure to obtain or maintain such qualification, good standing or licensing (i) would have a material adverse effect on the financial condition, earnings, liabilities, operations, operating results, business or assets of Newco or Investor, or (ii) would result in a material breach of any of the other representations, 50 warranties or covenants set forth in this Agreement. Each of Newco and Investor has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement and the Noncompetition Agreement have been duly authorized by all necessary corporate action and constitute (or upon execution and delivery will constitute) legal, valid and binding obligations of Newco and Investor, enforceable against each of them in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally. 4.02 Agreement not a Breach. The execution of this Agreement and the ---------------------- Noncompetition Agreement by Newco and Investor and the fulfillment, performance and compliance with the terms and provisions of this Agreement by Newco and Investor will not (or event which upon provision of notice or lapse of time or both would become such a default) (i) conflict with or result in a breach of any provision of Newco's Articles of Incorporation or Bylaws or the Investor's Certificate of Incorporation or Bylaws; (ii) conflict with, violate or result in a breach of the terms, conditions or provisions of, or constitute a default or result in the acceleration of any obligation under, or result in the cancellation or modification of, or permit termination of, any material agreement or instrument to which Newco or Investor is a party or by which Newco or Investor is bound; (iii) accelerate, or constitute an event entitling the holder of any Indebtedness of Newco or Investor to accelerate the maturity of any such Indebtedness of Newco or Investor, permit subordination of any Indebtedness of Newco or Investor to any other Indebtedness of Newco or Investor to which it was not already subordinated; (iv) conflict with or violate the provisions of any law or any judgment, decree, order, regulation, arbitration award or rule of any court or governmental authority or any 51 covenant or restriction binding upon Newco or Investor, including, without limitation, the Articles of Incorporation, Certificate of Incorporation or Bylaws of Newco or Investor; (v) violate or result in the modification, termination or loss of any permit, license or other authorization applicable to Newco or Investor; or (vi) result in the creation of any lien, charge or encumbrance upon any assets of Newco or Investor under any agreement or instrument to which Newco or Investor is a party or by which Newco or Investor is bound, unless any such matter set forth in item (i) - (vi) above would not result in a material adverse effect on the financial condition, earnings, liabilities, operations, operating results, business or assets of Newco or Investor. 4.03 Consents and Approvals of Governmental Authorities. Except as set -------------------------------------------------- forth in Schedule 4.03 hereto, no consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority is required in connection with the execution, delivery and performance of this Agreement and the Noncompetition Agreement by Newco or Investor and the consummation by Newco or Investor of the transactions contemplated hereby. 4.04 Brokers Commission or Finder's Fee. Neither Newco or Investor has ---------------------------------- retained any broker or finder or agreed to become obligated to pay any fee or commission to any broker or finder for or on account of the transactions contemplated by this Agreement. 4.05 Litigation. There is no pending, or to the knowledge of Newco or ---------- Investor, threatened, claim, suit, arbitration proceeding, governmental (including, without limitation, foreign) proceeding or investigation or other proceeding of any character against Newco or Investor or any judgment, decree, injunction or order of any court or governmental authority against Newco or Investor that could reasonably be expected to have a material adverse effect 52 on the financial condition, earnings, liabilities, operations, operating results, business or assets of Newco or Investor, or prevent, hinder or delay consummation of the transactions contemplated by this Agreement, declare the same unlawful, or cause the rescission thereof. 4.06 Consents of Non-Governmental Third Parties. Except as set forth in ------------------------------------------ Schedule 4.06 hereto, no consent, waiver or approval of any non-governmental third party is necessary for the execution and delivery of this Agreement or the consummation by Newco or Investor of the transactions contemplated hereby. 4.07 Accredited Investor. Newco and Investor represent and warrant that ------------------- at the Closing each will be an "Accredited Investor" as such term is defined in Rule 501 under Regulation D of the 1933 Act (as hereinafter defined). 4.08 Purchase for Investment. Investor acknowledges that it is acquiring ----------------------- the common stock of the Company and the New Preferred Stock for its own account and not with a view to, or present intention of, distribution thereof in violation of the Securities Act of 1933, as amended (the "1933 Act") or any applicable state securities laws, and the common stock of the Company and the New Preferred Stock will not be disposed of in contravention of the 1933 Act or applicable state securities laws. Investor also acknowledges that no public market now exists for the common stock of the Company or the New Preferred Stock and that it is unlikely that a public market for such stock will develop. 4.09 Shares Not Registered. Newco and Investor acknowledge that neither --------------------- the common stock of the Company nor the New Preferred Stock has been registered under the 1933 Act or any state securities laws and, therefore, cannot be sold, and must be held 53 indefinitely, unless subsequently registered under the 1933 Act and state securities laws or unless an exemption from such registration is available. 4.10 Economic Risk. Newco and Investor acknowledge that their investment ------------- in the common stock of the Company and the New Preferred Stock involves a high degree of risk and represent that they are able to bear the economic risk of such investment for an indefinite period of time. 4.11 Financing. Investor and Newco have sufficient funds available to --------- them to deliver the Agreed Purchase Price as set forth in Article II at the Closing and to consummate the transactions contemplated by this Agreement. ARTICLE V CERTAIN AGREEMENTS 5.01 Certain Employee Matters. ------------------------ (a) General Employees. Investor agrees that following the ----------------- Closing it will cause the Company to provide that all employees of the Company who are employed immediately prior to the Closing will be given full credit for all accrued vacation and holiday pay and all accumulated sick pay of such employees provided that nothing in this Agreement shall be deemed to constitute an agreement to employ any such employee for any length of time. (b) Incentive Payments. Investor acknowledges that, as an ------------------ incentive to the continued employment and productivity of the Company's employees through to the Effective Date, the Company has agreed to pay to substantially all of its employees (each such eligible employee, an "Incentive Employee") an incentive payment (each an "Incentive 54 Payment"). The aggregate amount of such Incentive Payments as of the date of this Agreement is as specified in Exhibit A hereto. The Investor acknowledges that such Incentive Payments are to be paid at or immediately following the Effective Date, and, to the extent that, for administrative convenience, such Incentive Payments are to be paid immediately following the Effective Date as specified in a schedule (the "Incentive Payment Schedule) that shall be delivered to the Investor at least five (5) business days prior to the Closing, Investor hereby agrees to cause the Company to pay such deferred Incentive Payments within five (5) days following the Effective Date, in all cases subject to applicable withholding requirements. 5.02 Tax Matters. ----------- (a) Tax Returns Required to Be Filed Prior to the Effective Date. ------------------------------------------------------------ The Company shall prepare and file or cause to be filed all Tax Returns of the Company and the Subsidiary that are required to be filed prior to the Effective Date (determined after giving effect to any applicable extensions of time in which to make such filings) and shall pay or cause to be paid all Taxes shown or reported to be due and payable by the Company and the Subsidiary on such Tax Returns. (b) Preparation of 1997 Tax Returns Due Following Closing and --------------------------------------------------------- Payment of Taxes. Prior to the due date applicable thereto, the Company shall - ---------------- file all Tax Returns required to be filed by the Company and the Subsidiary with respect to the 1997 calendar year and having a due date (determined after giving effect to any applicable extensions of required filing dates) following the Effective Date (the "1997 Tax Returns"). The 1997 Tax Returns for U.S. federal and state income and franchise Taxes (the "1997 Income Tax Returns") shall be prepared, by Arthur Andersen under the direction of Lovaas, in 55 accordance with applicable law and, to the extent not inconsistent with applicable law, on a basis consistent with the past practices of the Company, and shall be delivered to the Company at least 30 days prior to the due date thereof. The Company shall (i) provide Lovaas and Arthur Andersen with such information and such access to the Company's books and records, and at such times, as may reasonably be requested by Lovaas or Arthur Andersen for purposes of preparing and timely filing the 1997 Income Tax Returns, and (ii) file such 1997 Income tax Returns as prepared under the direction of Lovaas, provided, however, if Investor shall disagree with any item reported or reflected in such a Tax Return, such dispute shall be resolved as provided for under Section 5.02(g). All 1997 Tax Returns other than the 1997 Income Tax Returns shall be prepared, under the direction of the Company, by the Company or such Tax Return preparers as may be selected by the Company, provided, however, that in all cases such Tax Returns shall be prepared in accordance with the applicable law and, to the extent not inconsistent with applicable law, on a basis consistent with the items and positions reflected in the 1997 Income Tax Returns. All such 1997 Tax Returns shall be prepared using the Company's normal tax accounting methods and elections, and all reasonable costs and expenses incurred in preparing and filing the 1997 Tax Returns shall be paid by the Company. To the extent that the Taxes shown or reported on such 1997 Tax Returns do not exceed the reserves therefor as set forth in the account for accrued taxes payable or similar account included in the Final Balance Sheet Tax Liabilities and taken into account in the Working Capital Adjustment under Section 2.12 hereof; the Investor shall timely pay (or cause the timely payment of) such Taxes; to the extent that such Taxes exceed such reserves, the Shareholders shall pay such excess amount to the Company no later than three days prior to the due date (including extensions) for the filing of the applicable 1997 Tax Returns. Any refunds of such 1997 Taxes, whether pursuant to an amended return or any Tax Proceeding, shall be 56 paid to or for the benefit of the Shareholders. Any additional 1997 Taxes in excess of the Taxes reflected on the 1997 Tax Returns which at any time are assessed or imposed upon the Company, whether pursuant to an amended return or any Tax Proceeding, shall, to the extent they exceed such reserves therefor included in the Final Balance Sheet Tax Liabilities, be paid by the Shareholders promptly upon demand therefor by the Investor. (c) Preparation of 1998 Tax Returns Due Following Closing and --------------------------------------------------------- Payment of Taxes. - ---------------- (i) Short Period Returns. The parties acknowledge and agree -------------------- that the Company shall be required to file a short period U.S. federal income tax return as an S corporation for the period commencing December 27, 1997, and ending as of the Effective Date (if an election under Code Section 338(h)(10) is made) or as of the day immediately preceding the Effective Date (if no such election under Code Section 338(h)(10) is made). As used herein the term "Short Period Return" shall refer collectively to such short period S corporation return and any other short period return (ending as of the Effective Date and covering Taxes other than the federal Taxes covered by the S corporation short period return) which the Company or the Subsidiary is required to file with any Tax authority with respect to the short 1998 period ending on the Effective Date (or the day immediately preceding the Effective Date, as applicable). The Company shall file (or shall cause the Subsidiary to file, as applicable) each such Short Period Return prior to the due date therefor (determined after giving effect to any applicable extensions of required filing dates). The Short Period Returns for U.S. federal and state income and franchise Taxes (the "1998 Short Period Income Tax Returns") shall be prepared by Arthur Andersen under the direction of Lovaas, in accordance 57 with applicable law and, to the extent not inconsistent with applicable law, on a basis consistent with the past practices of the Company, and shall be delivered to the Company at least 30 days prior to the due date thereof. The Company shall (i) provide Lovaas and Arthur Andersen with such information and such access to the Company's books and records, and at such times, as may reasonably be requested by Lovaas or Arthur Andersen for purposes of preparing and timely filing the 1997 Short Period Income Tax Returns, and (ii) file such 1998 Short Period Income Tax Returns as prepared under the direction of Lovaas, provided, however, if Investor shall disagree with any item reported or reflected in such a Tax Return, such dispute shall be resolved as provided for under Section 5.02(g). All Short Period Returns other than the 1998 Short Period Income Tax Returns shall be prepared, under the direction of the Company, by the Company or such Tax Return preparers as may be selected by the Company, provided, however, that in all cases such Tax Returns shall be prepared in accordance with the applicable law and, to the extent not inconsistent with applicable law, on a basis consistent with the items and positions reflected in the 1998 Short Period Income Tax Returns. All such Short Period Tax Returns shall be prepared using the Company's or the Subsidiary's normal tax accounting methods and elections based on a closing of the Company's or the Subsidiary's books as of the applicable short period ending date, and all reasonable costs and expenses incurred in preparing and filing the Short Period Returns shall be paid by the Company. To the extent that the Taxes shown or reported on such Short Period Returns do not exceed the reserves therefor as set forth in the account for accrued taxes payable or similar account included in the Final Balance Sheet Tax Liabilities and taken into account in the Working Capital Adjustment under Section 2.12 hereof; the Investor shall timely pay (or cause the timely payment of) such Taxes; to the extent that such Taxes exceed such reserves, the Shareholders shall pay such excess amount to the Company no later than three days prior to the 58 due date (including extensions) for the filing of the applicable Short Period Returns. Any refunds of such Short Period Taxes, whether pursuant to an amended return or any Tax Proceeding, shall be paid to or for the benefit of the Shareholders. Any additional Short Period Taxes in excess of the Taxes reflected on the Short Period Returns which at any time are assessed or imposed upon the Company, whether pursuant to an amended return or any Tax Proceeding, shall, to the extent they exceed such reserves therefor included in the Final Balance Sheet Tax Liabilities, be paid by the Shareholders promptly upon demand therefor by the Investor. (ii) Full Year Returns. The parties acknowledge and agree ----------------- that the Company and the Subsidiary may be required, with respect to certain Taxes for the 1998 year, to file a full year return (herein a "Full Year Return") reporting and accounting for such Taxes on an aggregate basis covering both the 1998 period ending on the Effective Date (the "Pre-Closing Period") and the 1998 period following the Effective Date (the "Post-Closing Period"). Prior to the due date (including extensions) for any such Full Year Return, the Company shall prepare and file (or shall cause the Subsidiary to prepare and file) such Full Year Return using the Company's normal tax accounting methods and elections, provided, however, that in all cases such Tax Returns shall be prepared in accordance with applicable law and, to the extent not inconsistent with applicable law, on a basis consistent with the items and positions reflected in the 1998 Short Period Income Tax Returns, and all reasonable costs and expenses incurred in preparing and filing such Full Year Returns shall be paid by the Company. The Taxes reportable on such Full Year Returns (herein "FY Taxes") that are attributable to the Pre-Closing Period shall be determined as follows: 59 (x) in the case of Taxes that are either (1) based upon or related to net income, or (2) imposed in connection with any sale or other transfer or assignment of property (real or personal, tangible or intangible), the FY Taxes attributable to the Pre-Closing Period shall be deemed equal to the amount which would be payable if the taxable year or period ended on the Effective Date (except that, solely for purposes of determining the marginal Tax rate applicable to net income during such period in a jurisdiction in which such Tax rate depends upon the level of net income, annualized income may be taken into account, if appropriate, in order to achieve an equitable sharing of the FY Taxes); and (y) in the case of Taxes not described in subparagraph (x) above that are imposed on a periodic basis and measured by the level of any item, the FY Taxes attributable to the Pre-Closing Period shall be deemed to be the amount of such Taxes for the entire period (or, in the case of such Taxes determined on an arrears basis, the amount of such Taxes for the immediately preceding period) multiplied by a fraction the numerator of which is the number of calendar days in the Straddle Period ending on the Effective Date and the denominator of which is the number of calendar days in the entire relevant period. To the extent that FY Taxes allocable to the Pre-Closing Period do not exceed the reserves therefor as set forth in the account for accrued taxes payable or similar account included in the Final Balance Sheet Tax Liabilities and taken into account in the Working Capital Adjustment under Section 2.12 hereof; the Company shall timely pay such 60 Taxes; to the extent that such Pre-Closing Period FY Taxes exceed such reserves, the Shareholders shall pay such excess amount to the Company no later than three days prior to the due date (including extensions) for the filing of the applicable Full Year Return. Any refunds of such FY Taxes attributable to the Pre-Closing Period, whether pursuant to an amended return or any Tax Proceeding, shall be paid to or for the benefit of the Shareholders. Any additional FY Taxes attributable to the Pre-Closing Period which at any time are assessed or imposed upon or against the Company, whether pursuant to an amended return or any Tax Proceeding, shall, to the extent they exceed such reserves therefor included in the Final Balance Sheet Tax Liabilities, be paid by the Shareholders promptly upon demand therefor by Investor. (iii) Allocation Conventions. The preparation of Short ---------------------- Period Returns and the allocation of FY Taxes between the Pre-Closing Period and the Post-Closing Period shall be based on a closing of the Company's and the Subsidiary's books as of the Effective Date as provided in Section 5.02(c)(ii)(x); provided, however, that exemptions, allowances or deductions --------- ------- that are calculated on an annual basis (including, but not limited to, depreciation and amortization deductions) shall be allocated between the period ending on such date and the period after such date in the proportion which the number of days in each such period bears to the total number of days in the applicable annual period; and provided further, if as of the Effective Date the Company or the Subsidiary is a partner in any partnership which has a Tax year that does not end as of the Effective Date, any Tax liability attributable to such partnership's activities shall be allocated among the Pre-Closing Period and the Post-Closing Period in the same manner based upon the number of days in each such period. 61 (d) Tax Returns for Post-Acquisition Taxable Periods. Investor shall ------------------------------------------------ prepare or cause to be prepared the Tax Returns for Post-Acquisition Taxable Periods and shall pay or cause to be paid all Taxes shown on such Tax Returns to be due and payable. (e) Tax Proceedings. --------------- (1) Investor shall, promptly upon receipt of notice thereof by Investor or Company, notify Lovaas in writing of any communication with respect to any pending or threatened Tax Proceeding in connection with a Pre-Acquisition Taxable Period, or a Straddle Period or otherwise with respect to a Pre- Acquisition Tax Liability or a Shareholder Tax Liability (or an issue related thereto). Investor shall include with such notification a true, correct and complete copy of any written communication, and an accurate and complete written summary of any oral communication, so received by Investor or Company. A failure by Investor to give a timely notice hereunder shall not affect any right of indemnification that Investor may have under Article VIII hereof except to the extent that such failure results in the Shareholders becoming liable for the Tax Liability in question. (2) Lovaas shall have authority to represent the Shareholders in any and all Tax Proceedings involving or relating to Pre-Acquisition Taxable Periods, Straddle Periods (but only to the extent involving or relating to Pre- Acquisition Tax Liabilities and/or Shareholder Tax Liabilities) or which otherwise involve or relate to Pre-Acquisition Tax Liabilities and/or Shareholder Tax Liabilities (all such Tax Proceedings are collectively referred to herein as "Shareholder Tax Proceedings"). In addition to such right of participation, at her election, as communicated to Investor in writing within 30 days following her receipt of the applicable notice pursuant to Section 5.02(e)(1) (a "Control Election"), Lovaas shall (A) have overall control of; any Shareholder Tax Proceeding (but only to the extent involving Pre- 62 Acquisition Tax Liabilities and/or Shareholder Tax Liabilities) and (B) have authority to employ counsel of her choice with respect to such matters; provided, however, that Investor shall be permitted to participate in any such ------- Shareholder Tax Proceedings and all hearings and settlement negotiations related thereto. In any Shareholder Tax Proceeding as to which Lovaas has made a Control Election hereunder, (i) with respect to any issue or matter in any such Tax Proceeding which may reasonably be expected to have a material adverse effect on the Company's liability for Post Acquisition Tax Liabilities, Lovaas shall not settle or compromise any such issue or matter without the prior written consent of the Investor, and (ii) the Shareholders shall be liable for any Investor Tax Liabilities that are being contested in such Shareholder Tax Proceeding; provided, however, the Shareholders shall not be liable for any Investor Tax Liability with respect to which Investor refuses or otherwise fails to give its approval of a settlement or compromise proposed by Lovaas. In the case of any Shareholder Tax Proceeding as to which Lovaas does not make a Control Election hereunder, the Company and Investor shall have control over and responsibility for such Tax Proceeding, provided, however, Lovaas or her designated representatives shall be permitted to participate in any such Tax Proceeding and all hearings and settlement negotiations related thereto; and provided further, with respect to any issue or matter in such Tax Proceeding which may reasonably be expected to have a material adverse effect on the Shareholders' liability for Pre-Acquisition Tax Liabilities and/or Shareholder Tax Liabilities (a "Material Shareholder Tax Issue"), Company and Investor shall not settle or compromise any such Material Shareholder Tax Issue without the prior written consent of Lovaas. To the extent that any Shareholder Tax Proceeding described herein involves or relates to an Investor Tax Liability, the Company shall bear the cost thereof; and to the extent that such a Tax Proceeding involves or relates to a Pre- 63 Acquisition Tax Liability and/or a Shareholder Tax Liability, the Shareholders shall bear the cost thereof; with a fair and reasonable allocation of costs to be made in the case of a Tax Proceeding involving or relating to Investor Tax Liabilities, on the one hand, and Pre-Acquisition Tax Liabilities and/or Shareholder Tax Liabilities, on the other hand. (3) Subject to Section 5.02(e)(2), the Investor and/or the Company, as applicable, shall execute and deliver to Lovaas or any legal counsel or other tax representative designated by Lovaas any power of attorney reasonably requested by Lovaas or such legal counsel or other tax representative in connection with any Tax Proceeding described in this Section 5.02(e). (f) Cooperation: Maintenance and Retention of Records. Investor -------------------------------------------------- shall, and shall cause the Company to, provide Lovaas with such assistance and documents as may be reasonably requested by Lovaas in connection with (i) the preparation of any Tax Return, (ii) the conduct of any Tax Proceeding, (iii) any matter relating to Pre-Acquisition Tax Liabilities and (iv) any other matter that is a subject of this Section 5.02. Investor and the Company shall retain or cause to be retained all Tax Returns that are the subject of this Section 5.02 and all schedules, workpapers and material records or other documents relating thereto, until the expiration of the statute of limitations (including any waivers or extensions thereof) applicable with respect to the taxable years to which such Tax Returns and other documents relate or until the expiration of any additional period that Lovaas reasonably requests, in writing, with respect to specific material records or documents. If Investor or the Company intends to destroy any material records or documents, it shall provide Lovaas with reasonable advance notice and the opportunity to copy or take possession of such records and documents. The parties hereto will notify each other party in writing of any waivers or extensions of the 64 applicable statute of limitations that may affect the period for which the foregoing records or other documents must be retained. (g) Disputes. If the parties disagree as to any matter arising -------- out of this Section 5.02, the parties shall attempt in good faith to resolve such dispute. If such dispute is not resolved within 15 days, the parties shall jointly retain the Independent Accounting Firm to resolve the dispute. The fees of the Independent Accounting Firm shall be borne equally by the parties having the dispute, and the decision of such Independent Accounting Firm shall be final and binding on all parties involved. Following the decision of the Independent Accounting Firm, the parties shall each take or cause to be taken any action that is necessary or appropriate to implement such decision of the Independent Accounting Firm, including, without limitation, the prompt payment of Taxes as directed by the Independent Accounting Firm. (h) Nonforeign Affidavit. Shareholder shall furnish Investor an -------------------- affidavit stating, under penalty of perjury, that the number specified therein is the Shareholders' United States taxpayer identification number and that the Shareholder is not a foreign person within the meaning of Section 1445(b)(2) of the Code. (i) Election Under Section 338(h)(10). Unless prohibited --------------------------------- under applicable federal Tax law or Regulations, Investor and the Shareholders hereby agree to join in making an election under Section 338(g) and Section 338(h)(10) of the Code (and/or any comparable election under applicable state tax law) with respect to the acquisition of the Company by Investor. The Shareholders and Investor shall cooperate in the making of such election, including but not limited to executing and delivering such written consents and 65 providing such documents and information as may be required for purposes of making an effective election under Code Section 338(h)(10), including the completion and execution of Internal Revenue Service Form 8023-A. All costs and expenses related to making such election, including the preparation and filing of applicable election forms, shall be paid by the Company, and the Company shall pay any state income or franchise tax liability imposed on the Company as a result of such election. (j) Survival. Notwithstanding any other provision of this -------- Agreement, the covenants set forth in this Section shall survive until the expiration of the respective statutes of limitations applicable to the periods to which the Taxes relate. 5.03 Conduct of Business. Prior to the Effective Date and other than as ------------------- set forth in Exhibit A, the Shareholders will cause the Company to conduct its business only in the ordinary course of business and consistent with past practices. Without limiting the generality of the foregoing, except as contemplated by this Agreement, or as set forth in Exhibit A or as consented to or approved in writing and in advance by an authorized officer of Investor, the Shareholders covenant as follows with respect to the period between the date hereof and the Effective Date: (a) The Company will carry on its business in a manner consistent with prior practice and only in the usual and ordinary course, and the Company and the Shareholders will use commercially reasonable efforts to preserve intact the present business organization, goodwill and reputation of the Company, to keep available the services of its officers and employees and to preserve the relationships with customers, suppliers, distributors and other persons having business dealings with the Company; 66 (b) The Company will maintain its books, accounts and records consistent with past practices and policies and in accordance with GAAP. The Company will not materially change any of the Company's (A) accounting principles or practices or make any material revaluation of any of the Company's assets, including without limitation, any material write-offs, increases in any reserves (including any reserve for taxes payable) or any write-off of the value of inventory, property, plant, equipment or any other asset or materially increase or change any assumptions underlying, or methods of calculating, any bad debt, contingency or other reserves, (B) rebate or discount programs, (C) collection practices, (D) promotion and/or advertising programs, (E) inventory policies or practices, or (F) capital expenditure policies or programs; (c) The Company will not make or adopt any change in its Articles of Incorporation or Bylaws as in force and effect on the date hereof; (d) The Company will not issue, redeem or purchase any shares of capital stock of the Company or issue any options or other rights to purchase any shares of capital stock of the Company, any securities convertible or exchangeable for capital stock of the Company, or commit to do any of the foregoing; (e) Except as disclosed on Schedule 3.08, the Company will not enter into or amend any employment contract or agreement with any former, existing or prospective employee; (f) The Company will not cancel, without full payment, any note, loan or other obligation owing to the Company; 67 (g) The Company will not increase the compensation payable to or the benefits afforded any of its employees or former employees, nor shall it adopt or amend any employee benefit plan or compensation or commission arrangement, except that compensation of personnel (other than those employees set forth on Schedule 3.15, except as set forth on Schedule 5.03(g)) may be increased in the ordinary course consistent with past practice; (h) The Company will not sell or otherwise dispose of, or enter into any agreement for the sale, lease or disposition of, or mortgage or encumber or permit to exist any liens, claims or security interests on, any of its assets or properties, except for sales of inventory and obsolete equipment in the ordinary course of business consistent with past practices; (i) The Company will maintain its existing insurance policies covering it, unless comparable insurance is substituted therefor, and shall not take any action to terminate or modify those insurance policies; (j) The Company will observe and perform, and remain in material compliance with, its respective obligations in agreements and contracts and not enter into any agreements or contracts or incur any liabilities, commitments or obligations which would require payments by the Company of more than $100,000 over any period of twelve months; (k) The Company will cooperate with Investor and use commercially reasonable efforts to take, or cause to be taken, all action reasonably requested by Investor in connection with the financing of the transactions contemplated by this Agreement, and to treat the transactions contemplated by this Agreement as a recapitalization for financial reporting 68 purposes, including, without limitation, to assist Investor with any presentation to Investor's and Company's accountants, financing sources and any regulatory authority; (1) The Company will use commercially reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary to satisfy the conditions set forth herein as soon as practicable; (m) The Company will not make any investment in any person or entity whether by loan or advance, purchase of stock or other securities or contribution to capital; (n) The Company will use commercially reasonable efforts to not take any action that causes any of the representations and warranties made herein to be inaccurate as of the Effective Date; (o) The Company will not enter into or commit to enter into any transaction between the Company, on one hand, and any Related Party, on the other hand; (p) The Company will not guaranty the obligations of any third party (other than the Subsidiary); (q) The Company will not declare, set aside, pay or make any dividend, distribution or redemption in respect of shares of the Company's capital stock; (r) The Company will not incur any Indebtedness other than (i) pursuant to its presently existing revolving credit facility or (ii) as described on Exhibit A; 69 provided, however that any Indebtedness incurred pursuant to subsection (ii) above will not contain any prepayment restrictions or penalties; and (s) The Company will not enter into any agreement, plan or commitment to do any of the foregoing. 5.04 Access to Properties. Between the date hereof and the Effective -------------------- Date, with reasonable prior notice, the Shareholders will give and will cause the Company to give to authorized representatives of Investor full access with the right to conduct inspections, during normal business hours, in such manner as not to unduly disrupt normal business activities, to any and all premises, properties, contracts, commitments, books, records and affairs of the Company, and will cause the officers of the Company to furnish any and all financial, technical and operating data and other information as Investor shall from time to time reasonably request. 5.05 Confidentiality and Nonsolicitation. Pending the Closing, Investor ----------------------------------- will hold in confidence all information obtained from the Shareholders or the Company (or their officers, directors, employees, agents, advisors or representatives) in connection with the transactions completed herein and will use such information only for purposes related to the transactions contemplated hereby. Investor further agrees that, pending the Closing, it will not disclose any such information to any third party except upon the prior written consent of the Shareholders, or except as required by law or except to its advisors and financing sources who have been informed of the confidentiality of such information. If the transactions contemplated hereby are not consummated, Investor will return all such information to the Shareholders and continue to honor the foregoing confidentiality and non-disclosure covenants for a period of five years. Such obligation of confidentiality shall not extend to any information (a) which is 70 shown to be or becomes generally known to others engaged in the same trade or business as the Company (b) previously known to Investor prior to the start of discussions leading to the execution of this Agreement, (c) obtained by Investor in good faith from third parties who are not obligated to maintain the information confidential or (d) that is or becomes public knowledge through no act or omission by Investor or any of its directors, officers, employees, professional advisors or other representatives. Furthermore, if the transactions contemplated hereby are not consummated, Investor agrees that for a period of three years it will not, nor will it permit its officers, directors, employees, agents or representatives to, directly or indirectly solicit or attempt to solicit any of the employees of the Company at the level of manager or above to leave the Company or to become employees of or consultants to any other person or entity. 5.06 Exclusive Nature of Agreement. Prior to the Closing, or such earlier ----------------------------- date on which this Agreement is terminated in accordance with its terms, the Shareholders, the Company and their officers, employees, agents, representatives and trustees will not, directly or indirectly, solicit from any person, or otherwise encourage any person to make, any inquiries or proposals, or furnish information, relating to the acquisition, in whole or in part, of the assets or securities of the Company (an "Acquisition Proposal") or engage in any negotiations or enter into any agreement or understanding with any person (other than Investor) regarding an Acquisition Proposal. The Shareholders will not furnish any information concerning the Company to any person other than Investor for the purpose of, or with the intent of, permitting such person or entity to evaluate a possible Acquisition Proposal. The Shareholders and/or the Company will notify the Investor immediately of any Acquisition Proposal and will disclose 71 the terms of the Acquisition Proposal and identity of the party making the Acquisition Proposal. 5.07 Consummation of Agreement: Cooperation. The parties shall use --------------------------------------- commercially reasonable efforts to perform and fulfill all obligations on their respective parts to be performed and fulfilled under this Agreement, and to cause all the conditions precedent to the consummation of the transactions to be timely satisfied, to the end that the transactions contemplated by this Agreement shall be effected substantially in accordance with its terms. The parties hereto shall cooperate with each other in such actions and in securing requisite approvals and each party shall deliver such further documents as the other party may reasonably request as necessary to evidence such transactions. The execution of this Agreement by the Shareholders shall constitute a unanimous written consent of the Shareholders approving the principal terms hereof in accordance with Sections 603 and 1101 of the Corporations Code. 5.08 Maintenance of Corporate Name and Headquarters. Investor hereby ---------------------------------------------- covenants and agrees that for a period expiring on the fifth anniversary of the Effective Date: (a) The Company will retain the name "Hudson Respiratory Care Inc." and will continue to do business under the names "Hudson RCI" and/or "Hudson Respiratory Care Inc."; (b) The products and equipment manufactured or distributed by the Company shall continue to carry the "Hudson RCI" or "Hudson Respiratory Care Inc." name; and 72 (c) The Company's principal executive office and manufacturing facility shall be located in Temecula, California. 5.09 Maquiladora. No later than immediately prior to the Effective Date, ----------- Lovaas shall transfer the 21% interest in the Subsidiary that she holds directly to the Company in consideration of one dollar. 5.10 Conveyance Taxes. The Shareholders agree to assume liability for and ---------------- to hold Investor and the Company harmless against any stock transfer or other similar taxes incurred as a result of the transactions contemplated hereby. 5.11 Termination of Equity Plan. Prior to the Effective Date, the -------------------------- Shareholders shall cause the Company to take all actions necessary in order to terminate its EPP Plan as of and upon payment of all EPP Liabilities on the Effective Date. The names of and the amounts due to each EPP Participant as a result of the transactions contemplated by this Agreement are as set forth on the EPP Schedule. Each EPP Participant shall, upon receipt of the amount due such EPP Participant as provided in the EPP Schedule, execute a release acknowledging that the Company has no further obligation to such EPP Participant under the EPP Plan. In addition, Richard K. Ruiz shall, upon receipt of payment of the Ruiz Consulting Fee and the amount due him as provided in the EPP Schedule, execute a release acknowledging that the Company has no further obligation to him under the Ruiz Consulting Agreement, the EPP Plan or the Employee & Plan Participation Agreement between the Company and Richard K. Ruiz, dated July 1, 1995. 5.12 Consents, Etc. ------------- 73 (a) As soon as practicable after execution and delivery of this Agreement, Investor and the Company shall, if necessary and with all costs to be borne by Investor, file the Notification and Report Form required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") and, prior to the Effective Date, shall make all other filings required under the HSR Act. Each Shareholder, Investor and the Company covenants to use commercially reasonable efforts to (i) obtain all consents, approvals and agreements of, and to give all notices and make all other filings with, any third parties, including governmental authorities, necessary to authorize, approve or permit the consummation of the transactions contemplated hereby, and (ii) to cooperate with one another with respect thereto, including providing any additional information or other documents requested in connection with obtaining any necessary approval under the HSR Act. In addition, subject to the terms and conditions herein provided, each of the parties hereto covenants and agrees to use his or its commercially reasonable efforts to take, or cause to be taken, all action or do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to satisfy the conditions applicable to such party set forth in Article VI or VII. (b) The Company and the Shareholders will use commercially reasonable efforts to obtain all waivers, estoppels, non-disturbance agreements, consents and approvals (including, without limitation, consents required under any leases and Material Contracts) required for the consummation of the transactions contemplated hereby. In connection therewith, and in connection with its negotiations for consents, the Company may not offer or consent to any modification or amendment of any lease, or other contract, without Investor's prior written consent. The Company agrees to transmit the consents to the 74 appropriate parties for approval promptly after the execution hereof, which consents shall be subject to the reasonable approval of Investor. The Company shall keep Investor advised of its progress in obtaining such consents. (c) In the event Investor desires to make any modifications or amendments to any of the leases for the Leased Real Property, then at the request of Investor the Company shall cooperate with Investor and participate in any negotiations to effectuate the foregoing; provided, however, that achieving any such modifications or amendments shall not be a condition to Investor's or Newco's obligations to consummate the transactions contemplated hereby. (d) Within five (5) business days after the execution hereof, the Company shall obtain and deliver to Investor (i) copies of any existing title insurance policies in the possession of the Company or its affiliates with respect to each of the Fee Real Properties, and (ii) copies of any surveys of any Fee Real Properties in the possession of the Company or its affiliates. As promptly as possible after the execution of this Agreement, but in no event later than twenty-five (25) business days after the execution hereof, the Company shall obtain for and deliver to Investor (i) a commitment for title insurance for each of the Fee Real Properties, ALTA 1970 Form "B" (or the equivalent which is reasonably satisfactory to Investor), issued by Chicago Title (the "Title Company"), including all schedules and exhibits thereto, together with true, correct and legible copies of all instruments giving rise to any exceptions to title to each of the Fee Real Properties (collectively, the "Title Commitment"), and (ii) a current ALTA survey (the "Survey") of each Fee Real Property, certified to the Company, Investor's lender or financer, and the Title Company, in form reasonably acceptable 75 to Investor. The cost of each Title Commitment and Survey shall be borne solely by the Company. Within ten (10) business days after Investor's receipt of the last of the Title Commitment and Survey, Investor shall give notice to the Company specifying all matters shown on the Title Commitment or disclosed by the Survey which (x) are in an amount in excess of $10,000, if monetary, (other than assessments in connection with property tax bills not yet due and payable) or (y) materially and adversely affect the use of the property as it is currently being used, and are reasonably disapproved by Investor (any such item is referred to herein as a "Disapproved Exception"). The Company shall cure or remove any Disapproved Exception on or before the Effective Date. With respect to Fee Real Property, no later than the Effective Date, the Company shall cause to be delivered to Investor the irrevocable commitment of the Title Company to issue an extended coverage policy of title insurance (the "Title Policies"), ALTA 1970 Form "B" (or the equivalent which is reasonably satisfactory to Investor), insuring that the Company owns fee title to each Fee Real Property. The cost of such Title Policies shall be borne solely by the Company. (e) No later than five (5) business days prior to the Closing, Investor shall deliver to the Shareholders the Investor Transaction Expense Schedule and the New Debt Schedule. 5.13 Accounting Treatment. The Company shall use commercially reasonable -------------------- efforts, and take all reasonably necessary steps requested by Investor (and at Investor's expense), in order to obtain the recording of the Merger as a recapitalization for financial reporting purposes, including, without limitation, to assist Investor and its affiliates with any presentation to Investor's and the Company's accountants or any applicable regulatory authority with regard to such recording. Furthermore, the Company agrees to deliver to Investor before 76 March 1, 1998, Financial Statements prepared in accordance with Regulation S-X promulgated under the Securities Act of 1933, as amended, and such Financial Statements will not differ in any material respect from the Financial Statements delivered in accordance with Section 3.05 hereof. ARTICLE VI CONDITIONS TO OBLIGATIONS OF INVESTOR The obligation of Investor to consummate the transactions contemplated hereby shall be subject to the satisfaction, on or prior to the Effective Date, of each of the following conditions any one or more of which may be waived by Investor: 6.01 Performance of Agreements. The Shareholders and the Company shall ------------------------- have performed in all material respects their respective obligations and agreements contained in this Agreement required to be performed prior to the Closing, and the Shareholders and the Company shall have delivered to Investor a certificate to such effect. 6.02 Representations and Warranties True. The representations and ----------------------------------- warranties of the Shareholders contained in this Agreement shall each be true and correct in all material respects on the date hereof and on the Effective Date as if made again on such Date, and at the Closing the Shareholders shall have delivered to Investor certificates to such effect. 6.03 No Pending or Threatened Claim. No condition or restriction of any ------------------------------ governmental or regulatory authority shall be in effect and no claim, action, suit, investigation or other proceeding shall be pending or threatened before any court or governmental or regulatory authority that presents a substantial risk of the restraint or prohibition of the 77 transactions contemplated by this Agreement or the obtaining of material damages or other relief in connection therewith. 6.04 Opinion of the Company's Counsel. Investor shall have been furnished -------------------------------- at the Closing with an opinion of the Company's counsel, dated the Effective Date, in form and substance reasonably satisfactory to Investor, to the effect that: (a) The Company is a corporation and is duly organized, validly existing and in good standing under the laws of the State of California. (b) All corporate actions by the board of directors and the Shareholders of the Company required to be taken by or on the part of the Company to authorize the execution, delivery and performance of this Agreement by the Shareholders and the Company have been duly and properly taken. (c) This Agreement has been duly authorized, executed and delivered by the Shareholders and the Company, and constitutes valid and binding obligations of each of the Shareholders and the Company, enforceable against each of them, in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization or other laws affecting the enforcement of creditors' rights generally and general principles of equity. (d) Except as set forth in Schedule 3.04 hereto, the execution and delivery of this Agreement by the Shareholders and by the Company and the consummation of the transactions contemplated hereby by the Shareholders and by the Company do not (i) violate any constitutional or statutory provision or requirement, or to such counsel's knowledge, violate any material judicial or administrative order, consent decree, judgment or 78 decree applicable to the Shareholders or the Company; (ii) conflict with any terms, conditions or provisions of the Articles of Incorporation or Bylaws of the Company or the organizational documents of the Trust; (iii) result in a material breach of or default under the Material Contracts or (iv) to such counsel's knowledge, result in the creation of any lien, charge or encumbrance upon any of the assets or property of the Company under any such Material Contract, other than such liens, charges or encumbrances which would not have a Material Adverse Effect. 6.05 No Material Adverse Change. After the date hereof, there shall not -------------------------- have occurred any event, circumstance or occurrence which could reasonably be expected to cause a Material Adverse Effect. Investor shall have received a certificate addressed to it from the Shareholders dated the Effective Date to the foregoing effect. 6.06 Employee Participation. The employees of the Company shall have ---------------------- invested at least $6.5 million in Investor, of which at least $3 million will have been contributed by Richard W. Johansen, $1 million will have been contributed by Lougene Williams and $1 million will have been contributed by Jay R. Ogram. 6.07 Hart-Scott-Rodino. All applicable requirements under the Hart-Scott- ----------------- Rodino Antitrust Improvements Act of 1976 and the rules promulgated thereunder shall have been met, including all applicable waiting periods, and neither the Department of Justice nor the Federal Trade Commission shall have raised objections to the transactions contemplated hereby. 79 6.08 Agreement Not to Compete. Helen Hudson Lovaas shall have entered ------------------------ into an agreement not to compete substantially in the form attached hereto as Exhibit E with the Company and Investor. 6.09 Consents. All material consents, approvals and waivers from third -------- parties and governmental authorities necessary to the transactions as contemplated hereby shall have been obtained. 6.10 EPP Plan Terminated. The EPP Plan shall have been terminated and the ------------------- Company shall have no obligation under the EPP Plan to make any payment to employees or former employees other than with respect to the scheduled EPP Liabilities. 6.11 Shareholder Agreement. Lovaas shall have entered into a shareholder --------------------- agreement on substantially the terms set forth in Exhibit F hereto with Investor. 6.12 Accounting Matters. Investor shall have received Statement of ------------------ Auditing Standards No. 50 letters from Arthur Andersen, LLP and/or Deloitte & Touche, LLP concurring with the recapitalization treatment of the transactions contemplated by this Agreement. 6.13 Transactions with Affiliates. The transactions or agreements set ---------------------------- forth on Schedule 6.13 shall have been terminated by the Company or appropriate notice of termination shall have been given in the manner described in Schedule 6.13. ARTICLE VII CONDITIONS TO OBLIGATIONS OF SELLER 80 The obligations of the Shareholders and the Company to consummate the transactions contemplated hereby shall be subject to the satisfaction, on or prior to the Effective Date, of each of the following conditions, any one or more of which may be waived by Lovaas: 7.01 Performance of Agreements. The Investor shall have performed in all ------------------------- material respects its obligations and agreements contained in this Agreement required to be performed prior to the Closing, and Investor shall have delivered to Lovaas a certificate to such effect. 7.02 Representations and Warranties True. The representations and ----------------------------------- warranties of Investor contained in this Agreement shall be true and correct in all material respects on the date hereof and on the Effective Date, as if made again on such date, and at the Closing Investor shall have delivered to Lovaas a certificate to such effect. 7.03 Opinion of Investor's Counsel. The Shareholders shall have been ----------------------------- furnished with an opinion of counsel to Investor, dated the Effective Date, to the effect that: (a) Investor is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated. (b) All corporate actions required to be taken by or on the part of Investor to authorize the execution, delivery and performance of this Agreement by Investor have been duly and properly taken. (c) This Agreement has been duly authorized, executed and delivered by Investor, and constitutes valid and binding obligations of Investor, enforceable against it, in accordance with its terms, except as such enforceability may be limited by 81 bankruptcy, insolvency, reorganization or other laws affecting the enforcement of creditors' rights generally and general principles of equity. (d) The execution and delivery of this Agreement by Investor and the consummation of the transactions contemplated hereby by Investor do not (i) violate any constitutional or statutory provision or requirement, or to such counsel's knowledge, violate any material judicial or administrative order, award, consent decree, judgment or decree applicable to Investor; (ii) conflict with any terms, conditions or provisions of the Certificate of Incorporation or Bylaws of Investor; or (iii) to such counsel's knowledge, result in the creation of any lien, charge or encumbrance upon any of the assets or property of Investor under any such agreement or instrument, other than such liens, charges or encumbrances which, separately or in the aggregate, would not have a material adverse effect on Investor. 7.04 No Pending or Threatened Claim. No condition or restriction of any ------------------------------ governmental or regulatory authority shall be in effect and no claim, action, suit, investigation or other proceeding shall be pending or threatened before any court or governmental or regulatory authority that presents a substantial risk of the restraint or prohibition of the transactions contemplated by this Agreement or the obtaining of material damages or other relief in connection therewith. 7.05 Shareholder Agreement. Lovaas shall have entered into a shareholder --------------------- agreement on substantially the terms set forth on Exhibit F hereto with Investor. 7.06 Hart-Scott-Rodino. All applicable requirements under the Hart-Scott- ----------------- Rodino Antitrust Improvements Act of 1976 and the rules promulgated thereunder shall have been met, including all applicable waiting periods, and neither the Department of Justice nor the Federal Trade Commission shall have raised objection to the transactions contemplated hereby. 82 ARTICLE VIII INDEMNIFICATION 8.01 Indemnification by the Shareholders. The Shareholders shall jointly ----------------------------------- and severally indemnify and hold harmless the Surviving Corporation and its respective officers, directors, and employees in respect of any and all claims, actions, suits or other proceedings and any and all losses, costs, expenses, liabilities, fines, penalties, interest, and damages, whether or not arising out of any claim, action, suit or other proceeding (and including reasonable counsel and accountants' fees and expenses and all other reasonable costs and expenses of investigation, defense or settlement of claims and amounts paid in settlement) ("Damages") incurred by, imposed on or borne by the Surviving Corporation or resulting from: (a) The breach of any of the representations or warranties made by the Shareholders in this Agreement; or (b) The breach or the failure of performance by the Shareholders of any of the covenants that they are to perform hereunder. Damages shall exclude any amount with respect to which the Surviving Corporation shall be entitled to receive and shall have received payment under any insurance policy which provides coverage for the liability to which such amount relates. 8.02 Indemnification by Investor. Investor shall indemnify and hold --------------------------- harmless the Shareholders, in respect of any and all Damages incurred by, imposed on or borne by the Shareholders resulting from: 83 (a) The breach of any of the representations or warranties made by Investor in this Agreement; or (b) The breach or the failure of performance by Investor of any of the covenants that it is to perform hereunder. 8.03 Claims for Indemnification. Whenever any claim shall arise for -------------------------- indemnification hereunder, the party entitled to indemnification (the "indemnified party") shall promptly notify the other party or parties (the "indemnifying party") of the claim and, when known, the facts constituting the basis for such claim; provided that the indemnified party's failure to give such notice shall not affect any rights or remedies of an indemnified party hereunder with respect to indemnification for Damages except to the extent that the indemnifying party is materially prejudiced thereby. In the event of any claim for indemnification hereunder resulting from or in connection with any claim or legal proceedings by a third party, the notice to the indemnifying party shall specify, if known, the amount or an estimate of the amount of the liability arising therefrom. The indemnified party shall not settle or compromise any claim by a third party for which it is entitled to indemnification hereunder, without the prior written consent of the indemnifying party (which shall not be unreasonably withheld) unless suit shall have been instituted against it and the indemnifying party shall not have taken control of such suit after notification thereof as provided in Section 8.04 of this Agreement. 8.04 Defense by Indemnifying Party. In connection with any claim giving ----------------------------- rise to indemnity hereunder or resulting from or arising out of any claim or legal proceeding by a person who is not a party to this Agreement, the indemnifying party at its sole cost and expense may, upon written notice to the indemnified party, assume the defense of any such claim or legal proceeding if it acknowledges to the indemnified party in writing its obligations to 84 indemnify the indemnified party with respect to all elements of such claim, and thereafter diligently conducts the defense thereof with counsel reasonably acceptable to the indemnifies party. The indemnified party shall be entitled to participate in (but not control) the defense of any such action, with its counsel and at its own expense. If the indemnifying party does not assume or fails to conduct in a diligent manner the defense of any such claim or litigation resulting therefrom, (i) the indemnified party may defend against such claim or litigation, in such manner as it may deem appropriate, including, but not limited to, settling such claim or litigation, after giving notice of the same to the indemnifying party, on such terms as the indemnified party may deem appropriate all at the expense of the indemnifying party, who shall promptly reimburse all expenses incurred by the indemnified party, and (ii) the indemnifying party shall be entitled to participate in (but not control) the defense of such action, with its counsel and at its own expense. If the indemnifying party thereafter seeks to question the manner in which the indemnified party defended such third party claim or the amount or nature of any such settlement, the indemnifying party shall have the burden to prove by a preponderance of the evidence that the indemnified party did not defend or settle such third party claim in a reasonably prudent manner. Each party agrees to cooperate fully with the other, such cooperation to include, without limitation, attendance at depositions and the provision of relevant documents as may be reasonably requested by the indemnifying party, provided that the indemnifying party will hold the indemnified party harmless from all of its expenses, including reasonable attorney's fees, incurred in connection with such cooperation by the indemnified party. The indemnifying party shall have the right to elect to settle any such claim or demand, for monetary damages only, subject to the consent of the indemnified party; provided, however, if the ----------------- indemnified party fails to give such consent within 20 days of being 85 requested to do so, the indemnified party shall, at its expense, assume the defense of such claim or demand and regardless of the outcome of such matter, the indemnifying party's liability hereunder shall be limited to the amount of any such proposed settlement. In the event the indemnifying party assumes the defense of a claim or demand, the indemnified party shall have the right to assume control of the defense of any claim or demand from the indemnifying party at any time and to elect to settle such claim or demand; provided, however, the -------- ------- indemnifying party shall have no indemnification obligations with respect to such claim, demand or settlement except for the costs and expenses of such indemnifying party incurred prior to the assumption of the defense of the claim or demand by the indemnified party. Notwithstanding the foregoing, in the event that the indemnified party reasonably determines in good faith that its interest with respect to such claim cannot appropriately be represented by the indemnifying party due to a conflict of interest, such indemnified party shall have the right to assume control of the defense of, and to compromise or settle, such claim (exercising reasonable business judgment) at the indemnifying party's expense; provided; however, that any compromise or settlement shall be subject to the indemnifying party's consent, which consent shall not be unreasonably withheld. 8.05 Manner of Indemnification. All indemnification hereunder shall be ------------------------- effected by payment of cash or delivery of a certified or official bank check to the indemnified party. 8.06 Limitations on Indemnification. All representations and warranties ------------------------------ made by the parties herein or in any instrument or document furnished in connection herewith shall survive the Closing and any investigation at any time made by or on behalf of the parties hereto and (a) the representations and warranties set forth in Section 3.02 will survive in perpetuity, (b) the representations and warranties set forth in Sections 3.07 and 3.22 will survive until the 86 expiration of the respective statute of limitations with respect to such matters and (c) all other representations and warranties set forth herein or in any instrument or document furnished in connection herewith will expire on the 15 month anniversary of the Effective Date, unless prior to such time a claim specifying a breach of any such representation or warranty is submitted in writing to the indemnifying party and identified as a claim for indemnification pursuant to this Agreement. No claim or action for indemnity pursuant to Sections 8.01 or 8.02 hereof or otherwise for breach of any representation or warranty shall be asserted or maintained by any party hereto after the expiration of such representation or warranty pursuant to the provisions of this Section except for claims made in writing prior to such expiration and actions (whether instituted before or after such expiration) based on any claim made in writing prior to such expiration. All covenants will survive until satisfied in accordance with their terms. Notwithstanding any provision of this Agreement to the contrary, (i) the Shareholders shall have no obligation to indemnify any person entitled to indemnity under Section 8.01 for breach of representations and warranties (except the representations and warranties set forth in Section 3.07) unless the persons so entitled to indemnity thereunder have suffered Damages in an aggregate amount in excess of $1 million and then only to the extent of such excess; (ii) the Shareholders shall have no obligation to indemnify any person entitled to indemnity under Section 8.01 for breach of the representations and warranties set forth in Section 3.07 hereof unless the persons so entitled to indemnity thereunder have suffered Damages in an aggregate amount in excess of $150,000 and then only to the extent of such excess; and (iii) except with respect to the representations and warranties set forth in Section 3.07 hereof, the Shareholders' aggregate liability under Section 8.01 for breach of representations and warranties shall in no event exceed $15 million. 87 8.07 Exclusivity of Indemnification. The parties hereto agree that the ------------------------------ indemnification provisions of this Article VIII are intended to provide the exclusive remedy as to all Damages they may incur arising from or relating to the transactions contemplated hereby, and each party hereby waives, to the extent it may do so, any other rights or remedies that may arise under any applicable statute, rule or regulation; provided, however, that the foregoing ----------------- shall not be interpreted to limit the types of remedies, including specific performance or other equitable remedies, which may be sought by an indemnified person in connection with a breach of any covenant or agreement contained herein and shall not limit any available remedy for a willful misrepresentation or breach by another party. ARTICLE IX TERMINATION 9.01 Termination. This Agreement may be terminated prior to the Closing ----------- (a) by the mutual written consent of the parties hereto; (b) by either Investor or Lovaas, at any time after May 31, 1998 if for any reason the Merger shall not have been consummated by such date; (c) by Investor if there has been a material misrepresentation or material breach on the part of the Shareholders in the representations, warranties and covenants of the Shareholders set forth herein which, if curable, has not been cured within 10 business days after notice thereof by Investor; (d) by Lovaas, if there has been a material misrepresentation or material breach on the part of Investor in the representations, warranties and covenants of Investor set forth herein which, if curable, has not been cured within 10 business days after notice thereof by Lovaas; (e) by Investor upon delivery to Lovaas, of a written notice if any event occurs which renders impossible of satisfaction one or more of the conditions to Investor's obligations contained in Article VI hereof and noncompliance is not waived by Investor; and (f) by Lovaas, upon 88 delivery to Investor of a written notice if any event occurs which renders impossible of satisfaction one or more conditions to the Shareholders' obligations contained in Article VII hereof and noncompliance is not waived by Lovaas. The termination of this Agreement except pursuant to subsection (a) shall not affect the right of any party to bring an action against another party for breach of this Agreement. ARTICLE X GENERAL PROVISIONS 10.01 Notices. All notices, requests and demands to or upon the ------- respective parties hereto to be effective shall be in writing (including by facsimile) and, unless otherwise expressly provided herein, shall be delivered during normal business hours by hand, by Federal Express, United Parcel Service or other reputable overnight commercial delivery service, or by facsimile notice, confirmation of receipt received, addressed as follows, or to such other address as may be hereafter notified by the respective parties hereto: (a) If to Lovaas or the Company, to: Hudson Respiratory Care Inc. 27711 Diaz Road, P.O. Box 9020 Temecula, California Attn: Richard W. Johansen Facsimile Number: (909) 676-1578 89 With a copy to: Gibson, Dunn & Crutcher LLP 4 Park Plaza Irvine, California 92614 Attn: Gerard J. Kenny, Esq. Facsimile Number: (714) 451-4220 and: Salomon Smith Barney 333 S. Hope Street, Suite 3200 Los Angeles, California 90071 Attn: Mark Davis Facsimile Number: (213) 253-1808 (b) If to Investor, to: River Holding Corp. c/o Freeman Spogli & Co. 11100 Santa Monica Boulevard, Suite 1900 Los Angeles, California 90025 Attn: Charles R. Rullman, Jr. Facsimile Number: (310) 444-1870 90 With a copy to: Riordan & McKinzie 300 South Grand Avenue, 29th Floor Los Angeles, California 90071 Attn: Richard J. Welch, Esq. Facsimile Number: (213) 229-8550 10.02 Entire Agreement. This Agreement constitutes the entire ---------------- understanding between the parties with respect to the subject matter hereof; superseding all negotiations, prior discussions and preliminary agreements. 10.03 Governing Law. This Agreement and the rights and obligations of the ------------- parties under this Agreement shall be governed by and construed in accordance with the laws of the State of California, excluding its rules of conflicts of law. 10.04 Consent to Jurisdiction and Forum Selection. The parties agree that ------------------------------------------- all actions or proceedings arising in connection with this Agreement shall be tried and litigated exclusively in the State and Federal courts located in the County of Orange, State of California. The aforementioned choice of venue is intended by the parties to be mandatory and not permissive in nature, thereby precluding the possibility of litigation between the parties with respect to or arising out of this Agreement in any jurisdiction other than that specified in this paragraph. Each party hereby waives any right it may have to assert the doctrine of forum non conveniens or similar doctrine or to object to venue with respect to any proceeding brought in accordance with 91 this paragraph, and stipulates that the State and Federal courts located in the County of Orange, State of California shall have in personam jurisdiction and venue over each of them for the purpose of litigating any dispute, controversy or proceeding arising out of or related to this Agreement. Each party hereby authorizes and accepts service of process sufficient for personal jurisdiction in any action against it as contemplated by this paragraph by registered or certified mail, return receipt requested, postage prepaid, to its address for the giving of notices as set forth in this Agreement, or in the manner set forth in Section 10.01 of this Agreement for the giving of notice. Any final judgment rendered against a party in any action or proceeding shall be conclusive as to the subject of such final judgment and may be enforced in other jurisdictions in any manner provided by law. 10.05 Attorneys' Fees. If either party to this Agreement shall bring any --------------- action, suit, counterclaim or appeal for any relief against the other, declaratory or otherwise, to enforce the terms hereof or to declare rights hereunder (collectively, an "Action"), the prevailing party shall be entitled to recover as part of any such Action its reasonable attorneys' fees and costs, including any fees and costs incurred in bringing and prosecuting such Action and/or enforcing any order, judgment, ruling or award granted as part of such Action. "Prevailing party" within the meaning of this section includes, without limitation, a party who agrees to dismiss an Action upon the other party's payment of all or a portion of the sums allegedly due or performance of the covenants allegedly breached, or who obtains substantially the relief sought by it. 10.06 Amendment and Waiver. This Agreement may be amended only by a -------------------- written instrument signed by the parties hereto. No failure to exercise and no delay in exercising, on the part of any party, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege 92 hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. The failure of any party to insist upon a strict performance of any of the terms or provisions of this Agreement, or to exercise any option, right or remedy herein contained, shall not be construed as a waiver or as a relinquishment for the future of such term, provision, option, right or remedy, but the same shall continue and remain in full force and effect. No waiver by any party of any term or provision of this Agreement shall be deemed to have been made unless expressed in writing and signed by such party. 10.07 Captions. The captions of the Sections of this Agreement are for -------- convenience only and shall not be considered or referred to in resolving questions of construction. 10.08 Counterparts. This Agreement may be executed by one or more of the ------------ parties hereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 10.09 Assignment. Neither this Agreement nor any of the rights or ---------- obligations hereunder shall be assignable by any party without the written consent of the others provided that Investor may assign its rights under this Agreement (i) to a corporation, group or entity that purchases all or substantially all of the assets or capital stock of the Company or Investor or that succeeds to the rights of the Company or Investor by operation of law or (ii) to any lender in connection with any Indebtedness incurred by Investor or the Company. 93 10.10 Severability. Any portion or provision of the Agreement which is ------------ invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining portions or provisions hereof in such jurisdiction or, to the extent permitted by law, rendering that or any other portion or provision of the Agreement invalid, illegal or unenforceable in any other jurisdiction. 10.11 Expenses. Except as otherwise expressly provided herein, the -------- parties shall, if the transactions contemplated hereby are not consummated, each bear their own legal, accounting, investment banking and other fees and expenses in connection with this Agreement and the transactions contemplated hereby. If the transactions contemplated by this Agreement are consummated, the Company shall pay all expenses of Investor and Newco in connection therewith. 10.12 Schedules. All schedules, exhibits, appendices and documents --------- referred to in or attached to this Agreement are integral parts of this Agreement as if fully set forth herein, and all statements appearing therein shall be deemed disclosed for all purposes and not only in connection with the specific representation to which they are explicitly referenced. 10.13 Records. After the Closing, Investor shall cause the Company to ------- keep and preserve all books and records of the Company existing as of the Closing for a period of at least three years after the Closing. Investor will cause the Company to afford to the representatives of the Shareholders, including its counsel and accountants, reasonable access to, and, at the Shareholders' expense, copies of, the records retained by the Company during normal business hours after the Effective Date upon reasonable notice for proper business purposes. Investor and the Company shall also make their respective officers and employees available to the 94 Shareholders at reasonable times and places after the Closing upon reasonable notice for proper business purposes. 10.14 Further Assurances. From time to time after the Effective Date, at ------------------ Investor's request and without further consideration, the Shareholders shall execute and deliver to Investor such documents and take such other action as Investor may reasonably request in order to consummate more effectively the transactions contemplated hereby and to carry out the intent of this Agreement. From time to time after the Effective Date, at the request of the Shareholders and without further consideration, the Investor shall execute and deliver to the Shareholders such documents and take such other action as the Shareholders may reasonably request in order to consummate more effectively the Merger and to carry out the intent of this Agreement. 10.15 Publicity. The parties shall cooperate with each other in the --------- development and distribution of all news releases and other public disclosures relating to the transactions contemplated hereby. None of the parties shall issue or make, or cause to have issued or made, any press release or announcement concerning the transactions contemplated hereby without the advance approval in writing of the form and substance thereof by the other party, unless otherwise required by applicable law. 10.16 Definition of Knowledge. For purposes of this Agreement, whenever a ----------------------- statement is qualified by "to the Shareholders' knowledge," "to the knowledge of the Shareholders" or words of similar import, it is intended to indicate that none of Lovaas, Richard W. Johansen, Lougene Williams or Jay R. Ogram have actual knowledge of the inaccuracy of such statement. 95 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. River Holding Corp. (the "Investor") By: /s/ Charles P. Rullman ----------------------------- Name: Charles P. Rullman, Jr. Title: President By: /s/ Jon D. Ralph ----------------------------- Name: Jon D. Ralph Title: Vice President and Secretary River Acquisition Corp. ("Newco") By: /s/ Charles P. Rullman ----------------------------- Name: Charles P. Rullman, Jr. Title: President By: /s/ Jon D. Ralph ------------------------------ Name: Jon D. Ralph Title: Vice President and Secretary Title: Vice President and Secretary Hudson Respiratory Care Inc. (the "Company") By: /s/ Richard W. Johansen -------------------------------- Name: Richard W. Johansen Title: President and Chief Executive Officer By: /s/ Jay R. Ogram -------------------------------- Name: Jay R. Ogram Title: Chief Financial Officer Helen Lovaas Separate Property Trust U/D/T dated 7/17/97 By: /s/ Helen Lovaas -------------------------------- Helen Lovaas, Trustee Helen Lovaas Trust No. 1 U/D/T dated 11/10/97 By: /s/ Helen Lovaas -------------------------------- Helen Lovaas, Trustee EX-3.1 4 AMENDED & RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.1 CERTIFICATE OF DETERMINATION OF HUDSON RESPIRATORY CARE INC. Richard W. Johansen and Jay R. Ogram hereby certify as follows: 1. They are the President and Chief Financial Officer, respectively, of Hudson Respiratory Care Inc., a California corporation (the "Company"). 2. The number of shares of 11 1/2% Senior Redeemable PIK Preferred Stock Due 2010, $.01 par value, of the Company is 600,000 shares, none of which has been issued. 3. The number of shares of 11 1/2% Series B Senior Redeemable PIK Preferred Stock Due 2010, $.01 par value, of the Company is 600,000 shares, none of which has been issued. 4. The Board of Directors of the Company has duly adopted the following resolution: "WHEREAS, the Articles of Incorporation of the Company authorize the Board of Directors to determine the designations and powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference, of any series of Preferred Stock, and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series. NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby establish two series of Preferred Stock as follows: (a) The designation of such series of Preferred Stock are (i) the 11 1/2% Senior Redeemable PIK Preferred Stock Due 2010, $.01 par value, of the Company (the "Initial Company Preferred Stock"), and the number of shares of such Initial Company Preferred Stock is 600,000, and (ii) the 11 1/2% Series B Senior Redeemable PIK Preferred Stock Due 2010, $.01 par value, of the Company (the "Series B Stock"), and the number of shares of such Series B Stock is 600,000. The Initial Company Preferred Stock and the Series B Stock are referred to as the "Company Preferred Stock." The liquidation preference of the Company Preferred Stock shall be $100 per share (the "Liquidation Preference"). 2 The designations and powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference, granted to and imposed upon the Company Preferred Stock and the holders thereof (the "Holders") shall be as set forth below. (b) Ranking. The Initial Company Preferred Stock and the Series B -------- Stock will each rank on a parity with the other in all respects. The Company Preferred Stock will, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank (i) senior to all classes of common stock of the Company and to each other class of Capital Stock and to each other series of Preferred Stock established hereafter by the Board of Directors the terms of which do not expressly provide that it ranks senior to, or on a parity with, the Company Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution of the Company (collectively referred to, together with common stock of the Company, as "Junior Stock") and (ii) on a parity with each other class of Capital Stock or series of Preferred Stock established hereafter by the Board of Directors, the terms of which expressly provide that such series will rank on a parity with the Company Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution (collectively referred to as "Parity Stock"). The Company Preferred Stock and the Company's 11 1/2% Senior PIK Preferred Stock due 2010, $.01 par value (the "Senior PIK Preferred Stock"), will each rank on a parity with the other in all respects. (c) Dividends. (i) Holders of the outstanding shares of Company ---------- Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors of the Company, out of funds legally available therefor, cumulative preferential dividends on each share of the Company Preferred Stock at a rate per annum equal to 11 1/2% of the Liquidation Preference of such share, payable semi-annually in arrears (each such semi-annual period being herein called a "Dividend Period") in the manner set forth below. In addition to the dividends described in the preceding sentence, holders of outstanding shares of Company Preferred Stock will be entitled to additional dividends (the "Additional Dividends"), when, as and if declared by the Board of Directors of the Company, out of funds legally available therefor, with respect to the shares of Company Preferred Stock, which Additional Dividends shall accrue as follows if any of the following events occur (each such event in clauses (A), (B), (C), and (D) below being herein called a "Registration Default"): (A) if on or prior to 3 June 6, 1998, neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been filed with the Securities and Exchange Commission (the "SEC"); (B) if on or prior to September 5, 1998, neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been declared effective by the SEC; (C) if on or prior to October 5, 1998, neither the Registered Exchange Offer has been consummated nor the Shelf Registration Statement has been declared effective; or (D) after either the Exchange Offer Registration Statement or the Shelf Registration Statement has been declared effective, such Registration Statement thereafter ceases to be effective or usable (in each case except as permitted below) in connection with resales of the Company Preferred Stock in accordance with and during the periods specified herein. Additional Dividends shall accrue on the shares of Company Preferred Stock from and including the date on which any such Registration Default shall occur, to but excluding the date on which all such Registration Defaults have been cured. Such Additional Dividends will accrue at a rate of 0.25% per annum during the 90-day period immediately following the occurrence of such Registration Default and shall increase by 0.25% per annum at the end of each subsequent 90-day period, but in no event shall the amount of such Additional Dividends exceed 1.00% per annum. A Registration Default referred to in clause (C) of this paragraph (c)(i) shall be deemed not to have occurred and be continuing in relation to a Registration Statement or the related prospectus if (i) such Registration Default has occurred solely as a result of (x) the filing of a post-effective amendment to the Registration Statement to incorporate annual audited financial information with respect to the Company where such post-effective amendment is not yet effective and needs to be declared effective to permit Holders to use the related prospectus or (y) other material events with respect to the Company that would need to be described in the Registration Statement or the related prospectus and (ii) in the case of clause (y), the Company proceeds promptly and in good faith to amend or supplement the Registration Statement and related prospectus to describe such events unless the Company has determined in good faith that there are material legal or commercial impediments in doing so; provided, however, that in any case if such Registration Default occurs for a - -------- ------- continuous period in excess of 45 days, Additional Dividends shall be payable in accordance with the immediately preceding paragraphs of this paragraph (c)(i) from the day such Registration Default initially occurs to but excluding the date on which such Registration Default is cured and provided, further, that not -------- ------- more than one Registration Default shall be deemed to 4 have occurred pursuant to clause (y) of this paragraph during any 365-day period. Additional Dividends will not accrue with respect to a Registration Default referred to in clause (D) of this paragraph (c)(i) occurring solely as a result of the determination by the SEC that an Exchange Offer Registration Statement filed prior to the issuance of the Initial Company Preferred Stock may not register Company Preferred Stock if (x) the Company, within 30 days of the issuance of the Initial Company Preferred Stock, files an additional Exchange Offer Registration Statement (the "Supplemental Exchange Offer Registration Statement") with the SEC, (y) on or prior to the 90th day following the issuance of the Initial Company Preferred Stock the Supplemental Exchange Offer Registration Statement or an additional Shelf Registration Statement (the "Supplemental Shelf Registration Statement") has been declared effective by the SEC and (z) on or prior to the 120th day following the issuance of the Initial Company Preferred Stock the Registered Exchange Offer has been consummated or the Supplemental Shelf Registration Statement has been declared effective. Any amounts of Additional Dividends due pursuant to clauses (A), (B), (C) or (D) of this paragraph (c)(i) or pursuant to the proviso contained in the preceding sentence will be payable on the regular dividend payment dates with respect to the Company Preferred Stock and on the same terms and conditions and subject to the same limitations as pertain at such time for the payment of regular dividends. The amount of Additional Dividends will be determined by multiplying the applicable Additional Dividends rate by the aggregate Liquidation Preference of the outstanding shares of Company Preferred Stock, multiplied by a fraction, the numerator of which is the number of days such Additional Dividend rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months), and the denominator of which is 360. All dividends on the Company Preferred Stock, including Additional Dividends, to the extent accrued, shall be cumulative, whether or not the Company has earnings or profits, whether or not there are funds legally available for the payments of such dividends and whether or not dividends are declared, on a daily basis from the Issue Date or, in the case of additional shares of Company Preferred Stock issued in payment of a dividend, from the date of issuance of such additional shares of Company Preferred Stock, and shall be payable semi-annually in arrears on each April 15 and October 15 (each, a "Dividend Payment Date"), commencing on October 15, 1998, to holders of record on the April 1 and October 1 immediately preceding the relevant Dividend Payment Date. Any dividend on the Company Preferred Stock payable pursuant to this paragraph (c)(i) on 5 or prior to April 15, 2003 shall be, at the option of the Company, payable (1) in cash or (2) through the issuance of a number of additional shares (including fractional shares) of Company Preferred Stock (the "Additional Shares") equal to the dividend amount divided by the Liquidation Preference of such Additional Shares. With respect to dividends payable after April 15, 2003, all dividends shall be payable solely in cash. (ii) All dividends paid with respect to shares of the Company Preferred Stock pursuant to this paragraph (c) shall be paid pro rata to the Holders entitled thereto. (iii) No dividend whatsoever may be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Company Preferred Stock with respect to any Dividend Period unless all dividends for all preceding Dividend Periods have been declared and paid or declared and, if payable in cash, a sufficient sum in cash set apart for the payment of such dividend, upon all outstanding shares of Company Preferred Stock. (iv) No full dividends may be declared or paid or funds set apart for the payment of dividends by the Company on any Parity Stock for any period unless full cumulative dividends in respect of each Dividend Period ending on or before such period shall have been or contemporaneously are declared and paid in full or declared and, if payable in cash, a sufficient sum in cash set apart for such payment on the Company Preferred Stock. If full dividends are not so paid, the Company Preferred Stock will share dividends pro rata with the Parity Stock. (v) The Company will not (A) declare, pay or set apart funds for the payment of any dividend or other distribution with respect to any Junior Stock or (B) repurchase, redeem or otherwise retire any Junior Stock or Parity Stock, nor may funds be set apart for payment with respect thereto, unless all accrued and unpaid dividends with respect to the Company Preferred Stock at the time such dividends are payable have been paid or funds have been set apart for payment of such dividends, if payable in cash. As used herein, the term "dividend" does not include dividends payable solely in shares of Junior Stock on Junior Stock. (vi) Dividends on account of arrears for any past Dividend Period and dividends in connection with any optional redemption or any mandatory repurchase may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record on such date, not more than 45 days prior to the payment thereof, as may be fixed by the Board of Directors of the Company. 6 (vii) Dividends payable on the Company Preferred Stock for any period other than a Dividend Period shall be computed on the basis of a 360-day year comprised of twelve 30-day months and the actual number of days elapsed in the period for which payable and will be deemed to accrue on a daily basis. Dividends payable on the Company Preferred Stock for a full Dividend Period will be computed by dividing the per annum dividend rate by two. (d) Liquidation Preference. (i) Upon any voluntary or involuntary ----------------------- liquidation, dissolution or winding-up of the Company, each Holder of the Company Preferred Stock will be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, an amount equal to the Liquidation Preference per share of Company Preferred Stock held by such Holder, plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends (whether or not declared and including Additional Dividends, if any) thereon to the date fixed for liquidation, dissolution or winding-up (including, without duplication, an amount equal to a prorated dividend for the period from the last Dividend Payment Date to the date fixed for liquidation, dissolution or winding up that would have been payable had the Company Preferred Stock been the subject of an Optional Redemption on such date) before any distribution is made on any Junior Stock, including, without limitation, common stock of the Company. If, upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the amounts payable with respect to the holders of the Company Preferred Stock and all Parity Stock are not paid in full, the holders of the Company Preferred Stock and the Parity Stock will share equally and ratably (in proportion to the full liquidation preference and accumulated and unpaid dividends that would be payable on such shares of the Company Preferred Stock and the Parity Stock, respectively, if all amounts payable thereon had been paid in full) in any distribution of assets of the Company to which each is entitled. After payment of the full amount of the Liquidation Preference of the outstanding shares of Company Preferred Stock (plus all accumulated and unpaid dividends), the holders of shares of Company Preferred Stock will not be entitled to any further participation in any distribution of assets of the Company. (ii) For the purposes of this paragraph (d), neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more other entities shall be deemed to be a liquidation, dissolution or winding-up of the Company. 7 (e) Redemption. (i) Optional Redemption. (A) Except as set forth ----------- -------------------- in clause (B) below, the Company Preferred Stock shall not be redeemable at the option of the Company prior to April 15, 2003. On or after April 15, 2003, each share of the Company Preferred Stock may be redeemed at any time or from time to time, in whole or in part, at the option of the Company, at the redemption prices (expressed as a percentage of the Liquidation Preference of such share) set forth below, plus, without duplication, an amount in cash equal to all accrued and unpaid dividends to the date fixed for redemption (an "Optional Redemption Date") (including, without duplication, an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Optional Redemption Date) (the "Optional Redemption Price"), if redeemed during the 12-month period beginning April 15 of each of the years set forth below:
YEAR IN WHICH REDEMPTION OCCURS PERCENTAGE ----------------- ---------- 2003 . . . . . . . . . . . . . . . . . . . . 105.750% 2004 . . . . . . . . . . . . . . . . . . . . 104.600 2005 . . . . . . . . . . . . . . . . . . . . 103.450 2006 . . . . . . . . . . . . . . . . . . . . 102.300 2007 . . . . . . . . . . . . . . . . . . . . 101.150 2008 and thereafter . . . . . . . . . . . . . 100.000
(B) At any time prior to April 15, 2001, the Company may redeem at its option (i) up to 50% or (ii) all but not less than all of the outstanding shares of Company Preferred Stock with the net proceeds of any Public Equity Offering by the Company at a redemption price (expressed as a percentage of the Liquidation Preference per share thereof) of 111.5% plus accumulated and unpaid dividends (including, without duplication, an amount in cash equal to a prorated dividend for any partial dividend period). Any such redemption shall be made upon consummation of such Public Equity Offering upon not less than 30 nor more than 60 days' notice. (C) In the event of a redemption of only a portion of the then outstanding shares of Company Preferred Stock, the Company shall effect such redemption on a pro rata basis, except that the Company may redeem all of the shares held by Holders of fewer than 100 shares (or all of the shares held by Holders who would hold less than 100 shares as a result of such redemption), as may be determined by the Company. (ii) Mandatory Redemption. Each share of the Company Preferred Stock --------------------- (if not earlier redeemed) shall be subject to mandatory redemption in whole (to the extent of lawfully available funds therefor) on April 15, 2010 (the "Mandatory Redemption Date") at a price equal to 100% of the Liquidation Preference of such share, plus an amount equal 8 to all accrued and unpaid dividends thereon (including, without duplication, an amount equal to a prorated dividend thereon from the immediately preceding Dividend Payment Date to the Mandatory Redemption Date), if any, to the Mandatory Redemption Date (the "Mandatory Redemption Price"). (iii) Procedure for Redemption. (A) On and after an Optional ------------------------- Redemption Date or the Mandatory Redemption Date, as the case may be (the "Redemption Date"), unless the Company defaults in the payment of the applicable redemption price, dividends will cease to accumulate on shares of Company Preferred Stock called for redemption and all rights of Holders of such shares will terminate except for the right to receive the Optional Redemption Price or the Mandatory Redemption Price, as the case may be, without interest; provided, -------- however, that if a notice of redemption shall have been given as provided in - ------- subparagraph (iii)(B) and the funds necessary for redemption (including an amount in respect of all dividends that will accrue to the Redemption Date) shall have been segregated and irrevocably set apart by the Company, in trust for the benefit of the Holders of the shares called for redemption, then dividends shall cease to accumulate on the Redemption Date on the shares to be redeemed and, at the close of business on the day on which such funds are segregated and set apart, the Holders of the shares to be redeemed shall, with respect to the shares to be redeemed, cease to be shareholders of the Company and shall be entitled only to receive the Optional Redemption Price or the Mandatory Redemption Price, as the case may be, for such shares without interest from the Redemption Date. (B) With respect to a redemption pursuant to paragraph (e)(i) or (e)(ii), the Company will send a written notice of redemption by first class mail to each holder of record of shares of Company Preferred Stock at its registered address, not fewer than 30 days nor more than 60 days prior to the Redemption Date (the "Redemption Notice") and notice, if mailed in the manner herein provided, shall conclusively be presumed to have been given, whether or not the Holder receives such notice; provided, however, that no failure to give -------- ------- such notice nor any deficiency therein shall affect the validity of the procedure for the redemption of any shares of Company Preferred Stock to be redeemed except as to the Holder or Holders to whom the Company has failed to give said notice or except as to the Holder or Holders whose notice was defective. The Redemption Notice shall state: (1) whether the redemption is pursuant to paragraph (e)(i) or (e)(ii) hereof; (2) the Optional Redemption Price or the Mandatory Redemption Price, as the case may be; 9 (3) whether all or less than all the outstanding shares of Company Preferred Stock are to be redeemed and the total number of shares of Company Preferred Stock being redeemed; (4) the Redemption Date; (5) that the Holder is to surrender to the Company, in the manner, at the place or places and at the price designated, his certificate or certificates representing the shares of Company Preferred Stock to be redeemed; and (6) that dividends on the shares of the Company Preferred Stock to be redeemed shall cease to accumulate on such Redemption Date unless the Company defaults in the payment of the Optional Redemption Price or the Mandatory Redemption Price, as the case may be to the Holders of the Company Preferred Stock who have duly surrendered their certificates for redemption in accordance with clause (C) below on or before the Redemption Date. (C) Each Holder of Company Preferred Stock shall surrender the certificate or certificates representing such shares of Company Preferred Stock to the Company, duly endorsed (or otherwise in proper form for transfer, as determined by the Company), in the manner and at the place designated in the Redemption Notice, and on the Redemption Date the full Optional Redemption Price or Mandatory Redemption Price, as the case may be, for such shares shall be payable in cash to the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event that less than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (f) Voting Rights. (i) The Holders of Company Preferred Stock, -------------- except as otherwise required under California law or as set forth in paragraphs (ii) and (iii) below, shall not be entitled to vote on any matter required or permitted to be voted upon by the shareholders of the Company. (ii) (A) If (1) dividends on the Company Preferred Stock are in arrears and unpaid and, in the case of dividends payable after April 15, 2003, are not paid in cash for six or more Dividend Periods (whether or not consecutive) (a "Dividend Default"); (2) the Company fails for any reason to redeem the Company Preferred Stock on April 15, 2010, or fails to otherwise discharge any redemption obligation with respect to the Company Preferred Stock; (3) the Company fails to make an offer to redeem all 10 of the outstanding shares of the Company Preferred Stock following a Change of Control (whether or not the Company is permitted to do so by the terms of the Indenture, the New Credit Facility or any other obligation of the Company); (4) a breach or violation of any of the provisions set forth under paragraph (l) (Certain Additional Provisions) occurs and, the breach or violation continues for a period of 30 days or more after the Company receives notice thereof specifying the default from the Holders of at least 25% of the shares of the Company Preferred Stock then outstanding; or (5) the Company fails to pay at final maturity (giving effect to any applicable grace period) the principal amount of any Debt of the Company or any Subsidiary of the Company or the stated maturity of any such Debt of the Company or any Subsidiary of the Company is accelerated because of a default and the total amount of such Debt unpaid or accelerated exceeds $7.5 million, then, subject to paragraph (f)(ii)(E), the Holders of the then outstanding shares of Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable), voting together as a class, shall have the right and power to elect two directors to the Board of Directors of the Company and the common stock of the Company ("Common Stock") shall have the right to elect the remaining directors. Each such event described in clauses (1), (2), (3), (4) or (5) above is a "Voting Rights Triggering Event". (B) The voting rights set forth in paragraph (f)(ii)(A) above will continue until such time as (x) in the case of a Dividend Default, all dividends in arrears on the Company Preferred Stock are paid in full in cash and (y) in all other cases, any failure, breach or default giving rise to such Voting Rights Triggering Event is remedied or waived by the Holders of at least a majority of the shares of Company Preferred Stock then outstanding, at which time the exclusive right to elect directors shall revert to the Common Stock, subject to renewal of the voting right of the Company Preferred Stock under paragraph (f)(ii)(A) from time to time. At any time after the right to elect two directors is vested in the Company Preferred Stock, and at any time after the exclusive right to elect directors shall revert to the Common Stock, the holders of 25% or more of the outstanding shares of Company Preferred Stock (or the holders of 25% of the shares of any other series of Preferred Stock then outstanding upon which like rights have been conferred and are exercisable) or 25% or more of the outstanding Common Stock, as the case may be, have a right to call a special meeting of shareholders for the purpose of electing all of the members of the Board of Directors, such right to be exercisable by delivering a request in writing for the calling of the special meeting to the president or secretary, or to the chairman of the board or a vice-president if there be such; provided, however, - -------- ------- 11 that no such special meeting shall be called if the next annual meeting of shareholders of the Company is to be held within 60 days after the voting power to elect directors shall have become vested, in which case such meeting shall be deemed to have been called for such next annual meeting. The officer receiving the request shall forthwith cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than 35 nor more than 60 days after the receipt of the request. If the notice is not given within 20 days after receipt of the request, the shareholders calling the meeting shall have the rights accorded to them pursuant to subdivision (c) of Section 601 of the California Corporations Code. In lieu of electing directors at a meeting of the shareholders in accordance with the foregoing, the holders of Common Stock and Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any), voting as separate classes, may, pursuant to Section 603 of the Corporations Code of the State of California elect such directors by unanimous written consent. Upon the election of directors by the Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any) at a meeting of shareholders (or by written consent), the terms of all persons who were directors immediately prior thereto shall terminate and the directors elected by the Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any) together with those elected at such meeting (or by written consent) by the Common Stock shall constitute the directors of the Company until the next annual meeting, unless the terms of such directors shall terminate earlier in accordance with the immediately following sentence. Upon the election of directors by the Common Stock at a meeting of shareholders (or by written consent) after the exclusive right to elect directors has reverted to the Common Stock, the terms of all persons who were directors immediately prior thereto shall terminate and the directors elected by the Common Stock at such meeting (or by written consent) shall constitute the directors of the Company until the next annual meeting, unless earlier removed in accordance with this paragraph (f)(ii)(B). (C) At any meeting held for the purposes of electing directors at which the Holders of Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable) shall have the right, voting together as a single class, to elect directors as aforesaid, the presence in person or by proxy of the holders of at least a majority in voting power of the outstanding shares of 12 Company Preferred Stock (and such Preferred Stock) shall be required to constitute a quorum thereof. (D) Any vacancy occurring in the office of a director elected by the Holders of Company Preferred Stock (and such Preferred Stock) may be filled by the remaining director elected by the Holders of Company Preferred Stock (and such Preferred Stock) unless and until such vacancy shall be filled by the Holders of Company Preferred Stock (and such Preferred Stock) at a meeting of shareholders held in accordance with paragraph (f)(ii)(B). In lieu of electing a director at a meeting of the shareholders in accordance with the foregoing, a majority of the outstanding shares of Company Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any), voting together as a single class, may, pursuant to Sections 305(b) and 603 of the Corporations Code of the State of California, elect such director by written consent. (E) In the event that an event occurs at any time which results in the holders of any Parity Stock having voting rights to elect directors to the Board of Directors, Holders of Company Preferred Stock shall, whether or not such event otherwise constitutes a Voting Rights Triggering Event pursuant to paragraph (f)(ii)(A), have the voting rights set forth in paragraphs (f)(ii)(A) and (f)(ii)(B), and such event shall be deemed (for purposes of this paragraph (f) only) to constitute a Voting Rights Triggering Event. In addition, in the event that during a time in which directors elected by the Holders of Company Preferred Stock pursuant to this paragraph (f)(ii) are serving on the Board of Directors ("Previously-Elected Directors") an event occurs which results in holders of Preferred Stock having voting rights to elect (voting together with the Holders of Company Preferred Stock) at least two directors to the Board of Directors, the Holders of Company Preferred Stock shall vote together, as a single class, with the holders of such Preferred Stock to elect such new directors, and upon the election of the new directors the term of office of the Previously-Elected Directors shall (unless such Previously-Elected Directors are elected as new directors) automatically terminate. (iii) (A) So long as any shares of Company Preferred Stock are outstanding, the Company will not authorize, create or increase the authorized amount of any class or series of Capital Stock or Preferred Stock, the terms of which expressly provide that such class or series will rank senior to the Company Preferred Stock as to dividend rights and rights upon liquidation, winding-up and dissolution of the Company (collectively referred to as "Senior Stock") or Parity Stock without the affirmative vote or consent of Holders of at least two-thirds of the shares 13 of Company Preferred Stock then outstanding, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting. (B) So long as any shares of the Company Preferred Stock are outstanding, the Company will not amend this Certificate of Determination so as to affect adversely the specified rights, preferences, privileges or voting rights of Holders of shares of Company Preferred Stock or to authorize the issuance of any additional shares of the Company Preferred Stock (except to authorize the issuance of additional shares of Company Preferred Stock to be paid as dividends on the Company Preferred Stock, for which no consent shall be necessary) without the affirmative vote or consent of Holders of at least a majority of the issued and then outstanding shares of Company Preferred Stock, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting; provided that this paragraph shall not prohibit the merger of the -------- Company and a Wholly Owned Subsidiary of Holding or the Company incorporated in another state of the United States solely for the purpose of reincorporating the Company to the extent that the surviving corporation issues to Holding shares of a series of Preferred Stock having an aggregate liquidation preference equal to the Liquidation Preference of the Company Preferred Stock outstanding immediately prior to such merger and terms and provisions substantially similar to those of the Company Preferred Stock. (C) Except as required under California law or as set forth in paragraph (f)(iii)(A) or (B) above, (x) the creation, authorization or issuance of any shares of any Junior Stock, Parity Stock or Senior Stock, including the designation of a series thereof within the existing class of Company Preferred Stock, or (y) the increase or decrease in the amount of authorized Capital Stock of any class, including any Company Preferred Stock, shall not require the consent of Holders of Company Preferred Stock and shall not be deemed to affect adversely the rights, preferences, privileges or voting rights of shares of the Company Preferred Stock. (iv) In any case in which the Holders of Company Preferred Stock shall be entitled to vote pursuant to this paragraph (f) or pursuant to law, each Holder of the Company Preferred Stock entitled to vote with respect to such matters shall be entitled to one vote for each share of Company Preferred Stock held. (g) Redemption. (A) The Company may, at its option, redeem the ----------- Company Preferred Stock, in whole but not 14 in part (including in conjunction with, and after giving effect to, a redemption of up to 50% of the outstanding shares of the Company Preferred Stock with the proceeds of a Public Equity Offering by the Company pursuant to clause (B) of paragraph (e)(i) above), at any time, for Company Exchange Debentures; provided, -------- however, that (i) on the date of such redemption there are no accumulated and - ------- unpaid dividends on the Company Preferred Stock (including the dividend payable on such date) that are not paid contemporaneously with such redemption or other contractual impediments to such redemption; (ii) such redemption is permitted under applicable law; (iii) immediately after giving effect to such redemption, no Default (as defined in the Company Exchange Indenture) or Voting Rights Triggering Event, as applicable, shall have occurred and be continuing; and (iv) the Company shall have delivered to the Trustee under the Company Exchange Indenture an opinion of counsel with respect to the due authorization and issuance of the Company Exchange Debentures. (B) Upon any redemption of Company Preferred Stock for Company Exchange Debentures pursuant to this paragraph (g), each Holder of Company Preferred Stock will be entitled to receive, subject to the second succeeding sentence, $1.00 principal amount of Company Exchange Debentures for each $1.00 Liquidation Preference of Company Preferred Stock so redeemed, and an amount in cash equal to a prorated dividend for any partial dividend period. The Company Exchange Debentures will be issued in registered form without coupons. Company Exchange Debentures issued upon redemption of the Company Preferred Stock will be issued in principal amounts of $1,000 and integral multiples thereof to the extent possible, and will also be issued in principal amounts less than $1,000 so that each Holder of Company Preferred Stock will receive certificates representing the entire amount of Company Exchange Debentures to which such Holder's shares of Company Preferred Stock entitle such Holder; provided, -------- however, that the Company may pay cash in lieu of issuing a Company Exchange - ------- Debenture in a principal amount less than $1,000. (ii) Procedures. (A) The Company will send a written notice of ----------- redemption (the "Redemption Notice") by first-class mail to each Holder of record of shares of Company Preferred Stock not fewer than 30 days nor more than 60 days before the date fixed for any redemption (the "Redemption Date") at its registered address and notice, if mailed in the manner herein provided, shall conclusively be presumed to have been given, whether or not the Holder receives such notice; provided, however, that no failure to give such notice nor any -------- ------- deficiency therein shall affect the validity of the procedure for the redemption of any shares of Company Preferred Stock to be redeemed except as to the Holder or Holders to whom the Company has failed to give 15 said notice or except as to the Holder or Holders whose notice was defective; provided further that, in the event of any redemption which is intended to occur - ---------------- in conjunction with a Public Equity Offering by the Company, (i) the Company may provide for a Redemption Date which relates to the consummation of such Public Equity Offering and (ii) the Company shall have the right to revoke such written notice in the event that such related Public Equity Offering is terminated by sending by first-class mail a subsequent written notice to such Holders within two Business Days following such termination. The Redemption Notice shall state: (1) the Redemption Date; (2) that the Holder is to surrender to the Company, in the manner and at the place or places designated, his certificate or certificates representing the shares of Company Preferred Stock to be redeemed; (3) that dividends on the shares of Company Preferred Stock to be redeemed shall cease to accrue on such Redemption Date whether or not certificates representing shares of Company Preferred Stock are surrendered for redemption on such Redemption Date unless the Company shall default in the delivery of the Company Exchange Debentures to Holders of the Company Preferred Stock who have duly surrendered their certificates for redemption in accordance with clause (g)(ii)(C) on or before the Redemption Date; and (4) that interest on the Company Exchange Debentures shall accrue from the Redemption Date whether or not certificates for shares of Company Preferred Stock are surrendered for redemption on such Redemption Date. (B) On and after the Redemption Date, dividends will cease to accrue on the outstanding shares of Company Preferred Stock, and all rights of the Holders of Company Preferred Stock (except the right to receive the Company Exchange Debentures, an amount in cash, to the extent applicable, equal to the accumulated and unpaid dividends to the Redemption Date and, if the Company so elects, cash in lieu of any Company Exchange Debenture that is in a principal amount that is not an integral multiple of $1,000 or in lieu of any fractional share of Company Preferred Stock) will terminate. Subject to clause (g)(ii)(D) below, from and after the Redemption Date, the person entitled to receive the Company Exchange Debentures issuable upon such redemption will be treated for all purposes as the registered holder of such Company Exchange Debentures. 16 (C) On or before the Redemption Date, each Holder of the Company Preferred Stock shall surrender the certificate or certificates representing such shares of Company Preferred Stock, in the manner and at the place designated in the Redemption Notice. Upon surrender in accordance with the Redemption Notice of the certificates representing any shares of Company Preferred Stock so redeemed, duly endorsed (or otherwise in proper form for transfer, as determined by the Company), such shares shall be redeemed by the Company for Company Exchange Debentures received by the Company in accordance with clause g(i)(B). Subject to clause (g)(ii)(D) below, the Company shall pay interest, as applicable, on the Company Exchange Debentures at the rate and on the dates specified therein from the Redemption Date. (D) Anything contained herein to the contrary notwithstanding, no Holder of Company Preferred Stock will be entitled to receive any payment of interest on Company Exchange Debentures or exercise any other right or privilege in respect thereof, until such Holder has surrendered the certificate or certificates evidencing such Holder's Company Preferred Stock in accordance with clause (g)(ii)(C). The Company shall pay all interest which would have accrued on a Holder's Company Exchange Debentures without additional interest, had such Holder surrendered the certificate or certificates evidencing such Holder's Company Preferred Stock on the Redemption Date at the time such certificate or certificates are duly surrendered. (iii) No Redemption in Certain Cases. Notwithstanding the foregoing ------------------------------- provisions of this paragraph (g), the Company shall not be entitled to redeem the Company Preferred Stock for Company Exchange Debentures if such redemption, or any term or provision of the Company Exchange Indenture or the Company Exchange Debentures, or the performance of the Company's obligations under the Company Exchange Indenture or the Company Exchange Debentures, shall violate or conflict with any applicable law or agreement or instrument then binding on the Company or if, at the time of such redemption, the Company is insolvent or would be rendered insolvent by such redemption. (iv) Redemption of Initial Company Preferred Stock for Series B ---------------------------------------------------------- Stock. The Series B Stock will be issued by the Company only in connection with - ------ a redemption offer, on a share for share basis, for the Initial Company Preferred Stock as required pursuant to the Registration Agreement. Each share of Series B Stock issued upon redemption of a share of Initial Company Preferred Stock will be deemed to have the same Liquidation Preference and accrued and unpaid dividends as the share of Initial Company Preferred Stock so redeemed. 17 (h) Redemption at the Option of Holders Upon a Change of Control. ------------------------------------------------------------- (i) Upon the occurrence of a Change of Control (the date of such occurrence being the "Change of Control Date"), each Holder of Company Preferred Stock shall have the right to require the Company to redeem all or any part of such Holder's Company Preferred Stock pursuant to the offer described in paragraph (h)(ii) below (the "Change of Control Offer") at a cash redemption price (the "Change of Control Redemption Price") equal to 101% of the Liquidation Preference thereof, plus payment in cash of accrued and unpaid dividends thereon, if any, to the redemption date (including an amount in cash equal to a prorated dividend for any partial dividend period). (ii) Within 30 days following the date on which the Company knows or reasonably should have known a Change of Control has occurred, the Company shall (a) cause a notice of the Change of Control Offer to be sent at least once to the Dow Jones News Service or similar business news service in the United States and (b) send, by first-class mail, with a copy to the transfer agent, to each Holder of Company Preferred Stock, at such Holder's address appearing in the security register, a notice stating: (A) that a Change of Control has occurred and a Change of Control Offer is being made pursuant to this paragraph (h) and that all Company Preferred Stock timely tendered will be accepted for payment; (B) the Change of Control Redemption Price and the redemption date (the "Change of Control Redemption Date"), which shall be, subject to any contrary requirements of applicable law, a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed; (C) the circumstances and relevant facts regarding the Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to the Change of Control); (D) that any shares of Company Preferred Stock not tendered will continue to accrue dividends; (E) that, unless the Company defaults in making payment therefor, any share of Company Preferred Stock accepted for payment pursuant to the Change of Control Offer shall cease to accrue dividends after the Change of Control Redemption Date; (F) that Holders electing to have any shares of Company Preferred Stock redeemed pursuant to a Change of Control Offer will be required to surrender stock certificates representing such shares of Company Preferred Stock, properly endorsed for transfer, together with such other customary documents as the Company and the Transfer Agent may reasonably request to the Transfer Agent and registrar for the Company Preferred Stock at the address specified in the notice prior to the close of business on the Business Day prior to the Change of Control Redemption Date; (G) that Holders will be entitled to withdraw their election if the Company receives, not later than five Business Days prior to the Change of Control Redemption Date, a telegram, telex, facsimile transmission or letter 18 setting forth the name of the Holder, the number of shares of Company Preferred Stock the Holder delivered for redemption and a statement that such Holder is withdrawing his election to have such shares of Company Preferred Stock redemption; and (H) that Holders whose shares of Company Preferred Stock are redeemed only in part will be issued a new certificate representing the unredeemed shares of Company Preferred Stock. (iii) The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the redemption of Company Preferred Stock pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Certificate of Determination, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this Certificate of Determination by virtue of such compliance. (iv) On the Change of Control Redemption Date the Company shall (A) accept for payment the shares of Company Preferred Stock validly duly tendered pursuant to the Change of Control Offer, (B) pay to the Holders of shares so accepted the redemption price therefor in cash and (C) cancel each surrendered certificate and retire the shares represented thereby. Unless the Company defaults in the payment for the shares of Company Preferred Stock duly tendered pursuant to the Change of Control Offer, dividends will cease to accrue with respect to the shares of Company Preferred Stock tendered and all rights of Holders of such tendered shares will terminate, except for the right to receive payment therefor, on the Change of Control Redemption Date. (v) To accept the Change of Control Offer, the Holder of a share of Company Preferred Stock shall deliver, on or before the 10th day prior to the Change of Control Redemption Date, written notice to the Company (or an agent designated by the Company for such purpose) of such Holder's acceptance, together with certificates evidencing the shares of Company Preferred Stock with respect to which the Change of Control Offer is being accepted, duly endorsed for transfer. (i) Conversion or Exchange. The Holders of shares of Company ----------------------- Preferred Stock shall not have any rights hereunder to convert such shares into or exchange such shares for shares of any other class or classes or of any other series of any class or classes of Capital Stock of the Company. 19 (j) Reissuance of the Company Preferred Stock. Shares of Company ------------------------------------------ Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed, shall not be reissued as shares of Company Preferred Stock and shall (upon compliance with any applicable provisions of the laws of California) have the status of authorized and unissued shares of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of Preferred Stock; provided, however, that so long as any -------- ------- shares of Company Preferred Stock are outstanding, any issuance of such shares must be in compliance with the terms hereof. (k) Business Day. If any payment or redemption shall be required by ------------- the terms hereof to be made on a day that is not a Business Day, such payment or redemption shall be made on the immediately succeeding Business Day. (l) Certain Additional Provisions. The sole remedy to Holders of ------------------------------ Company Preferred Stock in the event that any of the following conditions shall occur, and the sole consequence of any such occurrence, shall be the voting rights described in paragraph (f)(ii). (i) SEC Reports. Notwithstanding that the Company may not be subject ------------ to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the SEC and provide the Holders and, upon request, security analysts of prospective holders of the Company Preferred Stock with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and other reports to be so filed and provided at the times specified for the filing of such information, documents and reports under such Sections; provided, however, -------- ------- that the Company shall not be so obligated to file such information, documents and reports with the SEC if the SEC does not permit such filings. The Company shall file with the SEC and provide Holders and, upon request, security analysts of prospective holders of the Company Preferred Stock with the information, documents and reports described herein whether or not the Exchange Offer Registration Statement has been filed or declared effective. (ii) Limitation on Debt. The Company shall not, and shall not permit ------------------- any Restricted Subsidiary to, Incur, directly or indirectly, any Debt unless, after giving pro forma effect to the application of the proceeds thereof, no Voting Rights Triggering Event would occur as a consequence of such Incurrence or be continuing following such Incurrence and either (a) after giving effect to the Incurrence of such Debt and the application of the proceeds 20 thereof, the Consolidated Interest Coverage Ratio would be greater than 1.75 to 1.00 if such Debt is Incurred from the Issue Date through April 15, 2000, and 2.00 to 1.00 if such Debt is Incurred thereafter or (b) such Debt is Permitted Debt. (iii) Limitation on Restricted Payments. The Company shall not make, ---------------------------------- and shall not permit any Restricted Subsidiary to make, directly or indirectly, any Restricted Payment if at the time of, and after giving pro forma effect to, such proposed Restricted Payment, (a) a Voting Rights Triggering Event shall have occurred and be continuing, (b) the Company could not Incur at least $1.00 of additional Debt pursuant to clause (a) of paragraph (l)(ii) above or (c) the aggregate amount of such Restricted Payment and all other Restricted Payments declared or made since the Issue Date (the amount of any Restricted Payment, if made other than in cash, to be based upon Fair Market Value) would exceed an amount equal to the sum of: (i) 50% of the aggregate amount of Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter during which the Issue Date occurs to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or if the aggregate amount of Consolidated Net Income for such period shall be a deficit, minus 100% of such deficit), (ii) Capital Stock Sale Proceeds, (iii) the amount by which Debt of the Company Incurred after the Issue Date is reduced on the Company's balance sheet upon the conversion or exchange (other than by the Company or a Subsidiary of the Company) subsequent to the Issue Date of any Debt for Parity Stock or Junior Stock (other than Disqualified Stock) of the Company (less the amount of any cash or other Property distributed by the Company or any Restricted Subsidiary upon such conversion or exchange), and (iv) an amount equal to the sum of (A) the net reduction in Investments in any Person other than the Company or a Restricted Subsidiary resulting from dividends, repayments of loans or 21 advances or other transfers of Property, in each case to the Company or any Restricted Subsidiary from such Person, to the extent such dividends, repayments or transfers do not increase the amount of Permitted Investments permitted to be made pursuant to clause (i) of the definition thereof and (B) the portion (proportionate to the Company's equity interest in such Unrestricted Subsidiary) of the Fair Market Value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided, however, that the foregoing sum shall not -------- ------- exceed, in the case of any Person, the amount of Investments previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in such Person, and (v) $7.5 million. Notwithstanding the foregoing limitation, the Company may: (a) pay dividends on its Capital Stock within 60 days of the declaration thereof if, on said declaration date, such dividends could have been paid in compliance with this covenant; provided, however, that at the -------- ------- time of such payment of such dividend, no other Voting Rights Triggering Event shall have occurred and be continuing (or result therefrom); provided -------- further, however, that such dividend shall be included in the calculation ------- ------- of the amount of Restricted Payments; (b) purchase, repurchase, redeem, legally defease, acquire or retire for value Capital Stock of the Company in exchange for, or in an amount not in excess of the proceeds of the substantially concurrent sale of, Parity Stock or Junior Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any of its Subsidiaries for the benefit of their employees); provided, however, -------- ------- that (i) such purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments and (ii) the Capital Stock Sale Proceeds from such exchange or sale shall be excluded from the calculation pursuant to clause (c)(ii) above; (c) purchase, repurchase, redeem, legally defease, acquire or retire for value shares of, or options to purchase shares of, common stock of the Company or Holding from employees or former employees of the 22 Company, Holding or any of their Subsidiaries (or their estates or beneficiaries thereof) upon death, disability, retirement or termination pursuant to the terms of the agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals purchase or sell, or are granted the option to purchase or sell, shares of such common stock (or pay dividends or make loans to Holding for such purpose); provided, however, that (i) the -------- ------- aggregate amount of such purchases, repurchases, redemptions, defeasances, acquisitions or retirements shall not exceed $1.0 million in any year or $5.0 million during the term of the Company Preferred Stock, except that (x) such amounts shall be increased by the aggregate net amount of cash received by the Company after the Issue Date from the sale of such shares to, or the exercise of options to purchase such shares by, employees of Holding, the Company or any of their Subsidiaries and (y) the Company may forgive or return Employee Notes without regard to the limitation set forth in clause (c)(i) above and such forgiveness or return shall not be treated as a Restricted Payment for purpose of determining compliance with such clause (c)(i) and (ii) such purchases, repurchases, defeasances, acquisitions or retirements (but not forgiveness or return of Employee Notes) shall be included in the calculation of the amount of Restricted Payments; and (d) make payments to Helen Hudson Lovaas pursuant to the Merger Agreement in an aggregate amount not to exceed $1.1 million in any fiscal year or $3.3 million during the term of the Company Preferred Stock (plus, in each case, interest due on the unpaid portion of such required payments in accordance with the Merger Agreement); provided, however, that such -------- ------- payments shall be excluded in the calculation of the amount of Restricted Payments. (iv) Limitation on Issuance or Sale of Capital Stock of Restricted ------------------------------------------------------------- Subsidiaries. The Company shall not (a) sell, pledge, hypothecate or otherwise - ------------- dispose of any shares of Capital Stock of a Restricted Subsidiary or (b) permit any Restricted Subsidiary to, directly or indirectly, issue or sell or otherwise dispose of any shares of its Capital Stock, other than (i) directors' qualifying shares, (ii) to the Company or a Wholly Owned Subsidiary or (iii) the disposition of 100% of the Capital Stock of a Restricted Subsidiary; provided -------- that (x) the Company receives consideration at the time of such disposition at least equal to the Fair Market Value of such Restricted Subsidiary, (y) at least 75% of the consideration paid to the Company in connection with such disposition is in the 23 form of cash or cash equivalents or the assumption by the purchaser of liabilities of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Company Preferred Stock) as a result of which the Company and the Restricted Subsidiaries are no longer obligated with respect to such liabilities, and (z) the Net Available Cash received by the Company from such disposition is applied within twelve months from the date of the receipt of such Net Available Cash to prepay, repay, legally defease or purchase Debt of the Company or any Restricted Subsidiary (excluding, in any such case, Disqualified Stock and Debt owed to the Company or an Affiliate of the Company) or to reinvest in Additional Assets (including by means of an Investment in Additional Assets by the Company or a Restricted Subsidiary with Net Available Cash received by the Company). (v) Limitation on Restrictions on Distributions from Restricted ----------------------------------------------------------- Subsidiaries. The Company shall not, and shall not permit any Restricted - ------------- Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist any consensual restriction on the right of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, or pay any Debt or other obligation owed, to the Company or any other Restricted Subsidiary (except, with respect to restrictions on dividends of non-cash Property, as permitted pursuant to clause (ii) of the next sentence), (b) make any loans or advances to the Company or any other Restricted Subsidiary or (c) transfer any of its Property to the Company or any other Restricted Subsidiary. The foregoing limitations will not apply (i) with respect to clauses (a), (b) and (c), to restrictions (A) in effect on the Issue Date, (B) pursuant to the Credit Facility, (C) relating to Debt of a Restricted Subsidiary and existing at the time it became a Restricted Subsidiary if such restriction was not created in connection with or in anticipation of the transaction or series of transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company or (D) which result from the Refinancing of Debt Incurred pursuant to an agreement referred to in clause (i)(A) or (B) above or in clause (ii)(A) or (B) below, provided such restriction is no less favorable to the holders of the Company - -------- Preferred Stock than those under the agreement evidencing the Debt so Refinanced, and (ii) with respect to clause (c) only, to restrictions (A) encumbering Property at the time such Property was acquired by the Company or any Restricted Subsidiary, so long as such restriction relates solely to the Property so acquired and was not created in connection with or in anticipation of such acquisition, (B) resulting from customary provisions restricting subletting or assignment of leases or customary provisions in other agreements that restrict assignment of such 24 agreements or rights thereunder or (C) customary restrictions contained in asset sale agreements limiting the transfer of such Property pending the closing of such sale. (vi) Limitation on Transactions with Affiliates. The Company shall ------------------------------------------- not, and shall not permit any Restricted Subsidiary to, directly or indirectly, conduct any business or enter into or suffer to exist any transaction or series of transactions (including the purchase, sale, transfer, assignment, lease, conveyance or exchange of any Property or the rendering of any service) with, or for the benefit of, any Affiliate of the Company (an "Affiliate Transaction"), unless (a) the terms of such Affiliate Transaction are (i) set forth in writing, (ii) in the interest of the Company or such Restricted Subsidiary, as the case may be, and (iii) no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could be obtained in a comparable arm's-length transaction with a Person that is not an Affiliate of the Company, (b) if such Affiliate Transaction involves aggregate payments or value in excess of $2.5 million, the Board of Directors (including a majority of the disinterested members of the Board of Directors, if any) approves such Affiliate Transaction and, in its good faith judgment, believes that such Affiliate Transaction complies with clauses (a) (ii) and (iii) of this paragraph as evidenced by a Board Resolution promptly delivered to the Transfer Agent and (c) if such Affiliate Transaction involves aggregate payments or value in excess of $5.0 million, the Company obtains a written opinion from an Independent Appraiser to the effect that the consideration to be paid or received in connection with such Affiliate Transaction is fair, from a financial point of view, to the Company or such Restricted Subsidiary, as the case may be. Notwithstanding the foregoing limitation, the Company or any Restricted Subsidiary may enter into or suffer to exist the following: (i) any transaction or series of transactions between the Company and one or more Restricted Subsidiaries or between two or more Restricted Subsidiaries in the ordinary course of business; provided that no more than -------- 5% of the total voting power of the Voting Stock (on a fully diluted basis) of any such Restricted Subsidiary is owned by an Affiliate of the Company (other than a Restricted Subsidiary); (ii) any Restricted Payment permitted to be made pursuant to paragraph (l)(iii) above;. (iii) the payment of compensation (including amounts paid pursuant to employee benefit plans) for the personal services of officers, directors and 25 employees of the Company or any of the Restricted Subsidiaries, so long as the Board of Directors in good faith shall have approved the terms thereof and deemed the services theretofore or thereafter to be performed for such compensation to be fair consideration therefor; (iv) loans and advances to employees made in the ordinary course of business and consistent with the past practices of the Company or such Restricted Subsidiary, as the case may be; provided that such loans and -------- advances do not exceed $1.0 million in the aggregate at any one time outstanding; (v) the payment of fees and expenses in connection with the Recapitalization pursuant to written agreements in effect on the Issue Date; (vi) the sale of common stock of the Company for cash; provided, that -------- the Company may receive Employee Notes in an aggregate principal amount not in excess of $1.0 million at any one time outstanding; (vii) the payment of dividends in kind in respect of (i) the Mirror Preferred Stock or (ii) any other Preferred Stock issued in compliance with this covenant; and (viii) a proportionate split of, or a common stock dividend payable on, the common stock of the Company. (vii) Designation of Restricted and Unrestricted Subsidiaries. The -------------------------------------------------------- Board of Directors may designate any Subsidiary of the Company (other than any Subsidiary of the Company designated as a Restricted Subsidiary under the Indenture governing the Notes) to be an Unrestricted Subsidiary if (a) the Subsidiary to be so designated does not own any Capital Stock or Debt of, or own or hold any Lien on any Property of, the Company or any other Restricted Subsidiary, (b) the Subsidiary to be so designated is not obligated under any Debt, Lien or other obligation that, if in default, would result (with the passage of time or notice or otherwise) in a default on any Debt of the Company or of any Restricted Subsidiary and (c) either (i) the Subsidiary to be so designated has total assets of $1,000 or less or (ii) such designation is effective immediately upon such entity becoming a Subsidiary of the Company. Unless so designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company will be classified as a Restricted Subsidiary; provided, however, that such Subsidiary shall not be designated a Restricted - -------- ------- Subsidiary and shall be automatically classified as an Unrestricted Subsidiary if either of the requirements set forth in clauses (x) and (y) of the immediately following paragraph 26 will not be satisfied after giving pro forma effect to such classification. Except as provided in the first sentence of this paragraph, no Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary if, immediately after giving pro forma effect to such designation, (x) the Company could Incur at least $1.00 of additional Debt pursuant to clause (a) of paragraph (l)(ii) above and (y) no Voting Rights Triffering Event shall have occurred and be continuing or would result therefrom. Any such designation or redesignation by the Board of Directors will be evidenced to the Transfer Agent by filing with the Transfer Agent a Board Resolution giving effect to such designation or redesignation and an Officers' Certificate (a) certifying that such designation or redesignation complies with the foregoing provisions and (b) giving the effective date of such designation or redesignation, such filing with the Transfer Agent to occur within 45 days after the end of the fiscal quarter of the Company in which such designation or redesignation is made (or, in the case of a designation or redesignation made during the last fiscal quarter of the Company's fiscal year, within 90 days after the end of such fiscal year). (viii) Merger, Consolidation and Sale of Property. The Company shall ------------------------------------------- not merge, consolidate or amalgamate with or into any other Person (other than a merger of a Wholly Owned Subsidiary into the Company) or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all its Property in any one transaction or series of transactions unless: (a) the Company shall be the surviving Person (the "Surviving Person") or the Surviving Person (if other than the Company) formed by such merger, consolidation or amalgamation or to which such sale, transfer, assignment, lease, conveyance or disposition is made shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia; (b) the Surviving Person (if other than the Company) expressly assumes all obligations of the Company under the Company Preferred Stock and this Certificate of Determination; (c) in the case of a sale, transfer, assignment, lease, conveyance or other disposition of all or substantially all the Property of the Company, such Property shall have been transferred as an entirety or virtually as an entirety to one Person; (d) immediately before and after giving effect to such transaction or series of transactions on a pro forma basis (and treating, for purposes of this clause (d) and clauses (e) and (f) below, any Debt which becomes, or is anticipated to become, an obligation of the Surviving Person or any Restricted Subsidiary as a result of such transaction or series of 27 transactions as having been Incurred by the Surviving Person or such Restricted Subsidiary at the time of such transaction or series of transactions), no Voting Rights Triggering Event shall have occurred and be continuing; (e) immediately after giving effect to such transaction or series of transactions on a pro forma basis, the Company or the Surviving Person, as the case may be, would be able to Incur at least $1.00 of additional Debt under clause (a) of the first paragraph of covenant (l)(iv) above, determining compliance thereunder for this purpose based upon the Consolidated Interest Expense, Consolidated Net Income and EBITDA of the Company or the Surviving Person, as the case may be, and its Restricted Subsidiaries; provided, however, that this clause (e) shall not apply to a -------- ------- merger between the Company and a Wholly Owned Subsidiary of the Company solely for the purpose of reincorporating the Company in another state of the United States so long as the total amount of Debt of the Company and its Restricted Subsidiaries is not increased as a result thereof; and (f) the Company shall deliver, or cause to be delivered, to the Transfer Agent, in form and substance reasonably satisfactory to the Transfer Agent, an Officers' Certificate and an Opinion of Counsel, each stating that such transaction complies with this covenant and that all conditions precedent herein provided for relating to such transaction have been satisfied. (m) Certificates. (i) Form and Dating. The Company Preferred Stock ------------- ---------------- and the Transfer Agent's Countersignature shall be substantially in the form of Exhibit A, which is hereby incorporated in and expressly made a part of this Certificate of Determination. The Company Stock certificate may have notations, legends or endorsements required by law, stock exchange rules, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). Each Company Preferred Stock certificate shall be dated the date of its countersignature. The terms of the Company Preferred Stock certificate set forth in Exhibit A are part of the terms of this Certificate of Determination. Notwithstanding any of the provisions of this paragraph (m) to the contrary, the rights, preferences, privileges and restrictions of each share of Company Preferred Stock shall be equal in all respects to each other share of Company Preferred Stock, except with respect to restrictions and other matters that may be imposed by applicable federal securities laws. (A) Global Company Preferred Stock. Rule 144A Company Preferred ------------------------------- Stock shall be issued initially in the form of one or more permanent global securities in definitive, fully registered form (collectively, the "Rule 144A Global Company Preferred Stock") and Regulation S Company Preferred Stock shall, to the extent required pursuant to paragraph (C)(3)(ii)(B) of Rule 903 under 28 Regulation S under the Securities Act, be issued initially in the form of one or more temporary global securities (collectively, the "Temporary Regulation S Global Company Preferred Stock"), and, to the extent permitted pursuant to paragraph (C)(3)(ii)(B) of such Rule 903, shall be issued initially in the form of one or more permanent global securities in definitive, fully registered form (collectively, the "Permanent Regulation S Global Company Preferred Stock"), in each case without coupons with the global securities legend and restricted securities legend set forth in Exhibit A hereto, which shall be deposited on behalf of the purchasers of the Initial Company Preferred Stock represented thereby with the Transfer Agent, at its New York office, as custodian for DTC (or with such other custodian as DTC may direct), and registered in the name of DTC or a nominee of DTC, duly executed by the Company and countersigned by the Transfer Agent as hereinafter provided. Beneficial ownership interests in Temporary Regulation S Global Company Preferred Stock will not be exchangeable for interests in the Rule 144A Global Company Preferred Stock, the Permanent Regulation S Global Company Preferred Stock, or any other security without a legend containing restrictions on transfer until the expiration of the Restricted Period and then only upon certification in form reasonably satisfactory to the Transfer Agent that beneficial ownership interests in such Temporary Regulation S Global Company Preferred Stock are owned either by non- U.S. persons or U.S. persons who purchased such interests in a transaction that did not require registration under the Securities Act. The Rule 144A Global Company Preferred Stock, Temporary Regulation S Global Company Preferred Stock and Permanent Regulation S Global Company Preferred Stock are collectively referred to herein as "Global Company Preferred Stock." Subject to the terms hereof and to the requirements of applicable law, the number of shares of Company Preferred Stock represented by Global Company Preferred Stock may from time to time be increased or decreased by adjustments made on the records of the Transfer Agent and DTC or its nominee as hereinafter provided. The Transfer Agent shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Certificate of Determination or under applicable law with respect to any transfer of any interest in the Company Preferred Stock (including any transfers between or among DTC participants, members or beneficial owners in any Global Company Preferred Stock) other than to require delivery of such certificates and other documentation or evidence as are expressly required by the terms of this Certificate of Determination, and to examine the same to determine substantial compliance as to form with the express requirements hereof. (B) Book-Entry Provisions. In the event Global Company Preferred ---------------------- Stock is deposited with or on behalf of 29 DTC, the Company shall execute and the Transfer Agent shall countersign and deliver initially one or more Global Company Preferred Stock certificates that (a) shall be registered in the name of DTC for such Global Company Preferred Stock or the nominee of DTC and (b) shall be delivered by the Transfer Agent to DTC or pursuant to DTC's instructions or held by the Transfer Agent as custodian for DTC. Members of, or participants in, DTC ("Agent Members") shall have no rights under this Certificate of Determination with respect to any Global Company Preferred Stock held on their behalf by DTC or by the Transfer Agent as the custodian of DTC or under such Global Company Preferred Stock, and DTC may be treated by the Company, the Transfer Agent and any agent of the Company or the Transfer Agent as the absolute owner of such Global Company Preferred Stock for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Transfer Agent or any agent of the Company or the Transfer Agent from giving effect to any written certification, proxy or other authorization furnished by DTC or impair, as between DTC and its Agent Members, the operation of customary practices of DTC governing the exercise of the rights of a holder of a beneficial interest in any Global Company Preferred Stock. (C) Definitive Securities. Except as provided by applicable law or ---------------------- as provided in this paragraph (m)(i) or in paragraph (m)(iii), owners of beneficial interests in Global Company Preferred Stock will not be entitled to receive physical delivery of certificated Company Preferred Stock. (ii) Execution and Countersignature. Two Officers shall sign the ------------------------------- certificates representing the Company Preferred Stock for the Company by manual or facsimile signature. The Company's seal shall be impressed, affixed, imprinted or reproduced on the Company Preferred Stock and may be in facsimile form. If an Officer whose signature is on certificates representing the Company Preferred Stock no longer holds that office at the time the Transfer Agent countersigns the Company Preferred Stock evidenced thereby, the shares of Company Preferred Stock evidenced thereby shall be valid nevertheless. A certificate representing the Company Preferred Stock shall not be valid until an authorized signatory of the Transfer Agent manually countersigns the Company Preferred Stock. The signature shall be conclusive evidence that the Company Preferred Stock has been countersigned under this Certificate of Determination. 30 The Transfer Agent shall countersign and deliver a number of shares of Initial Company Preferred Stock and Series B Stock equal to the aggregate number of shares of Holding Preferred Stock for which such Company Preferred Stock is exchanged for issue only in a Registered Exchange Offer pursuant to the Registration Agreement, in each case upon a written order of the Company signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of the Company. In addition, the Transfer Agent shall countersign and deliver, from time to time, Additional Shares for original issue upon order of the Company signed by two Officers or by an Officer or either an Assistant Treasurer or Assistant Secretary of the Company. Such orders shall specify the number of shares of the Company Preferred Stock to be countersigned and the date on which the original issue of Company Preferred Stock is to be countersigned and whether the Company Preferred Stock is to be Initial Company Preferred Stock or Series B Stock. The Transfer Agent may appoint an countersigning agent reasonably acceptable to the Company to countersign the Company Preferred Stock. Unless limited by the terms of such appointment, a countersigning agent may countersign the Company Preferred Stock whenever the Transfer Agent may do so. Each reference in this Certificate of Determination to countersign by the Transfer Agent includes countersign by such agent. An countersigning agent has the same rights as the Transfer Agent or agent for service of notices and demands. (iii) Transfer and Exchange. (A) Transfer and Exchange of ---------------------- ------------------------ Definitive Company Preferred Stock. When Definitive Company Preferred Stock is - ----------------------------------- presented to the Transfer Agent with a request to register the transfer of such Definitive Company Preferred Stock or to exchange such Definitive Company Preferred Stock for an equal number of shares of Definitive Company Preferred Stock of other authorized denominations, the Transfer Agent shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Definitive Company -------- ------- Preferred Stock surrendered for transfer or exchange: (1) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Transfer Agent, duly executed by the Holder thereof or its attorney duly authorized in writing; and (2) is being transferred or exchanged pursuant to an effective registration statement under the Securities Act or pursuant to clause (I) or (II) below, 31 and are accompanied by the following additional information and documents, as applicable: (I) if such Definitive Company Preferred Stock is being delivered to the Transfer Agent by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect in substantially the form of Exhibit B hereto; or (II) if such Definitive Company Preferred Stock is being transferred to the Company or to a "qualified institutional buyer" ("QIB") in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 or Regulation S under the Securities Act, a certification to that effect (in substantially the form of Exhibit B hereto). (B) Restrictions on Transfer of Definitive Company Preferred Stock -------------------------------------------------------------- for a Beneficial Interest in Global Company Preferred Stock. Definitive Company - ------------------------------------------------------------ Preferred Stock may not be exchanged for a beneficial interest in Global Company Preferred Stock except upon satisfaction of the requirements set forth below. Upon receipt by the Transfer Agent of Definitive Company Preferred Stock, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Transfer Agent, together with: (1) certification that such Definitive Company Preferred Stock is being transferred (A) to a QIB in accordance with Rule 144A, (B) to an institution that is an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act that has furnished to the Transfer Agent a signed letter in the form of Exhibit B hereto or (C) outside the United States in an offshore transaction within the meaning of Regulation S and in compliance with Rule 904 under the Securities Act; and (2) written instructions directing the Transfer Agent to make, or to direct DTC to make, an adjustment on its books and records with respect to such Global Company Preferred Stock to reflect an increase in the number of shares of Company Preferred Stock represented by the Global Company Preferred Stock, then the Transfer Agent shall cancel such Definitive Company Preferred Stock and cause, or direct DTC to cause, in accordance with the standing instructions and procedures existing between DTC and the Transfer Agent, the number of shares of Company Preferred Stock represented by the Global Company Preferred Stock to be increased accordingly. If no Global Company Preferred Stock is then outstanding, the 32 Company shall issue and the Transfer Agent shall countersign, upon written order of the Company in the form of an Officers' Certificate, a new Global Company Preferred Stock representing the appropriate number of shares. (C) Transfer and Exchange of Interests in Global Company Preferred -------------------------------------------------------------- Stock. The transfer and exchange of beneficial interests in Global Company - ------ Preferred Stock or beneficial interests therein shall be effected through DTC, in accordance with this Certificate of Determination (including applicable restrictions on transfer set forth herein, if any) and the procedures of DTC therefor. (D) Transfer of a Beneficial Interest in Temporary Regulation S ----------------------------------------------------------- Global Company Preferred Stock for interests in other Company Preferred Stock. - ------------------------------------------------------------------------------ During the Restricted Period, beneficial ownership interests in Temporary Regulation S Global Company Preferred Stock (if any) may not be exchanged for interests in any other Global Company Preferred Stock or Definitive Company Preferred Stock. Thereafter, such beneficial ownership interests may be so exchanged only upon delivery to the Company and the Transfer Agent of a certificate in form and substance satisfactory to them certifying that the beneficial owner of the Temporary Regulation S Global Company Preferred Stock is either a non-U.S. person or a U.S. person who purchased such beneficial ownership interests in a transaction that did not require registration under the Securities Act, as provided in paragraph (C)(3)(ii)(B) of Rule 903 under Regulation S under the Securities Act. (E) (i) Restrictions on Transfer and Exchange of Global Company ------------------------------------------------------- Preferred Stock. Notwithstanding any other provisions of this Certificate of - ---------------- Determination, Global Company Preferred Stock may not be transferred as a whole except by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such nominee to a successor depository or a nominee of such successor depository. (ii) Restrictions on Transfer of Temporary Regulation S Global --------------------------------------------------------- Company Preferred Stock Interests. During the Restricted Period, beneficial - ---------------------------------- ownership interests in Temporary Regulation S Global Company Preferred Stock may only be sold, pledged or transferred through Euroclear or Cedel in accordance with the Applicable Procedures and only (i) to the Company, (ii) so long as such security is eligible for resale pursuant to Rule 144A under the Securities Act ("Rule 144A"), to a person whom the selling Holder reasonably believes is a "qualified institutional buyer" ("QIB") as defined in Rule 144A that purchases for its own account or for the account of a QIB to whom notice 33 is given that the resale, pledge or transfer is being made in reliance on Rule 144A, (iii) in an offshore transaction in accordance with Regulation S, (iv) pursuant to an exemption from registration under the Securities Act provided by Rule 144 (if applicable) under the Securities Act, or (v) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. During the Restricted Period, interests in the Temporary Regulation S Global Company Preferred Stock may not be transferred to institutions that are "Accredited Investors" (but not QIBs) as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. (F) Countersignature of Definitive Company Preferred Stock. If at ------------------------------------------------------- any time: (1) DTC notifies the Company that DTC is unwilling or unable to continue as depository for the Global Company Preferred Stock and a successor depository for the Global Company Preferred Stock is not appointed by the Company within 90 days after delivery of such notice; (2) DTC ceases to be a clearing agency registered under the Exchange Act; (3) The Company, in its sole discretion, notifies the Transfer Agent in writing that it elects to cause the issuance of Definitive Company Preferred Stock under this Certificate of Determination, then the Company will execute, and the Transfer Agent, upon receipt of a written order of the Company signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of the Company requesting the countersign and delivery of Definitive Company Preferred Stock to the persons designated by the Company, will countersign and deliver Definitive Company Preferred Stock equal to the number of shares of Company Preferred Stock represented by the Global Company Preferred Stock, in exchange for such Global Company Preferred Stock. Definitive Company Preferred Stock issued in exchange for a beneficial interest in a Global Company Preferred Stock shall be registered in such names and in such authorized denominations as DTC, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Transfer Agent. The Transfer Agent shall mail or deliver such Definitive Company Preferred Stock to the persons in whose names such Company Preferred Stock are so registered in accordance with the instructions of DTC. (G) Legend. (1) Except as permitted by the following paragraph (2), ------- each certificate evidencing the 34 Global Company Preferred Stock and the Definitive Company Preferred Stock (and all Company Preferred Stock issued in exchange therefor or substitution thereof) shall bear a legend in substantially the following form: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE SECOND ANNIVERSARY OF THE ISSUANCE HEREOF (OR OF A PREDECESSOR SECURITY HERETO) OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF THE ISSUER AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE ISSUER, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), (3) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY) PROVIDED THAT A CERTIFICATE WHICH MAY BE OBTAINED FROM THE ISSUER IS DELIVERED BY CERTAIN TRANSFEREES TO THE ISSUER, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a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o)(2) OF RULE 902 UNDER) REGULATION S UNDER THE SECURITIES ACT." (2) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by Global Company Preferred Stock) pursuant to Rule 144 under the Securities Act or an effective registration statement under the Securities Act: (I) in the case of any Transfer Restricted Security that is a Definitive Company Preferred Stock, the Transfer Agent shall permit the Holder thereof to exchange such Transfer Restricted Security for a Definitive Company Preferred Stock that does not bear the legend set forth above and rescind any restriction on the transfer of such Transfer Restricted Security; and (II) in the case of any Transfer Restricted Security that is represented by a Global Company Preferred Stock, the Transfer Agent shall permit the Holder thereof to exchange such Transfer Restricted Security for interests in an Unrestricted Global Preferred Stock Security that does not bear the legend set forth above and rescind any restriction on the transfer of such Transfer Restricted Security, if the Holder's request for such exchange was made in reliance on Rule 144 and the Holder certifies to that effect in writing to the Transfer Agent (such certification to be in the form and substance satisfactory to the Transfer Agent). (3) In the case of any Restricted or Unrestricted Global Security that represents the Initial Company Preferred Stock, the Transfer Agent shall permit the Holder thereof to exchange such Restricted or Unrestricted Global Security for a new global security representing Series B Stock that does not bear the legend set forth above. 36 (H) Cancelation or Adjustment of Global Company Preferred Stock. At ------------------------------------------------------------ such time as all beneficial interests in Global Company Preferred Stock have either been exchanged for Definitive Company Preferred Stock, redeemed, repurchased or canceled, such Global Company Preferred Stock shall be returned to DTC for cancelation or retained and canceled by the Transfer Agent. At any time prior to such cancelation, if any beneficial interest in Global Company Preferred Stock is exchanged for Definitive Company Preferred Stock, redeemed, repurchased or canceled, the number of shares of Company Preferred Stock represented by such Global Company Preferred Stock shall be reduced and an adjustment shall be made on the books and records of the Transfer Agent with respect to such Global Company Preferred Stock, by the Transfer Agent or DTC, to reflect such reduction. (I) Obligations with Respect to Transfers and Exchanges of Company -------------------------------------------------------------- Preferred Stock. (1) To permit registrations of transfers and exchanges, the - ---------------- Company shall execute and the Transfer Agent shall countersign Definitive Company Preferred Stock and Global Company Preferred Stock as required pursuant to the provisions of this paragraph (iii). (2) All Definitive Company Preferred Stock and Global Company Preferred Stock issued upon any registration of transfer or exchange of Definitive Company Preferred Stock or Global Company Preferred Stock shall be the valid obligations of the Company, entitled to the same benefits under this Certificate of Determination as the Definitive Company Preferred Stock or Global Company Preferred Stock surrendered upon such registration of transfer or exchange. (3) Prior to due presentment for registration of transfer of any shares of Company Preferred Stock, the Transfer Agent and the Company may deem and treat the person in whose name such shares of Company Preferred Stock are registered as the absolute owner of such Company Preferred Stock and neither the Transfer Agent nor the Company shall be affected by notice to the contrary. (4) No service charge shall be made to a Holder for any registration of transfer or exchange upon surrender of any Company Preferred Stock Certificate at the office of the Transfer Agent maintained for that purpose. However, the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Company Preferred Stock Certificates. 37 (5) Upon any sale or transfer of shares of Company Preferred Stock (including any Company Preferred Stock represented by a Global Company Preferred Stock Certificate) pursuant to an effective registration statement under the Securities Act, pursuant to Rule 144 under the Securities Act or pursuant to an opinion of counsel reasonably satisfactory to the Company that no legend is required: (A) in the case of any Definitive Company Preferred Stock, the Transfer Agent shall permit the Holder thereof to exchange such Company Preferred Stock for Definitive Company Preferred Stock that does not bear the legend set forth in paragraph (iii)(G) above and rescind any restriction on the transfer of such Company Preferred Stock; and (B) in the case of any Global Company Preferred Stock, such Company Preferred Stock shall not be required to bear the legend set forth in paragraph (m)(iii)(G) above but shall continue to be subject to the provisions of paragraph (m)(iii)(D) hereof. (iv) Replacement Certificates. If a mutilated Company Preferred ------------------------- Stock certificate is surrendered to the Transfer Agent or if the Holder of a Company Preferred Stock certificate claims that the Company Preferred Stock certificate has been lost, destroyed or wrongfully taken, the Company shall issue and the Transfer Agent shall countersign a replacement Company Preferred Stock certificate if the reasonable requirements of the Transfer Agent, the Company and of Section 8-405 of the Uniform Commercial Code as in effect in the State of New York are met. If required by the Transfer Agent or the Company, such Holder shall furnish an indemnity bond sufficient in the judgment of the Company and the Transfer Agent to protect the Company and the Transfer Agent from any loss which either of them may suffer if a Company Preferred Stock certificate is replaced. The Company and the Transfer Agent may charge the Holder for their expenses in replacing a Company Preferred Stock certificate. (v) Temporary Certificates. Until definitive Company Preferred Stock ----------------------- certificates are ready for delivery, the Company may prepare and the Transfer Agent shall countersign temporary the Company Preferred Stock certificates. Temporary the Company Preferred Stock certificates shall be substantially in the form of definitive Company Preferred Stock certificates but may have variations that the Company considers appropriate for temporary Company Preferred Stock certificates. Without unreasonable delay, the Company shall prepare and the 38 Transfer Agent shall countersign definitive Company Preferred Stock certificates and deliver them in exchange for temporary Company Preferred Stock certificates. (vi) Cancelation. (A) In the event the Company shall purchase or ------------ otherwise acquire Definitive Company Preferred Stock, the same shall thereupon be delivered to the Transfer Agent for cancelation. (B) At such time as all beneficial interests in Global Company Preferred Stock have been exchanged for Definitive Company Preferred Stock, redeemed, repurchased or canceled, such Global Company Preferred Stock shall thereupon be delivered to the Transfer Agent for cancelation. (C) The Transfer Agent and no one else shall cancel and, subject to the record retention requirements under the Exchange Act, destroy all Company Preferred Stock certificates surrendered for transfer, exchange, replacement or cancelation and deliver a certificate of such destruction to the Company unless the Company directs the Transfer Agent to deliver canceled Company Preferred Stock certificates to the Company. The Company may not issue new Company Preferred Stock certificates to replace Company Preferred Stock certificates to the extent they evidence Company Preferred Stock which the Company has purchased or otherwise acquired. (n) Additional Rights of Holders. In addition to the rights provided ----------------------------- to Holders under this Certificate of Determination, Holders shall have the rights set forth in the Registration Agreement. (o) Certain Definitions. As used in this Certificate of -------------------- Determination, the following terms shall have the following meanings (and (1) terms defined in the singular have comparable meanings when used in the plural and vice versa, (2) "including" means including without limitation, (3) "or" is not exclusive and (4) an accounting term not otherwise defined has the meaning assigned to it in accordance with United States generally accepted accounting principles as in effect on the Issue Date and all accounting calculations will be determined in accordance with such principles), unless the content otherwise requires: "Additional Assets" means (a) any Property (other than cash, cash equivalents and securities) to be owned by the Company or any Restricted Subsidiary and used in a Related Business; or (b) Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary from any Person other than an Affiliate of the Company; provided, however, that, in the -------- ------- 39 case of clause (b), such Restricted Subsidiary is primarily engaged in a Related Business. "Affiliate" of any specified Person means (a) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person or (b) any other Person who is a director or officer of (i) such specified Person, (ii) any Subsidiary of such specified Person or (iii) any Person described in clause (a) above. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of the covenant described under paragraph (l)(vi) only, "Affiliate" shall also mean any beneficial owner of shares representing 5% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Voting Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. "Asset Sale" means any sale, lease, transfer, issuance or other disposition (or series of related sales, leases, transfers, issuances or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of (a) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares) or (b) any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary (other than, in the case of clauses (a) and (b) above, (i) any disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (ii) any disposition effected in compliance with the first paragraph of the covenant described under paragraph (l)(viii), (iii) any Sale and Leaseback Transaction completed within 180 days following the original acquisition of the subject assets where such Sale and Leaseback Transaction represents the intended financing of Property acquired after the Issue Date and (iv) any disposition or series of related dispositions of assets having a Fair Market Value and sale price of less than $500,000). "Attributable Debt" in respect of a Sale and Leaseback Transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental 40 payments during the remaining term of the lease included in such Sale and Leaseback Transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Average Life" means, as of any date of determination, with respect to any Debt or Preferred Stock, the quotient obtained by dividing (a) the sum of the product of the numbers of years (rounded to the nearest one twelfth of one year) from the date of determination to the dates of each successive scheduled principal payment of such Debt or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (b) the sum of all such payments. "Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "Business Day" means each day which is not a Legal Holiday. "Capital Lease Obligations" means any obligation under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of Debt represented by such obligation shall be the capitalized amount of such obligations determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Capital Stock" means, with respect to any Person, any shares or other equivalents (however designated) of corporate stock, partnership interests or any other participations, rights, warrants, options or other interests in the nature of an equity interest in such Person, including Preferred Stock, but excluding any debt security convertible or exchangeable into such equity interest. "Capital Stock Sale Proceeds" means the aggregate cash proceeds received by the Company from the issuance or sale (other than to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any of its Subsidiaries for the benefit of their employees) by the Company of any class of its Parity Stock and Junior Stock (other than Disqualified Stock) after the Issue Date, net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. 41 "Change of Control" means the occurrence of any of the following events: (a) prior to the first Public Equity Offering, the Permitted Holders cease to be the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of a majority of the voting power of the Voting Stock of the Company, whether as a result of the issuance of securities of the Company, any merger, consolidation, liquidation or dissolution of the Company, any direct or indirect transfer of securities by the Permitted Holders or otherwise (for purposes of this clause (a), the Permitted Holders will be deemed to beneficially own any Voting Stock of a corporation (the "specified corporation") held by any other corporation (the "parent corporation") so long as the Permitted Holders beneficially own, directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of such parent corporation); or (b) after the first Public Equity Offering, any "Person" or "group" (as such terms are used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provisions to either of the foregoing), including any group acting for the purpose of acquiring, holding, voting or disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act, other than any one or more of the Permitted Holders, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 35% or more of the voting power of the Voting Stock of the Company; provided, however, that the Permitted Holders are the "beneficial -------- ------- owners" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, in the aggregate of a lesser percentage of the total voting power of all classes of the Voting Stock of the Company than such other Person or group (for purposes of this clause (b), such Person or group shall be deemed to beneficially own any Voting Stock of a specified corporation held by a parent corporation so long as such Person or group 42 beneficially owns, directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of such parent corporation); or (c) the sale, transfer, assignment, lease, conveyance or other disposition, directly or indirectly, of all or substantially all the assets of the Company and the Restricted Subsidiaries, considered as a whole (other than a disposition of such assets as an entirety or virtually as an entirety to a Wholly Owned Subsidiary or one or more Permitted Holders) shall have occurred, or the Company merges, consolidates or amalgamates with or into any other Person (other than one or more Permitted Holders) or any other Person (other than one or more Permitted Holders) merges, consolidates or amalgamates with or into the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is reclassified into or exchanged for cash, securities or other Property, other than any such transaction where (i) the outstanding Voting Stock of the Company is reclassified into or exchanged for Voting Stock of the surviving corporation and (ii) the holders of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the surviving corporation immediately after such transaction and in substantially the same proportion as before the transaction; or (d) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election or appointment by such Board or whose nomination for election by the shareholders of the Company was approved by a vote of 66% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the Board of Directors then in office; or (e) the shareholders of the Company shall have approved any plan of liquidation or dissolution of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Company Exchange Debentures" means the 11 1/2% Subordinated Exchange Debentures due 2010 of the Company, issuable upon redemption of the Company Preferred Stock. 43 "Company Exchange Indenture" means the Exchange Indenture dated as of April 7, 1998 between the Company and the United States Trust Company of New York, as Trustee, governing the Company Exchange Debentures. "Consolidated Interest Coverage Ratio" means, as of any date of determination, the ratio of (a) the aggregate amount of EBITDA for the most recent four consecutive fiscal quarters ending at least 45 days prior to such determination date to (b) Consolidated Interest Expense for such four fiscal quarters; provided, however, that (i) if the Company or any Restricted -------- ------- Subsidiary has Incurred any Debt since the beginning of such period that remains outstanding or if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio is an Incurrence of Debt, or both, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Debt as if such Debt had been Incurred on the first day of such period and the discharge of any other Debt repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Debt as if such discharge had occurred on the first day of such period, (ii) if since the beginning of such period the Company or any Restricted Subsidiary shall have repaid, repurchased, legally defeased or otherwise discharged any Debt with Capital Stock Sale Proceeds, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such discharge as if such discharge had occurred on the first day of such period, (iii) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Sale or if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio is an Asset Sale, or both, EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the Property which is the subject of such Asset Sale for such period, or increased by an amount equal to the EBITDA (if negative) directly attributable thereto for such period, in either case as if such Asset Sale had occurred on the first day of such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Debt of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Asset Sale, as if such Asset Sale had occurred on the first day of such period (or, if the Capital Stock of any Restricted Subsidiary is sold, by an amount equal to the Consolidated Interest Expense for such period directly attributable to the Debt of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Debt after such sale), (iv) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or 44 otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of Property, including any acquisition of Property occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Debt) as if such Investment or acquisition occurred on the first day of such period and (v) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Sale, Investment or acquisition of Property that would have required an adjustment pursuant to clause (iii) or (iv) above if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Sale, Investment or acquisition occurred on the first day of such period. For purposes of this definition, pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company and as further contemplated by the definition of the term "pro forma". If any Debt bears a floating rate of interest and is being given pro forma effect, the interest expense on such Debt shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Debt if such Interest Rate Agreement has a remaining term in excess of 12 months). "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent Incurred by the Company or its Restricted Subsidiaries, (a) interest expense attributable to capital leases, (b) amortization of debt discount and debt issuance cost, including commitment fees, other than with respect to Debt Incurred in connection with the Recapitalization, (c) capitalized interest, (d) non-cash interest expenses, (e) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (f) net costs associated with Hedging Obligations (including amortization of fees), (g) Disqualified Dividends other than Disqualified Dividends paid with shares of Parity Stock or Junior Stock of the Company which is not Disqualified Stock, (h) Preferred Stock dividends in respect of all Preferred Stock of Restricted Subsidiaries held by Persons other than the Company or a Wholly Owned Subsidiary, (i) interest Incurred in connection with Investments in discontinued operations, (j) interest accruing on any Debt 45 of any other Person to the extent such Debt is Guaranteed by the Company or any Restricted Subsidiary and (k) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Debt Incurred by such plan or trust. "Consolidated Net Income" means, for any period, the net income (loss) of the Company and its consolidated Subsidiaries; provided, however, that there -------- ------- shall not be included in such Consolidated Net Income (a) any net income (loss) of any Person (other than the Company) if such Person is not a Restricted Subsidiary, except that (i) subject to the exclusion contained in clause (d) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to a Restricted Subsidiary, to the limitations contained in clause (c) below) and (ii) the Company's equity in a net loss of any such Person other than an Unrestricted Subsidiary for such period shall be included in determining such Consolidated Net Income, (b) for the purposes of paragraph (l)(iii) only, any net income (loss) of any Person acquired by the Company or any of its consolidated Subsidiaries in a pooling of interests transaction for any period prior to the date of such acquisition, (c) any net income (but not loss) of any Restricted Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions, directly or indirectly, to the Company, except that subject to the exclusion contained in clause (d) below, the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to another Restricted Subsidiary, to the limitation contained in this clause), (d) any gain (or, for purposes of paragraphs (l)(ii) and (l)(viii) only, loss) realized upon the sale or other disposition of any Property of the Company or any of its consolidated Subsidiaries (including pursuant to any Sale and Leaseback Transaction) which is not sold or otherwise disposed of in the ordinary course of business, provided, -------- that any tax benefit or tax liability resulting therefrom shall be excluded in such Consolidated Net Income, (e) any extraordinary gain or loss, provided, that -------- any tax benefit or tax liability resulting therefrom shall be excluded in such Consolidated Net Income, (f) the cumulative effect of a 46 change in accounting principles and (g) (i) any non-cash compensation expense realized for grants of performance shares, stock options or other stock awards to officers, directors and employees of the Company or any Restricted Subsidiary or (ii) compensation expense realized with respect to periods prior to Issue Date in respect of payments under the Company's 1994 Amended and Restated Equity Participation Plan or compensation expense, to the extent accrued in 1998, related to contingent payments to existing managers of the Company pursuant to the Merger Agreement in an aggregate amount not in excess of $2.4 million. Notwithstanding the foregoing, for the purposes of paragraph (l)(iii) only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clause (c)(iv) thereof. "Credit Facility" means, with respect to the Company or any Restricted Subsidiary, one or more debt or commercial paper facilities with banks or other institutional lenders (including the New Credit Facility) providing for revolving credit loans, term loans, receivables or inventory financing (including through the sale of receivables or inventory to such lenders or to special purpose, bankruptcy remote entities formed to borrow from such lenders against such receivables or inventory) or trade letters of credit, in each case together with any amendments, supplements, modifications (including by any extension of the maturity thereof), refinancings or replacements thereof by a lender or syndicate of lenders in one or more successive transactions (including any such transaction that changes the amount available thereunder, replaces such agreement or document, or provides for other agents or lenders). "Currency Exchange Protection Agreement" means, in respect of a Person, any foreign exchange contract, currency swap agreement, currency option or other similar agreement or arrangement designed to protect such Person against fluctuations in currency exchange rates. "Debt" means, with respect to any Person on any date of determination (without duplication), (a) the principal of and premium (if any) in respect of (i) debt of such Person for money borrowed and (ii) debt evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (b) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale and Leaseback Transactions entered into by such Person; (c) all 47 obligations of such Person issued or assumed as the deferred purchase price of Property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (d) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in (a) through (c) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit); (e) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person, any Preferred Stock (but excluding, in each case, any accrued dividends); (f) all obligations of the type referred to in clauses (a) through (e) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee; (g) all obligations of the type referred to in clauses (a) through (t) of other Persons secured by any Lien on any Property of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such Property or the amount of the obligation so secured; and (h) to the extent not otherwise included in this definition, Hedging Obligations of such Person. The amount of Debt of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided that the amount outstanding at any time of any Debt issued with -------- original issue discount is the face amount of such Debt less the remaining unamortized portion of the original issue discount of such Debt at such time as determined in accordance with GAAP. "Disqualified Dividends" means, for any dividend with respect to Disqualified Stock, the quotient of the dividend divided by the difference between one and the maximum statutory federal income tax rate (expressed as a decimal number between 1 and 0) then applicable to the issuer of such Disqualified Stock. "Disqualified Stock" means, with respect to any Person, Redeemable Stock of such Person as to which (i) the maturity, (ii) mandatory redemption or (iii) redemption, repurchase, conversion or exchange at the option of the 48 holder thereof occurs, or may occur, on or prior to the first anniversary of the Stated Maturity of the Company Preferred Stock; provided, however, that -------- ------- Redeemable Stock of such Person that would not otherwise be characterized as Disqualified Stock under this definition shall not constitute Disqualified Stock (a) if such Redeemable Stock is convertible or exchangeable into Debt or Disqualified Stock solely at the option of the issuer thereof or (b) solely as a result of provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Redeemable Stock upon the occurrence of a "change of control" occurring prior to the first anniversary of the Stated Maturity of the Company Preferred Stock, if (x) such repurchase obligation may not be triggered in respect of such Redeemable Stock unless a corresponding obligation also arises with respect to the Company Preferred Stock and (y) no such repurchase or redemption is permitted to be consummated unless and until such Person shall have satisfied all repurchase or redemption obligations with respect to any required purchase offer made with respect to the Company Preferred Stock. "EBITDA" means, for any period, an amount equal to, for the Company and its consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income for such period, plus the following to the extent reducing Consolidated Net Income for such period: (i) the provision for taxes based on income or profits or utilized in computing net loss, (ii) Consolidated Interest Expense, (iii) depreciation, (iv) amortization expense and (v) any other non-cash items (other than any such non-cash item to the extent that it represents an accrual of or reserve for cash expenditures in any future period), minus (b) all non- cash items increasing Consolidated Net Income for such period (other than any such non-cash item to the extent that it will result in the receipt of cash payments in any future period). Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its shareholders. "Employee Notes" means promissory notes of employees of Holding, the Company or any of their Subsidiaries payable to the Company or Holding and received 49 in connection with the substantially concurrent purchase of common stock of the Company or Holding by such employees. "Exchange Act" means the Securities Exchange Act of 1934. "Exchange Offer Registration Statement" means a registration statement of the Company on an appropriate form under the Securities Act with respect to the Registered Exchange Offer, all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Fair Market Value" means, with respect to any Property, the price which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair Market Value will be determined, except as otherwise provided, (a) if such Property has a Fair Market Value equal to or less than $2.5 million, by any Officer of the Company or (b) if such Property has a Fair Market Value in excess of $2.5 million, by a majority of the Board of Directors and evidenced by a Board Resolution, dated within 30 days of the relevant transaction, delivered to the Transfer Agent. "GAAP" means United States generally accepted accounting principles as in effect on the Issue Date, including those set forth (a) in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (b) in the statements and pronouncements of the Financial Accounting Standards Board, (c) in such other statements by such other entity as approved by a significant segment of the accounting profession and (d) the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Debt of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (b) entered 50 into for the purpose of assuring in any other manner the obligee against loss in respect thereof (in whole or in part); provided, however, that the term -------- ------- "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing any obligation. "Hedging Obligation" of any Person means any obligation of such Person pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement or any other similar agreement or arrangement. "Holder" means the person in whose name a share of Company Preferred Stock is registered on the Transfer Agent's books. "Holding" means River Holding Corp., the corporate parent of the Company, and any successor thereto. "IAI" means an institution that is an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "Incur" means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by merger, conversion, exchange or otherwise), extend, assume, Guarantee or become liable in respect of such Debt or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Debt or obligation on the balance sheet of such Person (and "Incurrence" and "Incurred" shall have meanings correlative to the foregoing); provided, -------- however, that a change in GAAP that results in an obligation of such Person that - ------- exists at such time, and is not theretofore classified as Debt, becoming Debt shall not be deemed an Incurrence of such Debt; provided further, however, that ---------------- solely for purposes of determining compliance with paragraph (l)(ii), amortization of debt discount shall not be deemed to be the Incurrence of Debt, provided that in the case of Debt sold at a discount, the amount of such Debt - -------- Incurred shall at all times be the aggregate principal amount at Stated Maturity. "Indenture" means the Indenture dated as of the Issue Date among Holding, the Company and the United States Trust Company of New York, as Trustee, governing the Notes. "Independent Appraiser" means an investment banking firm of national standing or any third party appraiser of national standing, provided that such -------- firm or appraiser is not an Affiliate of the Company. "Industrias Hudson" means Industrias Hudson S.A. de C.V. 51 "Interest Rate Agreement" means, for any Person, any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement designed to protect against fluctuations in interest rates. "Investment" by any Person means any direct or indirect loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of such Person), advance or other extension of credit or capital contribution (by means of transfers of cash or other Property to others or payments for Property or services for the account or use of others, or otherwise) to, or Incurrence of a Guarantee of any obligation of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person. For purposes of paragraphs (l)(iii) and (l)(vii) and the definition of "Restricted Payment", "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such -------- ------- Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary equal to an amount (if positive) equal to (a) the Company's "Investment" in such Subsidiary at the time of such redesignation less (b) the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the time of such redesignation. In determining the amount of any Investment made by transfer of any Property other than cash, such Property shall be valued at its Fair Market Value at the time of such Investment. "Issue Date" means April 7, 1998. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions are not required to be open in the City of New York and Los Angeles. "Lien" means, with respect to any Property of any Person, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property (including any Capital Lease Obligation, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing or any Sale and Leaseback Transaction). 52 "Merger Agreement" means the Amended and Restated Merger Agreement between Holding, River Acquisition Corp., the Company and shareholders of the Company dated as of March 15, 1998, as in effect on the Issue Date. "Mirror Preferred Stock" means the 11 1/2% Senior PIK Preferred Stock due 2010 of the Company. "Moody's" means Moody's Investors Service, Inc. or any successor to the rating agency business thereof. "Net Available Cash" from any Asset Sale or other transaction subject to paragraph (l)(iv) means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Debt or other obligations relating to the Property that is the subject of such transaction or received in any other noncash form), in each case net of (a) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such transaction, (b) all payments made on any Debt which is secured by any Property subject to such transaction, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such Property, or which must by its terms, or in order to obtain a necessary consent to such transaction, or by applicable law, be repaid out of the proceeds from such transaction, (c) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such transaction and (d) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the Property disposed in such transaction and retained by the Company or any Restricted Subsidiary after such transaction. "New Credit Facility" means the credit facilities made available pursuant to the Senior Secured Credit Agreement dated as of the Issue Date among the Company, Holding, the lenders party thereto, Salomon Smith Barney Inc, as Arranger, Advisor and Syndication Agent and Bankers Trust Company, as Administrative Agent. "Notes" means the 9 1/8% Senior Subordinated Notes due 2008 of the Company. "Officer" means the Chief Executive Officer, the President, the Chief Financial Officer or any Executive Vice President of the Company. 53 "Officers' Certificate" means a certificate signed by two Officers of the Company, at least one of whom shall be the principal executive officer or principal financial officer of the Company, and delivered to the Transfer Agent. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Transfer Agent. The counsel may be an employee of or counsel to the Company. "Permitted Debt" means: (a) Debt of the Company evidenced by the Notes and of Subsidiary Guarantors evidenced by Subsidiary Guaranties; (b) (i) Debt under the Credit Facility; provided that the aggregate -------- principal amount of all such Debt under the Credit Facility comprised of (A) term loans at any one time outstanding shall not exceed $40.0 million minus all principal amounts repaid in respect of such term loans and (B) revolving credit loans and obligations at any one time outstanding shall not exceed the greater of (x) $60.0 million and (y) the sum of the amounts equal to (1) 60% of the net book value of the inventory of the Company and the Restricted Subsidiaries and (2) 85% of the net book value of the accounts receivable of the Company and the Restricted Subsidiaries, in each case as of the most recent fiscal quarter ending at least 45 days prior to the date of determination and (ii) Guarantees of Debt under the Credit Facility; (c) Debt in respect of Capital Lease Obligations and Purchase Money Debt, provided that (i) the aggregate principal amount of such Debt does -------- not exceed the Fair Market Value (on the date of the Incurrence thereof) of the Property acquired, constructed or leased (including costs of installation, taxes and delivery charges with respect to such acquisition, construction or lease) and (ii) the aggregate principal amount of all Debt Incurred and then outstanding pursuant to this clause (c) (together with all Permitted Refinancing Debt Incurred in respect of Debt previously Incurred pursuant to this clause (c) and then outstanding) does not exceed $15.0 million; (d) Debt of the Company owing to and held by any Wholly Owned Subsidiary and Debt of a Wholly Owned Subsidiary owing to and held by the Company or any Wholly Owned Subsidiary; provided, however, that any -------- ------- subsequent issue or transfer of Capital Stock or other event that results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of any such Debt (except to the 54 Company or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Debt by the issuer thereof; (e) Debt of a Wholly Owned Subsidiary Incurred and outstanding on or prior to the date on which such Wholly Owned Restricted Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary (other than Debt Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of transactions pursuant to which such Wholly Owned Restricted Subsidiary became a Subsidiary of the Company or was otherwise acquired by the Company); provided that at the time such Wholly Owned Restricted -------- Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary and after giving pro forma effect to the Incurrence of such Debt, the Company would have been able to Incur $1.00 of additional Debt pursuant to clause (a) of paragraph (l)(ii); (f) Debt under Interest Rate Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting interest rate risk in the ordinary course of the financial management of the Company or such Restricted Subsidiary and not for speculative purposes, provided that the -------- obligations under such agreements are directly related to payment obligations on Debt otherwise permitted by the terms of paragraph (l)(ii); (g) Debt under Currency Exchange Protection Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting currency exchange rate risks directly related to transactions entered into by the Company or such Restricted Subsidiary in the ordinary course of business and not for speculative purposes; (h) Debt in connection with one or more standby letters of credit or performance bonds issued for the account of the Company or any Restricted Subsidiary in the ordinary course of business or pursuant to self-insurance obligations and not in connection with the borrowing of money or the obtaining of advances; (i) Debt outstanding on the Issue Date not otherwise described in clauses (a) through (h) above; (j) Debt not otherwise described in clauses (a) through (i) above and clause (1) below in an aggregate principal amount outstanding at any one time not to exceed $15.0 million; 55 (k) Permitted Refinancing Debt Incurred in respect of Debt Incurred pursuant to clause (a) of paragraph (l)(ii) and clauses (a), (c), (e) and (i) above, subject, in the case of clause (c) above, to the limitations set forth in the proviso thereto; and (l) Debt of the Company under the Company Exchange Debentures. "Permitted Holders" means Helen Hudson Lovaas, any member of the senior management of the Company or Holding on the Issue Date and Freeman Spogli & Co. Incorporated or any successor entity thereof controlled by the principals of Freeman Spogli & Co. Incorporated or any entity controlled by, or under common control with, Freeman Spogli & Co. Incorporated. "Permitted Investment" means any Investment by the Company or a Restricted Subsidiary in (a) any Restricted Subsidiary or any Person that will, upon the making of such Investment, become a Restricted Subsidiary; provided -------- that the primary business of such Restricted Subsidiary is a Related Business; (b) any Person if as a result of such Investment such Person is merged or consolidated with or into, or transfers or conveys all or substantially all its Property to, the Company or a Restricted Subsidiary; provided that such Person's -------- primary business is a Related Business; (c) Temporary Cash Investments; (d) receivables owing to the Company or a Restricted Subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms -------- ------- may include such concessionary trade terms as the Company or such Restricted Subsidiary deems reasonable under the circumstances; (e) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (f) (i) loans and advances to employees made in the ordinary course of business consistent with past practices of the Company or such Restricted Subsidiary, as the case may be; provided that such loans and -------- advances do not exceed $1.0 million at any one time outstanding and (ii) loans and advances to, or the receipt of Employee Notes from, employees of Holding, the Company or any of their Subsidiaries made or received in connection with the substantially concurrent purchase of common stock of the Company or Holding by such employees; provided that the aggregate principal amount of such loans, -------- ---- advances and notes payable shall not exceed $1.0 million at any one time outstanding; (g) stock, obligations or other securities received in settlement of debts created in the ordinary course of business and owing to the Company or a Restricted Subsidiary or in satisfaction of judgments; (h) any Person to the extent such Investment represents the 56 non-cash portion of the consideration received in connection with a disposition of assets; and (i) Investments in Persons engaged in a Related Business not to exceed $10.0 million at any one time outstanding (it being agreed that an Investment shall cease to be outstanding to the extent of dividends, repayments of loans or advances or other transfers of Property received by the Company or any Restricted Subsidiary from such Persons, provided that such amounts do not -------- increase the amount of Restricted Payments which the Company and the Restricted Subsidiaries may make pursuant to clause (c)(iv)(A) of paragraph (l)(iii)). "Permitted Refinancing Debt" means any Debt that Refinances any other Debt, including any successive Refinancings, so long as (a) such Debt is in an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) not in excess of the sum of (i) the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding of the Debt being Refinanced and (ii) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, related to such Refinancing, (b) the Average Life of such Debt is equal to or greater than the Average Life of the Debt being Refinanced and (c) the Stated Maturity of such Debt is no earlier than the Stated Maturity of the Debt being Refinanced; provided, however, that Permitted Refinancing Debt shall not include -------- ------- (x) Debt of a Subsidiary that Refinances Debt of the Company or (y) Debt of the Company or a Restricted Subsidiary that Refinances Debt of an Unrestricted Subsidiary. "Person" means any individual, corporation, company (including any limited liability company), partnership, joint venture, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock" means any Capital Stock of a Person, however designated, which entitles the holder thereof to a preference with respect to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of any other class of Capital Stock issued by such Person. "pro forma" means, with respect to any calculation made or required to be made pursuant to the terms hereof, a calculation performed in accordance with Article 11 of Regulation S-X promulgated under the Securities Act, as interpreted in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, or otherwise a calculation made in good faith by the Board of Directors after consultation 57 with the independent certified public accountants of the Company, as the case may be. "Property" means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including Capital Stock in, and other securities of, any other Person. "Public Equity Offering" means an underwritten public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act. "Purchase Money Debt" means Debt (a) consisting of the deferred purchase price of property, conditional sale obligations, obligations under any title retention agreement, other purchase money obligations and obligations in respect of industrial revenue bonds, in each case where the maturity of such Debt does not exceed the anticipated useful life of the asset being financed, and (b) Incurred to finance the acquisition or construction by the Company or a Restricted Subsidiary of such asset, including remodeling thereof and additions and improvements thereto; provided, however, that such Debt is Incurred within -------- ------- 180 days after such acquisition of such asset by the Company or a Restricted Subsidiary or completion of such construction, remodeling, addition or improvement, as the case may be. "Redeemable Stock" means, with respect to any Person, any Capital Stock that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable, in either case at the option of the holder thereof) or otherwise (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b) is or may become redeemable or repurchaseable at the option of the holder thereof, in whole or in part, or (c) is convertible or exchangeable, in either case at the option of the holder thereof, for Debt or Disqualified Stock. "Refinance" means, in respect of any Debt, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Debt, in exchange or replacement for, such Debt. "Refinanced" and "Refinancing" shall have correlative meanings. "Registered Exchange Offer" means the proposed offer to the Holders to issue and deliver to such Holders, upon redemption of the Initial Company Preferred Stock a like liquidation preference of Series B Stock. 58 "Registration Agreement" means the Registration Agreement, dated April 7, 1998, among the Company, Holding and Salomon Brothers Inc and BT Alex. Brown Incorporated. "Regulation S Company Preferred Stock" means all Initial Company Preferred Stock offered and sold outside the United States in reliance on Regulation S under the Securities Act. "Related Business" means any business that is related, ancillary or complementary to the businesses of the Company and the Restricted Subsidiaries on the Issue Date. "Restricted Payment" means (a) any dividend or distribution (whether made in cash, securities or other Property) declared or paid on or with respect to any shares of Parity Stock or Junior Stock of the Company or any Capital Stock of any Restricted Subsidiary (including any payment in connection with any merger or consolidation with or into the Company or any Restricted Subsidiary), except for any dividend or distribution which is made solely to the Company or a Restricted Subsidiary (and, if such Restricted Subsidiary is not a Wholly Owned Subsidiary, to the other shareholders of such Restricted Subsidiary on a pro rata basis or on a basis that results in the receipt by the Company or a Restricted Subsidiary of dividends or distributions of greater value than it would receive on a pro rata basis) or any dividend or distribution payable solely in shares of Junior Stock (other than Disqualified Stock) of the Company; (b) the purchase, repurchase, redemption, acquisition or retirement for value of any Parity Stock or Junior Stock of the Company or any Affiliate of the Company (other than from the Company or any Capital Stock of any Restricted Subsidiary) or any securities exchangeable for or convertible into any such Parity Stock, Junior Stock or Capital Stock, including the exercise of any option to exchange any Parity Stock, Junior Stock or Capital Stock (other than for or into Capital Stock of the Company that is not Disqualified Stock); or (c) any Investment (other than Permitted Investments) in any Person. "Restricted Subsidiary" means (a) any Subsidiary of the Company unless such Subsidiary shall have been designated an Unrestricted Subsidiary as permitted or required pursuant to paragraph (l)(vii) and (b) an Unrestricted Subsidiary which is redesignated as a Restricted Subsidiary as permitted pursuant to paragraph (l)(vii). "Rule 144A Company Preferred Stock" means the Initial Company Preferred Stock issued in reliance on Rule 144A under the Securities Act. 59 "S&P" means Standard & Poor's Ratings Service or any successor to the rating agency business thereof. "Sale and Leaseback Transaction" means any arrangement relating to Property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such Property to another Person and the Company or a Restricted Subsidiary leases it from such Person. "Securities Act" means the Securities Act of 1933. "Shelf Registration Statement" means a "shelf" registration statement of the Company pursuant to the provisions of the Registration Agreement which covers the Initial Company Preferred Stock and the Series B Stock on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the SEC, all amendments and supplements to such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless such contingency has occurred). "Subsidiary" means, in respect of any Person, any corporation, company, association, partnership, joint venture or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled directly or indirectly, by (a) such Person, (b) such Person and one or more Subsidiaries of such Person or (c) one or more Subsidiaries of such Person. "Subsidiary Guarantor" means each Subsidiary of the Company that becomes a Subsidiary Guarantor pursuant to the terms of the Notes. "Subsidiary Guaranty" means a Guarantee of the Notes on the terms set forth in the Indenture by a Subsidiary Guarantor of the Company's obligations with respect to the Notes. 60 "Temporary Cash Investments" means any of the following: (a) Investments in U.S. Government Obligations; (b) Investments in time deposit accounts, certificates of deposit and money market deposits maturing within 90 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America or any state thereof having capital, surplus and undivided profits aggregating in excess of $500 million and whose long-term debt is rate "A-3" or "A-" or higher according to Moody's or S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)); (c) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (a) entered into with a bank meeting the qualifications described in clause (b) above; (d) Investments in commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's or "A-" (or higher) according to S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)); (e) direct obligations (or certificates representing an ownership interest in such obligations) of any state of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of such state is pledged and which are not callable or redeemable at the issuer's option, provided that (i) the long-term debt of such state is rated "A- -------- 3" or "A-1" or higher according to Moody's or S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)) and (ii) such obligations mature within 180 days of the date of acquisition thereof; and (f) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (a) through (e) above. "Unrestricted Subsidiary" means (a) any Subsidiary of the Company in existence on the Issue Date that is not a Restricted Subsidiary; (b) any Subsidiary of an Unrestricted Subsidiary; and (c) any Subsidiary of the Company that is designated after the Issue Date as an Unrestricted Subsidiary as permitted or required pursuant to paragraph (l)(vii) and not thereafter redesignated as a Restricted Subsidiary as permitted pursuant thereto. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of 61 America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "Voting Stock" of a corporation means all classes of Capital Stock of such corporation then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means, at any time, a Restricted Subsidiary all the Voting Stock of which (except directors' qualifying shares) is at such time owned, directly or indirectly, by the Company and its other Wholly Owned Subsidiaries. 5. The foregoing Certificate of Determination has been duly approved by the required vote of holders of the Company's Senior PIK Preferred Stock (pursuant to the voting rights of such stock set forth in the Amended and Restated Certificate of Determination for that series). The Company has outstanding 300,000 shares of Senior PIK Preferred Stock. The vote required to approve this Certificate of Determination was more than two-thirds of the outstanding Senior PIK Preferred Stock, and the number of shares voting in favor of this Certificate of Determination equaled or exceeded the vote required. 62 The undersigned each further declares under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of his own knowledge and that this certificate has been executed on April 8, 1998 in Temecula, California. /s/ Richard W. Johansen ------------------------------ Richard W. Johansen, President /s/ Jay R. Ogram ------------------------------ Jay R. Ogram, Chief Financial Officer AMENDED AND RESTATED CERTIFICATE OF DETERMINATION OF HUDSON RESPIRATORY CARE INC. Richard W. Johansen and Jay R. Ogram hereby certify as follows: 1. They are the President and Chief Financial Officer, respectively, of Hudson Respiratory Care Inc., a California corporation (the "Company"). 2. The Certificate of Determination of the Company determining the designations and powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of the Company's 11 1/2% Senior PIK Preferred Stock due 2010, $.01 par value, is amended and restated to read as follows: "WHEREAS, the Articles of Incorporation of the Company authorize the Board of Directors to determine the designations and powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference, of any series of Preferred Stock, and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series. NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby establish a series of Preferred Stock as follows: (a) The designation of such series of Preferred Stock is the 11 1/2% Senior PIK Preferred Stock due 2010, $.01 par value, (the "Senior PIK Preferred Stock"), and the number of shares of such Senior PIK Preferred Stock is 600,000. The liquidation preference of the Senior PIK Preferred Stock shall be $100 per share (the "Liquidation Preference"). (b) The designations and powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference, granted 2 to and imposed upon the Senior PIK Preferred Stock and the holders thereof (the "Holders") shall be as set forth below. (c) Ranking. The Senior PIK Preferred Stock will, with respect to -------- dividend rights and rights on liquidation, winding up and dissolution, rank (i) senior to common stock of the Company and to each other series of Preferred Stock established hereafter by the Board of Directors the terms of which do not expressly provide that it ranks senior to, or on a parity with, the Senior PIK Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution of the Company (collectively referred to, together with common stock of the Company, as "Junior Stock") and (ii) on a parity with each other series of Preferred Stock established hereafter by the Board of Directors, the terms of which expressly provide that such series will rank on a parity with the Senior PIK Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution (collectively referred to as "Parity Stock"). (d) Dividends. (i) Holders of the outstanding shares of Senior PIK ---------- Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors of the Company, out of funds legally available therefor, cumulative preferential dividends on each share of the Senior PIK Preferred Stock at a rate per annum equal to 11 1/2% of the Liquidation Preference of such share, payable semi-annually in arrears (each such semi-annual period being herein called a "Dividend Period") in the manner set forth below. In addition to the dividends described in the preceding sentence, holders of outstanding shares of Senior PIK Preferred Stock will be entitled to additional dividends (the "Additional Dividends"), when, as and if declared by the Board of Directors of the Company, out of funds legally available therefor, with respect to the shares of Senior PIK Preferred Stock, which Additional Dividends shall accrue as follows if any of the following events occur (each such event in clauses (A), (B), (C), and (D) below being herein called a "Registration Default"): (A) if on or prior to June 6, 1998, neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been filed with the Securities and Exchange Commission (the "SEC"); (B) if on or prior to September 5, 1998, neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been declared effective by the SEC; (C) if on or prior to October 5, 1998, neither the Registered Exchange Offer has been consummated nor the Shelf Registration Statement has been declared effective; or (D) after either the Exchange Offer Registration Statement or the Shelf Registration Statement has been declared 3 effective, such Registration Statement thereafter ceases to be effective or usable (in each case except as permitted below) in connection with resales of Holding Preferred Stock in accordance with and during the periods specified herein. Additional Dividends shall accrue on the shares of Senior PIK Preferred Stock from and including the date on which any such Registration Default shall occur, to but excluding the date on which all such Registration Defaults have been cured. Such Additional Dividends will accrue at a rate of 0.25% per annum during the 90-day period immediately following the occurrence of such Registration Default and shall increase by 0.25% per annum at the end of each subsequent 90-day period, but in no event shall the amount of such Additional Dividends exceed 1.00% per annum. A Registration Default referred to in clause (C) of this paragraph (d)(i) shall be deemed not to have occurred and be continuing in relation to a Registration Statement or the related prospectus if (i) such Registration Default has occurred solely as a result of (x) the filing of a post-effective amendment to the Registration Statement to incorporate annual audited financial information with respect to Holding, where such post-effective amendment is not yet effective and needs to be declared effective to permit holders of Holding Preferred Stock to use the related prospectus or (y) other material events with respect to Holding that would need to be described in the Registration Statement or the related prospectus and (ii) in the case of clause (y), Holding proceeds promptly and in good faith to amend or supplement the Registration Statement and related prospectus to describe such events unless Holding has determined in good faith that there are material legal or commercial impediments in doing so; provided, however, that in any case if such Registration Default occurs for a - -------- ------- continuous period in excess of 45 days, Additional Dividends shall be payable in accordance with the immediately preceding paragraphs of this paragraph (d)(i) from the day such Registration Default initially occurs to but excluding the date on which such Registration Default is cured and provided, further, that not -------- ------- more than one Registration Default shall be deemed to have occurred pursuant to clause (y) of this paragraph during any 365-day period. Any amounts of Additional Dividends due pursuant to clauses (A), (B), (C) or (D) of this paragraph (d)(i) or pursuant to the proviso contained in the preceding sentence will be payable on the regular dividend payment dates with respect to the Senior PIK Preferred Stock and on the same terms and conditions and subject to the same limitations as pertain at such time for the payment of regular dividends. 4 The amount of Additional Dividends will be determined by multiplying the applicable Additional Dividends rate by the aggregate Liquidation Preference of the outstanding shares of Senior PIK Preferred Stock, multiplied by a fraction, the numerator of which is the number of days such Additional Dividend rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months), and the denominator of which is 360. All dividends on the Senior PIK Preferred Stock, including Additional Dividends, to the extent accrued, shall be cumulative, whether or not the Company has earnings or profits, whether or not there are funds legally available for the payments of such dividends and whether or not dividends are declared, on a daily basis from the Issue Date or, in the case of additional shares of Senior PIK Preferred Stock issued in payment of a dividend, from the date of issuance of such additional shares of Senior PIK Preferred Stock, and shall be payable semi-annually in arrears on each April 15 and October 15 (each, a "Dividend Payment Date"), commencing on October 15, 1998, to holders of record on the April 1 and October 1 immediately preceding the relevant Dividend Payment Date. Any dividend on the Senior PIK Preferred Stock payable pursuant to this paragraph (d)(i) on or prior to April 15, 2003 shall be, at the option of the Company, payable (1) in cash or (2) through the issuance of a number of additional shares (including fractional shares) of Senior PIK Preferred Stock (the "Additional Shares") equal to the dividend amount divided by the Liquidation Preference of such Additional Shares. With respect to dividends payable after April 15, 2003, all dividends shall be payable solely in cash. (ii) All dividends paid with respect to shares of the Senior PIK Preferred Stock pursuant to this paragraph (d) shall be paid pro rata to the Holders entitled thereto. (iii) No dividend whatsoever may be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Senior PIK Preferred Stock with respect to any Dividend Period unless all dividends for all preceding Dividend Periods have been declared and paid or declared and, if payable in cash, a sufficient sum in cash set apart for the payment of such dividend, upon all outstanding shares of Senior PIK Preferred Stock. (iv) No full dividends may be declared or paid or funds set apart for the payment of dividends by the Company on any Parity Stock for any period unless full cumulative 5 dividends in respect of each Dividend Period ending on or before such period shall have been or contemporaneously are declared and paid in full or declared and, if payable in cash, a sufficient sum in cash set apart for such payment on the Senior PIK Preferred Stock. If full dividends are not so paid, the Senior PIK Preferred Stock will share dividends pro rata with the Parity Stock. (v) The Company will not (A) declare, pay or set apart funds for the payment of any dividend or other distribution with respect to any Junior Stock or (B) repurchase, redeem or otherwise retire any Junior Stock or Parity Stock, nor may funds be set apart for payment with respect thereto, unless all accrued and unpaid dividends with respect to the Senior PIK Preferred Stock at the time such dividends are payable have been paid or funds have been set apart for payment of such dividends, if payable in cash. As used herein, the term "dividend" does not include dividends payable solely in shares of Junior Stock on Junior Stock. (vi) Dividends on account of arrears for any past Dividend Period and dividends in connection with any optional redemption or any mandatory repurchase may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record on such date, not more than 45 days prior to the payment thereof, as may be fixed by the Board of Directors of the Company. (vii) Dividends payable on the Senior PIK Preferred Stock for any period other than a Dividend Period shall be computed on the basis of a 360-day year comprised of twelve 30-day months and the actual number of days elapsed in the period for which payable and will be deemed to accrue on a daily basis. Dividends payable on the Senior PIK Preferred Stock for a full Dividend Period will be computed by dividing the per annum dividend rate by two. (e) Liquidation Preference. (i) Upon any voluntary or involuntary ----------------------- liquidation, dissolution or winding-up of the Company, each Holder of Senior PIK Preferred Stock will be entitled to be paid, out of the assets of the Company available for distribution to its shareholders, an amount equal to the Liquidation Preference per share of Senior PIK Preferred Stock held by such Holder, plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends (whether or not declared and including Additional Dividends, if any) thereon to the date fixed for liquidation, dissolution or winding-up (including, without duplication, an amount equal to a prorated dividend for the period from the last Dividend 6 Payment Date to the date fixed for liquidation, dissolution or winding up that would have been payable had the Senior PIK Preferred Stock been the subject of an Optional Redemption on such date) before any distribution is made on any Junior Stock, including, without limitation, common stock of the Company. If, upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the amounts payable with respect to the holders of the Senior PIK Preferred Stock and all Parity Stock are not paid in full, the holders of the Senior PIK Preferred Stock and the Parity Stock will share equally and ratably (in proportion to the full liquidation preference and accumulated and unpaid dividends that would be payable on such shares of Senior PIK Preferred Stock and the Parity Stock, respectively, if all amounts payable thereon had been paid in full) in any distribution of assets of the Company to which each is entitled. After payment of the full amount of the Liquidation Preference of the outstanding shares of Senior PIK Preferred Stock (plus all accumulated and unpaid dividends), the holders of shares of Senior PIK Preferred Stock will not be entitled to any further participation in any distribution of assets of the Company. (ii) For the purposes of this paragraph (e), neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more other entities shall be deemed to be a liquidation, dissolution or winding-up of the Company. (f) Redemption. (i) Optional Redemption. (A) Except as set forth in ---------- ------------------- clause (B) below, the Senior PIK Preferred Stock shall not be redeemable at the option of the Company prior to April 15, 2003. On or after April 15, 2003, each share of the Senior PIK Preferred Stock may be redeemed at any time or from time to time, in whole or in part, at the option of the Company, at the redemption prices (expressed as a percentage of the Liquidation Preference of such share) set forth below, plus, without duplication, an amount in cash equal to all accrued and unpaid dividends to the date fixed for redemption (an "Optional Redemption Date") (including, without duplication, an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Optional Redemption Date) (the "Optional Redemption Price"), if redeemed during the 12-month period beginning April 15 of each of the years set forth below:
YEAR IN WHICH REDEMPTION OCCURS PERCENTAGE --------------------- ----------- 2003................................. 105.750%
7
YEAR IN WHICH REDEMPTION OCCURS PERCENTAGE ----------------- ---------- ................................... 2005.................................. 103.450 2006.................................. 102.300 2007.................................. 101.150 2008 and thereafter................... 100.000
(B) At any time prior to April 15, 2001, the Company may redeem at its option (i) up to 50% or (ii) all but not less than all of the outstanding shares of Senior PIK Preferred Stock with the net proceeds of any Public Equity Offering by the Company at a redemption price (expressed as a percentage of the Liquidation Preference per share thereof) of 111.5% plus accumulated and unpaid dividends (including, without duplication, an amount in cash equal to a prorated dividend for any partial dividend period). Any such redemption shall be made upon consummation of such Public Equity Offering upon not less than 30 nor more than 60 days' notice. (C) In the event of a redemption of only a portion of the then outstanding shares of Senior PIK Preferred Stock, the Company shall effect such redemption on a pro rata basis, except that the Company may redeem all of the shares held by Holders of fewer than 100 shares (or all of the shares held by Holders who would hold less than 100 shares as a result of such redemption), as may be determined by the Company. (ii) Mandatory Redemption. Each share of the Senior PIK Preferred --------------------- Stock (if not earlier redeemed or exchanged) shall be subject to mandatory redemption in whole (to the extent of lawfully available funds therefor) on April 15, 2010 (the "Mandatory Redemption Date") at a price equal to 100% of the Liquidation Preference of such share, plus an amount equal to all accrued and unpaid dividends thereon (including, without duplication, an amount equal to a prorated dividend thereon from the immediately preceding Dividend Payment Date to the Mandatory Redemption Date), if any, to the Mandatory Redemption Date (the "Mandatory Redemption Price"). (iii) Procedure for Redemption. (A) On and after an Optional ------------------------- Redemption Date or the Mandatory Redemption Date, as the case may be (the "Redemption Date"), unless the Company defaults in the payment of the applicable redemption price, dividends will cease to accumulate on shares of Senior PIK Preferred Stock called for redemption and all rights of Holders of such shares will terminate except for the right to receive the Optional Redemption Price or the Mandatory Redemption Price, as the case may be, without 8 interest; provided, however, that if a notice of redemption shall have been -------- ------- given as provided in subparagraph (iii)(B) and the funds necessary for redemption (including an amount in respect of all dividends that will accrue to the Redemption Date) shall have been segregated and irrevocably set apart by the Company, in trust for the benefit of the Holders of the shares called for redemption, then dividends shall cease to accumulate on the Redemption Date on the shares to be redeemed and, at the close of business on the day on which such funds are segregated and set apart, the Holders of the shares to be redeemed shall, with respect to the shares to be redeemed, cease to be shareholders of the Company and shall be entitled only to receive the Optional Redemption Price or the Mandatory Redemption Price, as the case may be, for such shares without interest from the Redemption Date. (B) In connection with any redemption pursuant to this paragraph (f), the Company will send a written notice of redemption by first class mail to each holder of record of shares of Senior PIK Preferred Stock at its registered address, not fewer than 30 days nor more than 60 days prior to the Redemption Date (the "Redemption Notice"), and notice, if mailed in the manner herein provided, shall conclusively be presumed to have been given, whether or not the Holder receives such notice; provided, however, that no failure to give such -------- ------- notice nor any deficiency therein shall affect the validity of the procedure for the redemption of any shares of Senior PIK Preferred Stock to be redeemed except as to the Holder or Holders to whom the Company has failed to give said notice or except as to the Holder or Holders whose notice was defective. The Redemption Notice shall state: (1) whether the redemption is pursuant to paragraph (f)(i) or (f)(ii) hereof; (2) the Optional Redemption Price the Mandatory Redemption Price, as the case may be; (3) whether all or less than all the outstanding shares of Senior PIK Preferred Stock are to be redeemed and the total number of shares of Senior PIK Preferred Stock being redeemed; (4) the Redemption Date; (5) that the Holder is to surrender to the Company, in the manner, at the place or places and at the price designated, his certificate or certificates 9 representing the shares of Senior PIK Preferred Stock to be redeemed; and (6) that dividends on the shares of the Senior PIK Preferred Stock to be redeemed shall cease to accumulate on such Redemption Date unless the Company defaults in the payment of the Optional Redemption Price the Mandatory Redemption Price, as the case may be, to the Holders of the Senior PIK Preferred Stock who have duly surrendered their certificates for redemption in accordance with clause (C) below on or before the Redemption Date. (C) Each Holder of Senior PIK Preferred Stock shall surrender the certificate or certificates representing such shares of Senior PIK Preferred Stock to the Company, duly endorsed (or otherwise in proper form for transfer, as determined by the Company), in the manner and at the place designated in the Redemption Notice, and on the Redemption Date the full Optional Redemption Price or Mandatory Redemption Price, as the case may be, for such shares shall be payable in cash to the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event that less than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (g) Voting Rights. (i) The Holders of Senior PIK Preferred Stock, in ------------- addition to any other voting rights required under California law, shall be entitled, subject to paragraph (g)(ii)(A), to cast a one-half vote per share on matters required or permitted to be voted upon by the shareholders of the Company, and the Senior PIK Preferred Stock shall vote together with the Company's common stock ("Common Stock") as a single class on all such matters. Further, the Holders of the Senior PIK Preferred Stock, voting as a separate class, shall have the voting rights set forth in paragraph (g)(ii). (ii) (A) If (1) dividends on the Senior PIK Preferred Stock are in arrears and unpaid and, in the case of dividends payable after April 15, 2003, are not paid in cash for six or more Dividend Periods (whether or not consecutive) (a "Dividend Default"); (2) the Company fails for any reason to redeem the Senior PIK Preferred Stock on April 15, 2010, or fails to otherwise discharge any redemption obligation with respect to the Senior PIK Preferred Stock; (3) the Company fails to make an offer to redeem all of the outstanding shares of Senior PIK Preferred Stock following a Change of Control (whether or not the 10 Company is permitted to do so by the terms of the Indenture, the New Credit Facility or any other obligation of the Company); (4) a breach or violation of any of the provisions set forth under paragraph (l) (Certain Additional Provisions) occurs and, the breach or violation continues for a period of 30 days or more after the Company receives notice thereof specifying the default from the Holders of at least 25% of the shares of Senior PIK Preferred Stock then outstanding; or (5) the Company fails to pay at final maturity (giving effect to any applicable grace period) the principal amount of any Debt of the Company or any Subsidiary of Holding or the stated maturity of any such Debt of the Company or any Subsidiary of Holding is accelerated because of a default and the total amount of such Debt unpaid or accelerated exceeds $7.5 million, then, subject to paragraph (g)(ii)(E), the Holders of the then outstanding shares of Senior PIK Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable), voting together as a class, shall have the right and power to elect two directors to the Board of Directors of the Company and the Common Stock shall have the right to elect the remaining directors; provided, that, -------- notwithstanding the provisions of paragraph (g)(i) to the contrary, so long as a Voting Rights Triggering Event shall have occurred and be continuing, the Holders of Senior PIK Preferred Stock shall not be entitled to cast any votes per share of Senior PIK Preferred Stock with the Common Stock as a single class in connection with such election of directors. Each such event described in clauses (1), (2), (3), (4) or (5) above is a "Voting Rights Triggering Event". (B) The voting rights set forth in paragraph (g)(ii)(A) above will continue until such time as (x) in the case of a Dividend Default, all dividends in arrears on the Senior PIK Preferred Stock are paid in full in cash and (y) in all other cases, any failure, breach or default giving rise to such Voting Rights Triggering Event is remedied or waived by the Holders of at least a majority of the shares of Senior PIK Preferred Stock then outstanding, at which time the exclusive right to elect directors shall revert to the Common Stock and the Senior PIK Preferred Stock, which shall vote together as a single class in accordance with paragraph (g)(i), subject to renewal of the voting right of the Senior PIK Preferred Stock under paragraph (g)(ii)(A) from time to time. At any time after the right to elect two directors is vested in the Senior PIK Preferred Stock, and at any time after the exclusive right to elect directors shall revert to the Common Stock and the Senior PIK Preferred Stock as contemplated by paragraph (g)(i), (i) the holders of 25% or more of the outstanding 11 shares of Senior PIK Preferred Stock (or the holders of 25% of the shares of any other series of Preferred Stock then outstanding upon which like rights have been conferred and are exercisable) or (ii) 25% or more of the outstanding Common Stock voting rights, which shall include the one-half common vote per share to which the Senior PIK Preferred Stock is entitled under paragraph (g)(i), respectively, have a right to call a special meeting of shareholders for the purpose of electing all of the members of the Board of Directors, such right to be exercisable by delivering a request in writing for the calling of the special meeting to the president or secretary, or to the chairman of the board or a vice-president if there be such; provided, however, that no such special -------- ------- meeting shall be called if the next annual meeting of shareholders of the Company is to be held within 60 days after the voting power to elect directors shall have become vested, in which case such meeting shall be deemed to have been called for such next annual meeting. The officer receiving the request shall forthwith cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than 35 nor more than 60 days after the receipt of the request. If the notice is not given within 20 days after receipt of the request, the shareholders calling the meeting shall have the rights accorded to them pursuant to subdivision (c) of Section 601 of the California Corporations Code. In lieu of electing directors at a meeting of the shareholders in accordance with the foregoing, the holders of Common Stock and Senior PIK Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any), voting as separate classes in accordance with paragraph (g)(ii)(A), may, pursuant to Section 603 of the Corporations Code of the State of California elect such directors by unanimous written consent. Upon the election of directors by the Senior PIK Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any) at a meeting of shareholders (or by written consent), the terms of all persons who were directors immediately prior thereto shall terminate and the directors elected by the Senior PIK Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any) together with those elected at such meeting (or by written consent) by the Common Stock shall constitute the directors of the Company until the next annual meeting, unless the terms of such directors shall terminate earlier in accordance with the immediately following sentence. Upon the election of directors by the Common Stock and the Senior PIK Preferred 12 Stock, voting together as a single class in accordance with paragraph (g)(i), at a meeting of shareholders (or by written consent) after the exclusive right to elect directors has reverted to the Common Stock and the Senior PIK Preferred Stock, as contemplated by paragraph (g)(i), the terms of all persons who were directors immediately prior thereto shall terminate and the directors elected by the Common Stock and the Senior PIK Preferred Stock, as contemplated by paragraph (g)(i), at such meeting (or by written consent) shall constitute the directors of the Company until the next annual meeting, unless earlier removed in accordance with this paragraph (g)(ii)(B). (C) At any meeting held for the purposes of electing directors at which the Holders of Senior PIK Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable) shall have the right, voting together as a single class, to elect directors as aforesaid, the presence in person or by proxy of the holders of at least a majority in voting power of the outstanding shares of Senior PIK Preferred Stock (and such Preferred Stock) shall be required to constitute a quorum thereof. (D) Any vacancy occurring in the office of a director elected by the Holders of Senior PIK Preferred Stock (and such Preferred Stock) may be filled by the remaining director elected by the Holders of Senior PIK Preferred Stock (and such Preferred Stock) unless and until such vacancy shall be filled by the Holders of Senior PIK Preferred Stock (and such Preferred Stock) at a meeting of shareholders held in accordance with paragraph (g)(ii)(B). In lieu of electing a director at a meeting of the shareholders in accordance with the foregoing, a majority of the outstanding shares of Senior PIK Preferred Stock (together with the holders of any other series of Preferred Stock upon which like rights have been conferred and are exercisable, if any), voting together as a single class, may, pursuant to Sections 305(b) and 603 of the Corporations Code of the State of California, elect such director by written consent. (E) In the event that an event occurs at any time which results in the holders of any Parity Stock having voting rights to elect directors to the Board of Directors, Holders of Senior PIK Preferred Stock shall, whether or not such event otherwise constitutes a Voting Rights Triggering Event pursuant to paragraph (g)(ii)(A), have the voting rights set forth in paragraphs (g)(ii)(A) and (g)(ii)(B), and such event shall be deemed (for purposes of this paragraph (g) only) to constitute a Voting Rights Triggering 13 Event. In addition, in the event that during a time in which directors elected by the Holders of Senior PIK Preferred Stock pursuant to this paragraph (g)(ii) are serving on the Board of Directors ("Previously-Elected Directors") an event occurs which results in holders of Preferred Stock having voting rights to elect (voting together with the Holders of Senior PIK Preferred Stock) at least two directors to the Board of Directors, the Holders of Senior PIK Preferred Stock shall vote together, as a single class, with the holders of such Preferred Stock to elect such new directors, and upon the election of the new directors the term of office of the Previously-Elected Directors shall (unless such Previously- Elected Directors are elected as new directors) automatically terminate. (iii) (A) So long as any shares of Senior PIK Preferred Stock are outstanding, the Company will not authorize, create or increase the authorized amount of any class or series of Capital Stock or Preferred Stock, the terms of which expressly provide that such class or series will rank senior to the Senior PIK Preferred Stock as to dividend rights and rights upon liquidation, winding- up and dissolution of the Company (collectively referred to as "Senior Stock") or Parity Stock without the affirmative vote or consent of Holders of at least two-thirds of the shares of Senior PIK Preferred Stock then outstanding, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting. (B) So long as any shares of the Senior PIK Preferred Stock are outstanding, the Company will not amend this Certificate of Determination so as to affect adversely the specified rights, preferences, privileges or voting rights of Holders of shares of Senior PIK Preferred Stock or to authorize the issuance of any additional shares of Senior PIK Preferred Stock (except to authorize the issuance of additional shares of Senior PIK Preferred Stock to be paid as dividends on the Senior PIK Preferred Stock, for which no consent shall be necessary) without the affirmative vote or consent of Holders of at least a majority of the issued and then outstanding shares of Senior PIK Preferred Stock, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting; provided that this paragraph shall not prohibit the merger of the -------- Company and a Wholly Owned Subsidiary of Holding or the Company incorporated in another state of the United States solely for the purpose of reincorporating the Company to the extent that the surviving corporation issues to Holding shares of a series of Preferred Stock having an aggregate 14 liquidation preference equal to the Liquidation Preference of the Senior PIK Preferred Stock outstanding immediately prior to such merger and terms and provisions substantially similar to those of the Senior PIK Preferred Stock. (C) Except as required under California law or as set forth in paragraph (g)(iii)(A) or (B) above, (x) the creation, authorization or issuance of any shares of any Junior Stock, Parity Stock or Senior Stock, including the designation of a series thereof within the existing class of Senior PIK Preferred Stock, or (y) the increase or decrease in the amount of authorized Capital Stock of any class, including any Senior PIK Preferred Stock, shall not require the consent of Holders of Senior PIK Preferred Stock and shall not be deemed to affect adversely the rights, preferences, privileges or voting rights of shares of Senior PIK Preferred Stock. (iv) In any case in which the Holders of Senior PIK Preferred Stock shall be entitled to vote pursuant to paragraph (g)(ii) or pursuant to law, each Holder of Senior PIK Preferred Stock entitled to vote with respect to such matters shall be entitled to one vote for each share of Senior PIK Preferred Stock held. (h) Redemption at the Option of Holders Upon a Change of Control. (i) ------------------------------------------------------------- Upon the occurrence of a Change of Control (the date of such occurrence being the "Change of Control Date"), each Holder of Senior PIK Preferred Stock shall have the right to require the Company to redeem all or any part of such Holder's Senior PIK Preferred Stock pursuant to the offer described in paragraph (h)(ii) below (the "Change of Control Offer") at a cash redemption price (the "Change of Control Redemption Price") equal to 101% of the Liquidation Preference thereof, plus payment in cash of accrued and unpaid dividends thereon, if any, to the redemption date (including an amount in cash equal to a prorated dividend for any partial dividend period). (ii) Within 30 days following the date on which the Company knows or reasonably should have known a Change of Control has occurred, the Company shall (a) cause a notice of the Change of Control Offer to be sent at least once to the Dow Jones News Service or similar business news service in the United States and (b) send, by first-class mail to each Holder of Senior PIK Preferred Stock, at such Holder's address appearing in the security register, a notice stating: (A) that a Change of Control has occurred and a Change of Control Offer is being made pursuant to this paragraph (h) and that all Senior PIK Preferred Stock timely tendered will be accepted for payment; (B) the Change of 15 Control Redemption Price and the purchase date (the "Change of Control Redemption Date"), which shall be, subject to any contrary requirements of applicable law, a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed; (C) the circumstances and relevant facts regarding the Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to the Change of Control); (D) that any shares of Senior PIK Preferred Stock not tendered will continue to accrue dividends; (E) that, unless the Company defaults in making payment therefor, any share of Senior PIK Preferred Stock accepted for payment pursuant to the Change of Control Offer shall cease to accrue dividends after the Change of Control Redemption Date; (F) that Holders electing to have any shares of Senior PIK Preferred Stock redeemed pursuant to a Change of Control Offer will be required to surrender stock certificates representing such shares of Senior PIK Preferred Stock, properly endorsed for transfer, together with such other customary documents as the Company may reasonably request to the Company at the address specified in the notice prior to the close of business on the Business Day prior to the Change of Control Redemption Date; (G) that Holders will be entitled to withdraw their election if the Company receives, not later than five Business Days prior to the Change of Control Redemption Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the number of shares of Senior PIK Preferred Stock the Holder delivered for redemption and a statement that such Holder is withdrawing his election to have such shares of Senior PIK Preferred Stock redemption; and (H) that Holders whose shares of Senior PIK Preferred Stock are redeemed only in part will be issued a new certificate representing the unredeemed shares of Senior PIK Preferred Stock. (iii) The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the redemption of Senior PIK Preferred Stock pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Certificate of Determination, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this Certificate of Determination by virtue of such compliance. (iv) On the Change of Control Redemption Date the Company shall (A) accept for payment the shares of Senior PIK Preferred Stock validly tendered pursuant to the Change of Control Offer, (B) pay to the Holders of shares so 16 accepted the redemption price therefor in cash and (C) cancel each surrendered certificate and retire the shares represented thereby. Unless the Company defaults in the payment for the shares of Senior PIK Preferred Stock duly tendered pursuant to the Change of Control Offer, dividends will cease to accrue with respect to the shares of Senior PIK Preferred Stock tendered and all rights of Holders of such tendered shares will terminate, except for the right to receive payment therefor, on the Change of Control Redemption Date. (v) To accept the Change of Control Offer, the Holder of a share of Senior PIK Preferred Stock shall deliver, on or before the 10th day prior to the Change of Control Redemption Date, written notice to the Company (or an agent designated by the Company for such purpose) of such Holder's acceptance, together with certificates evidencing the shares of Senior PIK Preferred Stock with respect to which the Change of Control Offer is being accepted, duly endorsed for transfer. (i) Conversion or Exchange. The Holders of shares of Senior PIK ---------------------- Preferred Stock shall not have any rights hereunder to convert such shares into or exchange such shares for shares of any other class or classes or of any other series of any class or classes of Capital Stock of the Company. (j) Reissuance of Senior PIK Preferred Stock. Shares of Senior PIK ----------------------------------------- Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed or exchanged, shall not be reissued as shares of Senior PIK Preferred Stock and shall (upon compliance with any applicable provisions of the laws of California) have the status of authorized and unissued shares of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of Preferred Stock; provided, however, that so -------- ------- long as any shares of Senior PIK Preferred Stock are outstanding, any issuance of such shares must be in compliance with the terms hereof. (k) Business Day. If any payment, redemption or exchange shall be ------------- required by the terms hereof to be made on a day that is not a Business Day, such payment, redemption or exchange shall be made on the immediately succeeding Business Day. 17 (l) Certain Additional Provisions. The sole remedy to Holders of ----------------------------- Senior PIK Preferred Stock in the event of the Company's failure to comply with any of the following covenants, and the sole consequence of any such failure, shall be the voting rights described in paragraph (g)(ii). (i) Limitation on Debt. The Company shall not, and shall not ------------------ permit any Restricted Subsidiary to, Incur, directly or indirectly, any Debt unless, after giving pro forma effect to the application of the proceeds thereof, either (a) after giving effect to the Incurrence of such Debt and the application of the proceeds thereof, the Consolidated Interest Coverage Ratio would be greater than 1.75 to 1.00 if such Debt is Incurred from the Issue Date through April 15, 2000, and 2.00 to 1.00 if such Debt is Incurred thereafter or (b) such Debt is Permitted Debt. (ii) Limitation on Restricted Payments. The Company shall not --------------------------------- make, and shall not permit any Restricted Subsidiary to make, directly or indirectly, any Restricted Payment if at the time of, and after giving pro forma effect to, such proposed Restricted Payment, (a) a Voting Rights Triggering Event shall have occurred and be continuing, (b) the Company could not Incur at least $1.00 of additional Debt pursuant to clause (a) of paragraph (l)(i) above or (c) the aggregate amount of such Restricted Payment and all other Restricted Payments declared or made since the Issue Date (the amount of any Restricted Payment, if made other than in cash, to be based upon Fair Market Value) would exceed an amount equal to the sum of: (i) 50% of the aggregate amount of Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter during which the Issue Date occurs to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or if the aggregate amount of Consolidated Net Income for such period shall be a deficit, minus 100% of such deficit), (ii) Capital Stock Sale Proceeds, 18 (iii) the amount by which Debt of the Company Incurred after the Issue Date is reduced on Holding's balance sheet upon the conversion or exchange (other than by the Company or a Subsidiary of the Company) subsequent to the Issue Date of any Debt for Preferred Stock or Junior Stock (other than Disqualified Stock) of the Company (less the amount of any cash or other Property distributed by the Company or any Restricted Subsidiary upon such conversion or exchange), and (iv) an amount equal to the sum of (A) the net reduction in Investments in any Person other than the Company or a Restricted Subsidiary resulting from dividends, repayments of loans or advances or other transfers of Property, in each case to the Company or any Restricted Subsidiary from such Person, to the extent such dividends, repayments or transfers do not increase the amount of Permitted Investments permitted to be made pursuant to clause (i) of the definition thereof and (B) the portion (proportionate to the Company's equity interest in such Unrestricted Subsidiary) of the Fair Market Value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided, however, that the foregoing sum shall not exceed, in the -------- ------- case of any Person, the amount of Investments previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in such Person, and (v) $7.5 million. Notwithstanding the foregoing limitation, the Company may: (a) pay dividends on its Capital Stock within 60 days of the declaration thereof if, on said declaration date, such dividends could have been paid in compliance with this covenant; provided, however, that at the -------- ------- time of such payment of such dividend, no other Voting Rights Triggering Event shall have occurred and be continuing (or result therefrom); provided -------- further, however, that such dividend shall be included in the calculation ------- ------- of the amount of Restricted Payments; 19 (b) purchase, repurchase, redeem, legally defease, acquire or retire for value Capital Stock of the Company in exchange for, or in an amount not in excess of the proceeds of the substantially concurrent sale of, Parity Stock or Junior Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any of its Subsidiaries for the benefit of their employees); provided, however, -------- ------- that (i) such purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments and (ii) the Capital Stock Sale Proceeds from such exchange or sale shall be excluded from the calculation pursuant to clause (c)(ii) above; (c) purchase, repurchase, redeem, legally defease, acquire or retire for value shares of, or options to purchase shares of, common stock of the Company or Holding from employees or former employees of the Company, Holding or any of their Subsidiaries (or their estates or beneficiaries thereof) upon death, disability, retirement or termination pursuant to the terms of the agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors or the Company, as the case may be, under which such individuals purchase or sell, or are granted the option to purchase or sell, shares of such common stock (or pay dividends or make loans to Holding for such purpose); provided, however, -------- ------- that (i) the aggregate amount of such purchases, repurchases, redemptions, defeasances, acquisitions or retirements shall not exceed $1.0 million in any year or $5.0 million during the term of the Holding Preferred Stock, except that (x) such amounts shall be increased by the aggregate net amount of cash received by Holding or the Company after the Issue Date from the sale of such shares to, or the exercise of options to purchase such shares by, employees of the Company, Holding or any of their Subsidiaries and (y) Holding or the Company may forgive or return Employee Notes without regard to the limitation set forth in clause (c)(i) above and such forgiveness or return shall not be treated as a Restricted Payment for purposes of determining compliance with such clause (c)(i) and (ii) such purchases, repurchases, defeasances, acquisitions or retirements (but not forgiveness or return of Employee Notes) shall be included in the calculation of the amount of Restricted Payments; and 20 (d) make payments to Helen Hudson Lovaas pursuant to the Merger Agreement in an aggregate amount not to exceed $1.1 million in any fiscal year or $3.3 million in the aggregate (plus, in each case, interest due on the unpaid portion of such required payments in accordance with the Merger Agreement); provided, however, that such payments shall be excluded in the -------- ------- calculation of the amount of Restricted Payments. (iii) Limitation on Issuance or Sale of Capital Stock of Restricted ------------------------------------------------------------- Subsidiaries. The Company shall not (a) sell, pledge, hypothecate or otherwise - ------------- dispose of any shares of Capital Stock of a Restricted Subsidiary or (b) permit any Restricted Subsidiary to, directly or indirectly, issue or sell or otherwise dispose of any shares of its Capital Stock, other than (i) directors' qualifying shares, (ii) to the Company or a Wholly Owned Subsidiary or (iii) the disposition of 100% of the Capital Stock of a Restricted Subsidiary; provided -------- that (x) the Company receives consideration at the time of such disposition at least equal to the Fair Market Value of such Restricted Subsidiary, (y) at least 75% of the consideration paid to the Company in connection with such disposition is in the form of cash or cash equivalents or the assumption by the purchaser of liabilities of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Senior PIK Preferred Stock) as a result of which the Company and the Restricted Subsidiaries are no longer obligated with respect to such liabilities, and (z) the Net Available Cash received by the Company from such disposition is applied within twelve months from the date of the receipt of such Net Available Cash to prepay, repay, legally defease or purchase Debt of the Company or any Restricted Subsidiary (excluding, in any such case, Disqualified Stock and Debt owed to the Company or an Affiliate of the Company) or to reinvest in Additional Assets (including by means of an Investment in Additional Assets by the Company or a Restricted Subsidiary with Net Available Cash received by the Company). (iv) Limitation on Restrictions on Distributions from Restricted ----------------------------------------------------------- Subsidiaries. The Company shall not, and shall not permit any Restricted - ------------- Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist any consensual restriction on the right of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, or pay any Debt or other obligation owed, to the Company or any other Restricted Subsidiary (except, with respect to restrictions on dividends of non-cash Property, as permitted pursuant to clause (ii) of the next sentence), 21 (b) make any loans or advances to the Company or any other Restricted Subsidiary or (c) transfer any of its Property to the Company or any other Restricted Subsidiary. The foregoing limitations will not apply (i) with respect to clauses (a), (b) and (c), to restrictions (A) in effect on the Issue Date, (B) pursuant to the Credit Facility, (C) relating to Debt of a Restricted Subsidiary and existing at the time it became a Restricted Subsidiary if such restriction was not created in connection with or in anticipation of the transaction or series of transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company or (D) which result from the Refinancing of Debt Incurred pursuant to an agreement referred to in clause (i)(A) or (C) above or in clause (ii)(A) or (B) below, provided such restriction -------- is no less favorable to the Holders of the Senior PIK Preferred Stock than those under the agreement evidencing the Debt so Refinanced, and (ii) with respect to clause (c) only, to restrictions (A) encumbering Property at the time such Property was acquired by the Company or any Restricted Subsidiary, so long as such restriction relates solely to the Property so acquired and was not created in connection with or in anticipation of such acquisition, (B) resulting from customary provisions restricting subletting or assignment of leases or customary provisions in other agreements that restrict assignment of such agreements or rights thereunder or (C) customary restrictions contained in asset sale agreements limiting the transfer of such Property pending the closing of such sale. (v) Limitation on Transactions with Affiliates. The Company shall ------------------------------------------- not, and shall not permit any Restricted Subsidiary to, directly or indirectly, conduct any business or enter into or suffer to exist any transaction or series of transactions (including the purchase, sale, transfer, assignment, lease, conveyance or exchange of any Property or the rendering of any service) with, or for the benefit of, any Affiliate of the Company (an "Affiliate Transaction"), unless (a) the terms of such Affiliate Transaction are (i) set forth in writing, (ii) in the interest of the Company or such Restricted Subsidiary, as the case may be, and (iii) no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could be obtained in a comparable arm's-length transaction with a Person that is not an Affiliate of the Company, (b) if such Affiliate Transaction involves aggregate payments or value in excess of $2.5 million, the Board of Directors of the Company (including a majority of the disinterested members of such Board of Directors, if any) approves such Affiliate Transaction and, in its good faith judgment, believes that such Affiliate Transaction complies 22 with clauses (a)(ii) and (iii) of this paragraph and (c) if such Affiliate Transaction involves aggregate payments or value in excess of $5.0 million, the Company obtains a written opinion from an Independent Appraiser to the effect that the consideration to be paid or received in connection with such Affiliate Transaction is fair, from a financial point of view, to the Company or such Restricted Subsidiary, as the case may be. Notwithstanding the foregoing limitation, the Company or any Restricted Subsidiary may enter into or suffer to exist the following: (i) any transaction or series of transactions between the Company and one or more Restricted Subsidiaries or between two or more Restricted Subsidiaries in the ordinary course of business; provided that no more than -------- 5% of the total voting power of the Voting Stock (on a fully diluted basis) of any such Restricted Subsidiary is owned by an Affiliate of the Company (other than a Restricted Subsidiary); (ii) any Restricted Payment permitted to be made pursuant to paragraph (l)(ii) above; (iii) the payment of compensation (including amounts paid pursuant to employee benefit plans) for the personal services of officers, directors and employees of the Company or any of the Restricted Subsidiaries, so long as the Board of Directors in good faith shall have approved the terms thereof and deemed the services theretofore or thereafter to be performed for such compensation to be fair consideration therefor; (iv) loans and advances to employees made in the ordinary course of business and consistent with the past practices of the Company or any Restricted Subsidiary, as the case may be; provided that such loans and -------- advances do not exceed $1.0 million in the aggregate at any one time outstanding; (v) the payment of fees and expenses in connection with the Recapitalization pursuant to written agreements in effect on the Issue Date; (vi) the sale of common stock of the Company for cash; provided, that -------- the Company may receive Employee Notes in an aggregate principal amount not in excess of $1.0 million at any one time outstanding; and 23 (vii) a proportionate split of, or a common stock dividend payable on, the common stock of the Company. (vi) Designation of Restricted and Unrestricted Subsidiaries. ------------------------------------------------------- The Board of Directors may designate any Subsidiary of the Company (other than any Subsidiary of the Company designated as a Restricted Subsidiary under the Indenture governing the Notes) to be an Unrestricted Subsidiary if (a) the Subsidiary to be so designated does not own any Capital Stock or Debt of, or own or hold any Lien on any Property of, the Company or any other Restricted Subsidiary, (b) the Subsidiary to be so designated is not obligated under any Debt, Lien or other obligation that, if in default, would result (with the passage of time or notice or otherwise) in a default on any Debt of the Company or of any Restricted Subsidiary and (c) either (i) the Subsidiary to be so designated has total assets of $1,000 or less or (ii) such designation is effective immediately upon such entity becoming a Subsidiary of the Company. Unless so designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company will be classified as a Restricted Subsidiary; provided, however, that such Subsidiary shall not be designated a Restricted - -------- ------- Subsidiary and shall be automatically classified as an Unrestricted Subsidiary if the requirement set forth in the immediately following paragraph will not be satisfied after giving pro forma effect to such classification. Except as provided in the first sentence of this paragraph, no Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary if, immediately after giving pro forma effect to such designation, the Company could Incur at least $1.00 of additional Debt pursuant to clause (a) of the first paragraph of covenant (l)(i) above. (vii) Merger, Consolidation and Sale of Property. The Company shall ------------------------------------------- not merge, consolidate or amalgamate with or into any other Person (other than a merger of a Wholly Owned Subsidiary into the Company) or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all its Property in any one transaction or series of transactions unless: (a) the Company shall be the surviving Person (the "Surviving Person") or the Surviving Person (if other than the Company) formed by such merger, consolidation or amalgamation or to which such sale, transfer, assignment, lease, conveyance or disposition is made shall be a corporation organized and existing under the laws of the United States of America, any State thereof or 24 the District of Columbia; (b) the Surviving Person (if other than the Company ) expressly assumes all obligations of the Company under the Senior PIK Preferred Stock and this Certificate of Determination; (c) in the case of a sale, transfer, assignment, lease, conveyance or other disposition of all or substantially all the Property of the Company, such Property shall have been transferred as an entirety or virtually as an entirety to one Person; (d) immediately before and after giving effect to such transaction or series of transactions on a pro forma basis (and treating, for purposes of this clause (d) and clauses (e) and (f) below, any Debt which becomes, or is anticipated to become, an obligation of the Surviving Person or any Restricted Subsidiary as a result of such transaction or series of transactions as having been Incurred by the Surviving Person or such Restricted Subsidiary at the time of such transaction or series of transactions), no Voting Rights Triggering Event shall have occurred and be continuing; (e) immediately after giving effect to such transaction or series of transactions on a pro forma basis, the Company or the Surviving Person, as the case may be, would be able to Incur at least $1.00 of additional Debt under clause (a) of the first paragraph of covenant (l)(i) above, determining compliance thereunder for this purpose based upon the Consolidated Interest Expense, Consolidated Net Income and EBITDA of the Company or the Surviving Person, as the case may be, and its Restricted Subsidiaries; provided, however, that this clause (e) shall not apply to a merger between the - -------- ------- Company and a Wholly Owned Subsidiary of the Company solely for the purpose of reincorporating the Company in another state of the United States so long as the total amount of Debt of the Company and its Restricted Subsidiaries is not increased as a result thereof. (m) Certificates. (i) Form and Dating. The Senior PIK Preferred ------------- ---------------- Stock shall be substantially in the form of Exhibit A, which is hereby incorporated in and expressly made a part of this Certificate of Determination. The Senior PIK Preferred Stock certificate may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). The terms of the Senior PIK Preferred Stock certificate set forth in Exhibit A are part of the terms of this Certificate of Determination. (ii) Execution. Two Officers shall sign the certificates ---------- representing Senior PIK Preferred Stock for the Company by manual or facsimile signature. The Company's 25 seal shall be impressed, affixed, imprinted or reproduced on the Senior PIK Preferred Stock and may be in facsimile form. If an Officer whose signature is on certificates representing Senior PIK Preferred Stock no longer holds that office, the shares of Senior PIK Preferred Stock evidenced thereby shall be valid nevertheless. (iii) Legend. Each certificate evidencing the Senior PIK Preferred ------- Stock (and all Senior PIK Preferred Stock issued in exchange therefor or substitution thereof) shall bear a legend in substantially the following form: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION REGISTERED UNDER SUCH ACT OR PURSUANT TO AN AVAILABLE EXEMPTION THEREFROM UNDER SAID ACT OR THE RULES AND REGULATIONS PROMULGATED THEREUNDER. (n) Certain Definitions. As used in this Certificate of -------------------- Determination, the following terms shall have the following meanings (and (1) terms defined in the singular have comparable meanings when used in the plural and vice versa, (2) "including" means including without limitation, (3) "or" is not exclusive and (4) an accounting term not otherwise defined has the meaning assigned to it in accordance with United States generally accepted accounting principles as in effect on the Issue Date and all accounting calculations will be determined in accordance with such principles), unless the content otherwise requires: "Additional Assets" means (a) any Property (other than cash, cash equivalents and securities) to be owned by the Company or any Restricted Subsidiary and used in a Related Business; or (b) Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary from any Person other than an Affiliate of the Company; provided, however, that, in the case of clause (b), -------- ------- such Restricted Subsidiary is primarily engaged in a Related Business. "Affiliate" of any specified Person means (a) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person or (b) any other Person who is a director or officer of (i) such specified Person, (ii) any Subsidiary of such specified Person or (iii) any Person described in clause (a) above. For the purposes of this definition, "control" when used with respect to any Person 26 means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of paragraph (l) (v) only, "Affiliate" shall also mean any beneficial owner of shares representing 5% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Voting Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. "Asset Sale" means any sale, lease, transfer, issuance or other disposition (or series of related sales, leases, transfers, issuances or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of (a) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares) or (b) any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary (other than, in the case of clauses (a) and (b) above, (i) any disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (ii) any disposition effected in compliance with the covenant described under paragraph (l)(vii), (iii) any Sale and Leaseback Transaction completed within 180 days following the original acquisition of the subject assets where such Sale and Leaseback Transaction represents the intended financing of Property acquired after the Issue Date and (iv) any disposition or series of related dispositions of assets having a Fair Market Value and sale price of less than $500,000). "Attributable Debt" in respect of a Sale and Leaseback Transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Average Life" means, as of any date of determination, with respect to any Debt or Preferred Stock, the quotient obtained by dividing (a) the sum of the product of the numbers of years (rounded to the nearest one-twelfth 27 of one year) from the date of determination to the dates of each successive scheduled principal payment of such Debt or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (b) the sum of all such payments. "Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "Business Day" means each day which is not a Legal Holiday. "Capital Lease Obligations" means any obligation under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of Debt represented by such obligation shall be the capitalized amount of such obligations determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Capital Stock" means, with respect to any Person, any shares or other equivalents (however designated) of corporate stock, partnership interests or any other participations, rights, warrants, options or other interests in the nature of an equity interest in such Person, including Preferred Stock, but excluding any debt security convertible or exchangeable into such equity interest. "Capital Stock Sale Proceeds" means the aggregate cash proceeds received by the Company from the issuance or sale (other than to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any of its Subsidiaries for the benefit of their employees) by the Company of any class of its Parity Stock and Junior Stock (other than Disqualified Stock) after the Issue Date, net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Certificate of Determination" means this Amended and Restated Certificate of Determination, as amended from time to time. 28 "Change of Control" means the occurrence of any of the following events: (a) prior to the first Public Equity Offering, the Permitted Holders cease to be the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of a majority of the voting power of the Voting Stock of Holding or the Company, whether as a result of the issuance of securities of Holding or the Company, any merger, consolidation, liquidation or dissolution of Holding or the Company, any direct or indirect transfer of securities by the Permitted Holders or otherwise (for purposes of this clause (a), the Permitted Holders will be deemed to beneficially own any Voting Stock of a corporation (the "specified corporation") held by any other corporation (the "parent corporation") so long as the Permitted Holders beneficially own, directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of such parent corporation); or (b) after the first Public Equity Offering, any "Person" or "group" (as such terms are used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provisions to either of the foregoing), including any group acting for the purpose of acquiring, holding, voting or disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act, other than any one or more of the Permitted Holders, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 35% or more of the voting power of the Voting Stock of Holding or the Company; provided, however, that the Permitted Holders are -------- ------- the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, in the aggregate of a lesser percentage of the total voting power of all classes of the Voting Stock of Holding or the Company than such other Person or group (for purposes of this 29 clause (b), such Person or group shall be deemed to beneficially own any Voting Stock of a specified corporation held by a parent corporation so long as such Person or group beneficially owns, directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of such parent corporation); or (c) the sale, transfer, assignment, lease, conveyance or other disposition, directly or indirectly, of all or substantially all the assets of Holding 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 Holding 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 Holding, in any such event pursuant to a transaction in which the outstanding Voting Stock of Holding is reclassified into or exchanged for cash, securities or other Property, other than any such transaction where (i) the outstanding Voting Stock of Holding is reclassified into or exchanged for Voting Stock of the surviving corporation and (ii) the Holders of the Voting Stock of Holding 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 of Holding or the Board of Directors of the Company (together with any new directors whose election or appointment by the applicable board or whose nomination for election by the shareholders of Holding or the Company was approved by a vote of 66-2/3% of the applicable directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of such board then in office; or (e) the shareholders of Holding or the Company shall have approved any plan of liquidation or dissolution of Holding or the Company. 30 "Code" means the Internal Revenue Code of 1986, as amended. "Company" means Hudson Respiratory Care Inc., a California corporation. "Company Exchange Debentures" means the 11 1/2% Subordinated Exchange Debentures due 2010 of the Company, issuable in exchange for the Holding Preferred Stock or the Senior Exchangeable Preferred Stock. "Consolidated Interest Coverage Ratio" means, as of any date of determination, the ratio of (a) the aggregate amount of EBITDA for the most recent four consecutive fiscal quarters ending at least 45 days prior to such determination date to (b) Consolidated Interest Expense for such four fiscal quarters; provided, however, that (i) if the Company or any Restricted -------- ------- Subsidiary has Incurred any Debt since the beginning of such period that remains outstanding or if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio is an Incurrence of Debt, or both, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Debt as if such Debt had been Incurred on the first day of such period and the discharge of any other Debt repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Debt as if such discharge had occurred on the first day of such period, (ii) if since the beginning of such period the Company or any Restricted Subsidiary shall have repaid, repurchased, legally defeased or otherwise discharged any Debt with Capital Stock Sale Proceeds, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such discharge as if such discharge had occurred on the first day of such period, (iii) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Sale or if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio is an Asset Sale, or both, EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the Property which is the subject of such Asset Sale for such period, or increased by an amount equal to the EBITDA (if negative) directly attributable thereto for such period, in either case as if such Asset Sale had occurred on the first day of such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Debt of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such 31 Asset Sale, as if such Asset Sale had occurred on the first day of such period (or, if the Capital Stock of any Restricted Subsidiary is sold, by an amount equal to the Consolidated Interest Expense for such period directly attributable to the Debt of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Debt after such sale), (iv) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of Property, including any acquisition of Property occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Debt) as if such Investment or acquisition occurred on the first day of such period and (v) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Sale, Investment or acquisition of Property that would have required an adjustment pursuant to clause (iii) or (iv) above if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Sale, Investment or acquisition occurred on the first day of such period. For purposes of this definition, pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company and as further contemplated by the definition of the term "pro forma". If any Debt bears a floating rate of interest and is being given pro forma effect, the interest expense on such Debt shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Debt if such Interest Rate Agreement has a remaining term in excess of 12 months). "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent Incurred by the Company or its Restricted Subsidiaries, (a) interest expense attributable to capital leases, (b) amortization of debt discount and debt issuance cost, including commitment fees, other than with respect to Debt Incurred in connection with the Recapitalization, 32 (c) capitalized interest, (d) non-cash interest expenses, (e) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (f) net costs associated with Hedging Obligations (including amortization of fees), (g) Disqualified Dividends other than Disqualified Dividends paid with shares of Parity Stock or Junior Stock of the Company which is not Disqualified Stock, (h) Preferred Stock dividends in respect of all Preferred Stock of Restricted Subsidiaries held by Persons other than the Company or a Wholly Owned Subsidiary, (i) interest Incurred in connection with Investments in discontinued operations, (j) interest accruing on any Debt of any other Person to the extent such Debt is Guaranteed by the Company or any Restricted Subsidiary and (k) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Debt Incurred by such plan or trust. "Consolidated Net Income" means, for any period, the net income (loss) of the Company and its consolidated Subsidiaries; provided, however, that there -------- ------- shall not be included in such Consolidated Net Income (a) any net income (loss) of any Person (other than the Company) if such Person is not a Restricted Subsidiary, except that (i) subject to the exclusion contained in clause (d) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to a Restricted Subsidiary, to the limitations contained in clause (c) below) and (ii) the Company's equity in a net loss of any such Person other than an Unrestricted Subsidiary for such period shall be included in determining such Consolidated Net Income, (b) for the purposes of paragraph (l)(ii) only, any net income (loss) of any Person acquired by the Company or any of its consolidated Subsidiaries in a pooling of interests transaction for any period prior to the date of such acquisition, (c) any net income (but not loss) of any Restricted Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions, directly or indirectly, to the Company, except that subject to the exclusion contained in clause (d) below, the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Restricted Subsidiary during such period 33 to the Company or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to another Restricted Subsidiary, to the limitation contained in this clause), (d) any gain (or, for purposes of paragraphs (l)(i) and (l)(vii) only, loss) realized upon the sale or other disposition of any Property of the Company or any of its consolidated Subsidiaries (including pursuant to any Sale and Leaseback Transaction) which is not sold or otherwise disposed of in the ordinary course of business, provided that any tax benefit or tax liability -------- resulting therefrom shall be excluded in such Consolidated Net Income, (e) any extraordinary gain or loss, provided that any tax benefit or tax liability -------- resulting therefrom shall be excluded in such Consolidated Net Income, (f) the cumulative effect of a change in accounting principles and (g) (i) any non-cash compensation expense realized for grants of performance shares, stock options or other stock awards to officers, directors and employees of the Company or any Restricted Subsidiary or (ii) compensation expense realized with respect to periods prior to the Issue Date in respect of payments under the Company's 1994 Amended and Restated Equity Participation Plan or compensation expense, to the extent accrued in 1998, related to contingent payments to existing managers of the Company pursuant to the Merger Agreement in an aggregate amount not in excess of $2.4 million. Notwithstanding the foregoing, for the purposes of paragraph (l)(ii) only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clause (c)(iv) thereof. "Credit Facility" means, with respect to the Company or any Restricted Subsidiary, one or more debt or commercial paper facilities with banks or other institutional lenders (including the New Credit Facility) providing for revolving credit loans, term loans, receivables or inventory financing (including through the sale of receivables or inventory to such lenders or to special purpose, bankruptcy remote entities formed to borrow from such lenders against such receivables or inventory) or trade letters of credit, in each case together with any amendments, supplements, modifications (including by any extension of the maturity thereof), refinancings or replacements thereof by a lender or syndicate of lenders in one or more successive transactions (including any such transaction that changes the amount available thereunder, 34 replaces such agreement or document, or provides for other agents or lenders). "Currency Exchange Protection Agreement" means, in respect of a Person, any foreign exchange contract, currency swap agreement, currency option or other similar agreement or arrangement designed to protect such Person against fluctuations in currency exchange rates. "Debt" means, with respect to any Person on any date of determination (without duplication), (a) the principal of and premium (if any) in respect of (i) debt of such Person for money borrowed and (ii) debt evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (b) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale and Leaseback Transactions entered into by such Person; (c) all obligations of such Person issued or assumed as the deferred purchase price of Property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (d) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in (a) through (c) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit); (e) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person, any Preferred Stock (but excluding, in each case, any accrued dividends); (f) all obligations of the type referred to in clauses (a) through (e) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, Guarantor or otherwise, including by means of any Guarantee; (g) all obligations of the type referred to in clauses (a) through (f) of other Persons secured by any Lien on any Property of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such Property or the amount of the obligation so secured; and (h) to the extent not otherwise included in this definition, Hedging Obligations of such Person. The amount of Debt of any Person 35 at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided that the amount outstanding at any time of any Debt issued -------- with original issue discount is the face amount of such Debt less the remaining unamortized portion of the original issue discount of such Debt at such time as determined in accordance with GAAP. "Disqualified Dividends" means, for any dividend with respect to Disqualified Stock, the quotient of the dividend divided by the difference between one and the maximum statutory federal income tax rate (expressed as a decimal number between 1 and 0) then applicable to the issuer of such Disqualified Stock. "Disqualified Stock" means, with respect to any Person, Redeemable Stock of such Person as to which (i) the maturity, (ii) mandatory redemption or (iii) redemption, repurchase, conversion or exchange at the option of the holder thereof occurs, or may occur, on or prior to the first anniversary of the Stated Maturity of the Senior PIK Preferred Stock; provided, however, that Redeemable -------- ------- Stock of such Person that would not otherwise be characterized as Disqualified Stock under this definition shall not constitute Disqualified Stock (a) if such Redeemable Stock is convertible or exchangeable into Debt or Disqualified Stock solely at the option of the issuer thereof or (b) solely as a result of provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Redeemable Stock upon the occurrence of a "change of control" occurring prior to the first anniversary of the Stated Maturity of the Senior PIK Preferred Stock, if (x) such repurchase obligation may not be triggered in respect of such Redeemable Stock unless a corresponding obligation also arises with respect to the Senior PIK Preferred Stock and (y) no such repurchase or redemption is permitted to be consummated unless and until such Person shall have satisfied all repurchase or redemption obligations with respect to any required purchase offer made with respect to the Senior PIK Preferred Stock. "EBITDA" means, for any period, an amount equal to, for the Company and its consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income for such period, plus the following to the extent reducing Consolidated Net Income for such period: (i) the provision for taxes based on income or profits or utilized in computing net loss, (ii) Consolidated Interest Expense, (iii) depreciation, (iv) amortization expense and (v) any 36 other non-cash items (other than any such non-cash item to the extent that it represents an accrual of or reserve for cash expenditures in any future period), minus (b) all non-cash items increasing Consolidated Net Income for such period (other than any such non-cash item to the extent that it will result in the receipt of cash payments in any future period). Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its shareholders. "Employee Notes" means promissory notes of employees of Holding, the Company or any of their Subsidiaries payable to Holding or the Company and received in connection with the substantially concurrent purchase of common stock of Holding or the Company by such employees. "Exchange Act" means the Securities Exchange Act of 1934. "Exchange Offer Registration Statement" means a registration statement of Holding and, if applicable and permitted by the SEC, the Company on an appropriate form under the Securities Act with respect to the Registered Exchange Offer, all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchange Securities" means the Series B Holding Preferred Stock issued in exchange for Holding Preferred Stock and, if applicable, new exchange debentures of the Company issued in exchange for the Company Exchange Debentures and new preferred stock of the Company issued in exchange for the Senior Exchangeable Preferred Stock, pursuant to the Exchange Offer Registration Statement. "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 37 seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair Market Value will be determined, except as otherwise provided, (a) if such Property has a Fair Market Value equal to or less than $2.5 million, by any Officer of the Company or (b) if such Property has a Fair Market Value in excess of $2.5 million, by a majority of the Board of Directors and evidenced by a board resolution, dated within 30 days of the relevant transaction. "GAAP" means United States generally accepted accounting principles as in effect on the Issue Date, including those set forth (a) in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (b) in the statements and pronouncements of the Financial Accounting Standards Board, (c) in such other statements by such other entity as approved by a significant segment of the accounting profession and (d) the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Debt of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for - -------- ------- collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing any obligation. "Hedging Obligation" of any Person means any obligation of such Person pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement or any other similar agreement or arrangement. 38 "Holder" means the Person in whose name a share of Senior PIK Preferred Stock is registered on the Company's books. "Holding" means River Holding Corp., a Delaware corporation. "Holding Preferred Stock" means the 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010 of Holding, exchangeable into Company Exchange Debentures or Senior Exchangeable Preferred Stock. "Incur" means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by merger, conversion, exchange or otherwise), extend, assume, Guarantee or become liable in respect of such Debt or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Debt or obligation on the balance sheet of such Person (and "Incurrence" and "Incurred" shall have meanings correlative to the foregoing); provided, -------- however, that a change in GAAP that results in an obligation of such Person that - ------- exists at such time, and is not theretofore classified as Debt, becoming Debt shall not be deemed an Incurrence of such Debt; provided further, however, that ---------------- ------- solely for purposes of determining compliance with paragraph (l)(i), amortization of debt discount shall not be deemed to be the Incurrence of Debt, provided that in the case of Debt sold at a discount, the amount of such Debt - -------- Incurred shall at all times be the aggregate principal amount at Stated Maturity. "Indenture" means the Indenture dated as of the Issue Date among Holding, the Company and the United States Trust Company of New York, as Trustee, governing the Notes. "Independent Appraiser" means an investment banking firm of national standing or any third party appraiser of national standing, provided that such -------- firm or appraiser is not an Affiliate of the Company. "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 39 of transfers of cash or other Property to others or payments for Property or services for the account or use of others, or otherwise) to, or Incurrence of a Guarantee of any obligation of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person. For purposes of paragraphs (l)(ii) and (l)(vi) and the definition of "Restricted Payment", "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a -------- ------- redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary equal to an amount (if positive) equal to (a) the Company's "Investment" in such Subsidiary at the time of such redesignation less (b) the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the time of such redesignation. In determining the amount of any Investment made by transfer of any Property other than cash, such Property shall be valued at its Fair Market Value at the time of such Investment. "Issue Date" means April 7, 1998. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions are not required to be open in the City of New York and Los Angeles. "Lien" means, with respect to any Property of any Person, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property (including any Capital Lease Obligation, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing or any Sale and Leaseback Transaction). "Merger Agreement" means the Amended and Restated Merger Agreement between Holding, River Acquisition Corp., the Company and shareholders of the Company dated as of March 15, 1998, as in effect on the Issue Date. 40 "Merger" means the merger of River Acquisition Corp. with and into the Company pursuant to the Merger Agreement. "Moody's" means Moody's Investors Service, Inc. or any successor to the rating agency business thereof. "Net Available Cash" from any Asset Sale or other transaction subject to paragraph (l)(iii) means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Debt or other obligations relating to the Property that is the subject of such transaction or received in any other non-cash form), in each case net of (a) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such transaction, (b) all payments made on any Debt which is secured by any Property subject to such transaction, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such Property, or which must by its terms, or in order to obtain a necessary consent to such transaction, or by applicable law, be repaid out of the proceeds from such transaction, (c) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such transaction and (d) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the Property disposed in such transaction and retained by the Company or any Restricted Subsidiary after such transaction. "New Credit Facility" means the credit facilities made available pursuant to the Credit Agreement dated as of the Issue Date among the Company, Holding, the lenders party thereto, Salomon Smith Barney Inc, as Arranger, Advisor and Syndication Agent, and Bankers Trust Company, as Administrative Agent. "Notes" means the 91/2% Senior Subordinated Notes due 2008 of the Company. "Officer" means the Chief Executive Officer, the President, the Chief Financial Officer or any Executive Vice President of the Company. 41 "Permitted Debt" means:(a) Debt of the Company evidenced by the Notes and of Subsidiary Guarantors evidenced by Subsidiary Guaranties; (b)(i) Debt under the Credit Facility; provided that the aggregate principal amount of all -------- such Debt under the Credit Facility comprised of (A) term loans at any one time outstanding shall not exceed $40.0 million minus all principal amounts repaid in respect of such term loans and (B) revolving credit loans or obligations at any one time outstanding shall not exceed the greater of (x) $60.0 million and (y) the sum of the amounts equal to (1) 60% of the net book value of the inventory of the Company and the Restricted Subsidiaries and (2) 85% of the net book value of the accounts receivable of the Company and the Restricted Subsidiaries, in each case as of the most recent fiscal quarter ending at least 45 days prior to the date of determination and (ii) Guarantees of Debt under the Credit Facility; (c) Debt in respect of Capital Lease Obligations and Purchase Money Debt; provided that (i) the aggregate principal amount of such Debt does not exceed the Fair Market Value (on the date of the Incurrence thereof) of the Property acquired, constructed or leased (including costs of installation, taxes and delivery charges with respect to such acquisition, construction or lease) and (ii) the aggregate principal amount of all Debt Incurred and then outstanding pursuant to this clause (c) (together with all Permitted Refinancing Debt Incurred in respect of Debt previously Incurred pursuant to this clause (c) and then outstanding) does not exceed $15.0 million; (d) Debt of the Company owing to and held by any Wholly Owned Subsidiary and Debt of a Wholly Owned Subsidiary owing to and held by the Company or any Wholly Owned Subsidiary; provided, -------- however, that any subsequent issue or transfer of Capital Stock or other event - ------- that results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of any such Debt (except to the Company or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Debt by the issuer thereof; (e) Debt of a Wholly Owned Subsidiary Incurred and outstanding on or prior to the date on which such Wholly Owned Restricted Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary (other than Debt Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of transactions pursuant to which such Wholly Owned Restricted Subsidiary became a Subsidiary of the Company or was otherwise acquired by the Company); provided that at the time such Wholly Owned Restricted Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary and after giving pro forma effect to the Incurrence of such Debt, the Company would have been able to Incur $1.00 of additional Debt 42 pursuant to clause (a) in the first paragraph of covenant (l)(i); (f) Debt under Interest Rate Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting interest rate risk in the ordinary course of the financial management of the Company or such Restricted Subsidiary and not for speculative purposes, provided that the obligations under such agreements are directly related to payment obligations on Debt otherwise permitted by the terms of covenant (l)(i); (g) Debt under Currency Exchange Protection Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting currency exchange rate risks directly related to transactions entered into by the Company or such Restricted Subsidiary in the ordinary course of business and not for speculative purposes; (h) Debt in connection with one or more standby letters of credit or performance bonds issued for the account of the Company or a Restricted Subsidiary in the ordinary course of business or pursuant to self-insurance obligations and not in connection with the borrowing of money or the obtaining of advances; (i) Debt outstanding on the Issue Date not otherwise described in clauses (a) through (h) above; (j) Debt not otherwise described in clauses (a) through (i) above and clause (l) below in an aggregate principal amount outstanding at any one time not to exceed $15.0 million; (k) Permitted Refinancing Debt Incurred in respect of Debt Incurred pursuant to clause (a) of the first paragraph of covenant (l)(i) and clauses (a), (c), (e) and (i) above, subject, in the case of clause (c) above, to the limitations set forth in the proviso thereto; and (l) Debt of the Company under the Company Exchange Debentures. "Permitted Holders" means Helen Hudson Lovaas, any member of the senior management of the Company or Holding on the Issue Date and Freeman Spogli & Co. Incorporated or any successor entity thereof controlled by the principals of Freeman Spogli & Co. Incorporated or any entity controlled by, or under common control with, Freeman Spogli & Co. Incorporated. "Permitted Investment" means any Investment by the Company or a Restricted Subsidiary in (a) any Restricted Subsidiary or any Person that will, upon the making of such Investment, become a Restricted Subsidiary; provided -------- that the primary business of such Restricted Subsidiary is a Related Business; (b) any Person if as a result of such Investment such Person is merged or consolidated with or into, or transfers or conveys all or substantially all its Property to, the Company or a Restricted Subsidiary; provided that such Person's -------- primary business is a Related Business; (c) Temporary Cash Investments; (d) receivables 43 owing to the Company or a Restricted Subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such -------- ------- concessionary trade terms as the Company or such Restricted Subsidiary deems reasonable under the circumstances; (e) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (f) (i) loans and advances to employees made in the ordinary course of business consistent with past practices of the Company or such Restricted Subsidiary, as the case may be; provided that such loans and -------- advances do not exceed $1.0 million at any one time outstanding and (ii) loans and advances to, or the receipt of Employee Notes from, employees of Holding, the Company or any of their Subsidiaries made or received in connection with the substantially concurrent purchase of common stock of the Company by such employees; provided that the aggregate principal amount of such loans, advances -------- and notes payable shall not exceed $1.0 million at any one time outstanding; (g) stock, obligations or other securities received in settlement of debts created in the ordinary course of business and owing to the Company or a Restricted Subsidiary or in satisfaction of judgments; (h) any Person to the extent such Investment represents the non-cash portion of the consideration received in connection with a disposition of assets; and (i) Investments in Persons engaged in a Related Business not to exceed $20.0 million at any one time outstanding (it being agreed that an Investment shall cease to be outstanding to the extent of dividends, repayments of loans or advances or other transfers of Property received by the Company or any Restricted Subsidiary from such Persons, provided -------- that such amounts do not increase the amount of Restricted Payments which the Company and the Restricted Subsidiaries may make pursuant to clause (c)(iv)(A) of paragraph (l)(ii)). "Permitted Refinancing Debt" means any Debt that Refinances any other Debt, including any successive Refinancings, so long as (a) such Debt is in an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) not in excess of the sum of (i) the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding of the Debt being Refinanced and (ii) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, related to such Refinancing, (b) the Average Life of such Debt is equal to or greater than the Average Life of the Debt being Refinanced and (c) the Stated Maturity of such Debt is no earlier than the Stated Maturity 44 of the Debt being Refinanced; provided, however, that Permitted Refinancing Debt -------- ------- shall not include (x) Debt of a Subsidiary that Refinances Debt of the Company or (y) Debt of the Company or a Restricted Subsidiary that Refinances Debt of an Unrestricted Subsidiary. "Person" means any individual, corporation, company (including any limited liability company), partnership, joint venture, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock" means any Capital Stock of a Person, however designated, which entitles the holder thereof to a preference with respect to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of any other class of Capital Stock issued by such Person. "pro forma" means, with respect to any calculation made or required to be made pursuant to the terms hereof, a calculation performed in accordance with Article 11 of Regulation S-X promulgated under the Securities Act, as interpreted in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, or otherwise a calculation made in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, as the case may be. "Property" means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including Capital Stock in, and other securities of, any other Person. "Public Equity Offering" means an underwritten public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act. "Purchase Money Debt" means Debt (a) consisting of the deferred purchase price of property, conditional sale obligations, obligations under any title retention agreement, other purchase money obligations and obligations in respect of industrial revenue bonds, in each case where the maturity of such Debt does not exceed the anticipated useful life of the asset being financed, and (b) Incurred to finance the acquisition or construction by the Company or a Restricted Subsidiary of such asset, including remodeling 45 thereof and additions and improvements thereto; provided, however, that such -------- ------- Debt is Incurred within 180 days after such acquisition of such asset by the Company or a Restricted Subsidiary or completion of such construction, remodeling, addition or improvement, as the case may be. "Redeemable Stock" means, with respect to any Person, any Capital Stock that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable, in either case at the option of the holder thereof) or otherwise (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b) is or may become redeemable or repurchaseable at the option of the holder thereof, in whole or in part, or (c) is convertible or exchangeable, in either case at the option of the holder thereof, for Debt of Disqualified Stock. "Refinance" means, in respect of any Debt, to finance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Debt, in exchange or replacement for, such Debt. "Refinanced" and "Refinancing" shall have correlative meanings. "Registered Exchange Offer" means the proposed offer to the holders of Holding Preferred Stock to issue and deliver to such holders, in exchange for Holding Preferred Stock (or, if Holding Preferred Stock has been exchanged therefor, the Senior Exchangeable Preferred Stock or Company Exchange Debentures, as applicable), a like principal amount or liquidation preference of Exchange Securities. "Registration Agreement" means the Registration Agreement, dated as of April 7, 1998, among the Company, Holding and Salomon Brothers Inc and BT Alex. Brown Incorporated, as purchasers. "Related Business" means any business that is related, ancillary or complementary to the businesses of the Company and the Restricted Subsidiaries on the Issue Date. "Restricted Payment" means (a) any dividend or distribution (whether made in cash, securities or other Property) declared or paid on or with respect to any shares of Parity Stock or Junior Stock of the Company or any Capital Stock of any Restricted Subsidiary (including any payment in connection with any merger or consolidation with or into the Company or any Restricted Subsidiary), except for any dividend or distribution which is made solely to the Company or a Restricted Subsidiary (and, if such Restricted Subsidiary is not a Wholly Owned Subsidiary, to the other 46 shareholders of such Restricted Subsidiary on a pro rata basis or on a basis --- ---- that results in the receipt by the Company or a Restricted Subsidiary of dividends or distributions of greater value than it would receive on a pro rata basis) or any dividend or distribution payable solely in shares of Junior Stock (other than Disqualified Stock) of the Company; (b) the purchase, repurchase, redemption, acquisition or retirement for value of any Parity Stock or Junior Stock of the Company or any Capital Stock of any Affiliate of the Company (other than from the Company or a Restricted Subsidiary) or any securities exchangeable for or convertible into any such Parity Stock, Junior Stock or Capital Stock, including the exercise of any option to exchange any such Parity Stock, Junior Stock or Capital Stock (other than for or into Capital Stock that is not Disqualified Stock); or (c) any Investment (other than Permitted Investments) in any Person. "Restricted Subsidiary" means (a) any Subsidiary of the Company unless such Subsidiary shall have been designated an Unrestricted Subsidiary as permitted or required pursuant to paragraph (l)(vi) and (b) an Unrestricted Subsidiary which is redesignated as a Restricted Subsidiary as permitted pursuant to paragraph (l)(vi). "S&P" means Standard & Poor's Ratings Service or any successor to the rating agency business thereof. "Sale and Leaseback Transaction" means any arrangement relating to Property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such Property to another Person and the Company or a Restricted Subsidiary leases if from such Person. "Securities Act" means the Securities Act of 1933. "Senior Exchangeable Preferred Stock" means the 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010 of the Company, issuable in exchange for the Holding Preferred Stock. "Series B Holding Preferred Stock" means the 11 1/2% Series B Senior Exchangeable Preferred Stock Due 2010 of Holding, exchangeable for Holding Preferred Stock pursuant to the Exchange Offer Registration Statement. "Shelf Registration Statement" means a "shelf" registration statement of the Company and Holding pursuant to the provisions of the Registration Agreement which covers Holding Preferred Stock (or if Holding Preferred Stock has 47 been exchanged therefor, the Senior Exchangeable Preferred Stock or Company Exchange Debentures, as applicable), and the Exchange Securities, as applicable, on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the SEC, all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless such contingency has occurred). "Subsidiary" means, in respect of any Person, any corporation, company, association, partnership, joint venture or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled directly or indirectly, by (a) such Person, (b) such Person and one or more Subsidiaries of such Person or (c) one or more Subsidiaries of such Person. "Subsidiary Guarantor" means each Subsidiary of the Company that becomes a Subsidiary Guarantor pursuant to the terms of the Notes. "Subsidiary Guaranty" means a Guarantee of the Notes on the terms set forth in the Indenture by a Subsidiary Guarantor of the Company's obligations with respect to the Notes. "Temporary Cash Investments" means any of the following: (a) Investments in U.S. Government Obligations; (b) Investments in time deposit accounts, certificates of deposit and money market deposits maturing within 90 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America or any state thereof having capital surplus and undivided profits aggregating in excess of $500.0 million and whose long-term debt rate is "A-3 or "A-" or higher according to Moody's or S&P (or such similar 48 equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)); (c) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (a) entered into with a bank meeting the qualifications described in clause (b) above; (d) Investments in commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)): (e) direct obligations (or certificates representing an ownership in such obligations) of any state of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of such state is pledged and which are not callable or redeemable at the issuer's option, provided that (i) the long-term -------- debt of such state is rated "A-3" or "A-" or higher according to Moody's or S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)) and (ii) such obligations mature within 180 days of the date of acquisition thereof; and (f) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (a) through (e) above. "Unrestricted Subsidiary" means (a) any Subsidiary of the Company in existence on the Issue Date that is not a Restricted Subsidiary; (b) any Subsidiary of an Unrestricted Subsidiary; and (c) any Subsidiary of the Company that is designated after the Issue Date as an Unrestricted Subsidiary as permitted or required pursuant to paragraph (l)(vi) and not thereafter redesignated as a Restricted Subsidiary as permitted pursuant thereto. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "Voting Stock" of a corporation means all classes of Capital Stock of such corporation then outstanding and 49 normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means, at any time, a Restricted Subsidiary all the Voting Stock of which (except directors' qualifying shares) is at such time owned, directly or indirectly, by the Company and its other Wholly Owned Subsidiaries. 3. The foregoing Amendment and Restatement of Certificate of Determination set forth herein has been duly approved and adopted by the Board of Directors of the Company. 4. The foregoing Amendment and Restatement of Certificate of Determination set forth herein has been duly approved by the required vote of shareholders in accordance with Section 902 and 903 of the Corporations Code. The Company has outstanding 7,800,000 shares of Common Stock and 300,000 shares of Senior PIK Preferred Stock. The vote required to approve this amendment was more than 50% of the outstanding Common Stock and more than 50% of the outstanding Senior PIK Preferred Stock, each voting as a separate class, and the number of shares voting in favor of this amendment equaled or exceeded the vote required. [remainder of page intentionally left blank] 50 The undersigned each further declares under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of his own knowledge and that this certificate has been executed on April 8, 1998 in Temecula, California. /s/ Richard W. Johansen ___________________________________________ Richard W. Johansen, President /s/ Jay R. Ogram ___________________________________________ Jay R. Ogram, Chief Financial Officer AMENDED AND RESTATED ARTICLES OF INCORPORATION OF HUDSON RESPIRATORY CARE INC. Richard W. Johansen and Jay R. Ogram certify that: 1. They are the President and Secretary, respectively, of Hudson Respiratory Care Inc., a California corporation (the "CORPORATION"). 2. The Amended and Restated Articles of Incorporation of the Corporation are amended and restated to read as follows: I NAME OF CORPORATION The name of the Corporation shall be: Hudson Respiratory Care Inc. II PURPOSE The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III AUTHORIZED CAPITAL STOCK The Corporation is authorized to issue two classes of shares of stock to be designated, respectively, "COMMON STOCK" and "PREFERRED STOCK;" the total number of such shares shall be seventeen million (17,000,000); the total number of Common Stock shall be fifteen million (15,000,000), each having a par value of one-cent ($.01); and the total number of Preferred Stock shall be two million (2,000,000), each having a par value of one-cent ($.01). Upon amendment and restatement of the Amended and Restated Articles of Incorporation as herein set forth, each outstanding share of Common Stock is split up and converted into two hundred and forty-five (245) shares of Common Stock. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby vested with authority to fix by resolution or resolutions the designations and the powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference, of any series of Preferred Stock, and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series (but not below the number of shares thereof then outstanding). In case the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status which they had before the adoption of the resolution or resolutions originally fixing the number of such shares. IV LIMITATION ON DIRECTOR LIABILITY The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. V INDEMNIFICATION OF AGENTS The Corporation is authorized to provide indemnification of its agents (as such term is defined in Section 317 of the California General Corporation Law) to the fullest extent permissible under California law. 3. The foregoing amendment and restatement of the Amended and Restated Articles of Incorporation has been duly approved by the Board of Directors of the Corporation. 4. The foregoing amendment and restatement of the Amended and Restated Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of the Corporation is fifty-nine thousand and fifty-six (59,056). The number of shares voting in favor of the amendment and restatement was fifty-nine thousand and fifty-six (59,056) and this number equaled or exceeded the vote required. The percentage vote required was more than 50%. 2 We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: March 23, 1998 /s/ Richard W. Johansen ---------------------------------- Richard W. Johansen President /s/ Jay R. Ogram ---------------------------------- Jay R. Ogram Secretary [SEAL APPEARS HERE] 3 EX-3.2 5 BYLAWS OF HUDSON RCI EXHIBIT 3.2 BYLAWS FOR THE REGULATION OF HUDSON RESPIRATORY CARE INC. A CALIFORNIA CORPORATION ARTICLE I Principal Executive Office -------------------------- The principal executive office of the corporation shall be 27711 Diaz Road, Temecula, California 92390. ARTICLE II Meeting of Shareholders ----------------------- Section 2.01 Annual Meetings. The annual meeting of shareholders shall --------------- be held on such date as the board of directors shall determine. At each annual meeting, directors shall be elected and any other proper business may be transacted. Section 2.02 Special Meetings. Special meetings of shareholders may be ---------------- called by the board of directors, the chairman of the board, the chief executive officer, or the holders of shares entitled to cast not less than ten percent (10%) of the votes at such meeting. Each special meeting shall be held at such date and time as is requested by the person or persons calling the meeting within the limits fixed by law. Section 2.03 Place of Meetings. Each annual or special meeting of ----------------- shareholders shall be held at such location as may be determined by the board of directors, or if no such determination is made, at such place as may be determined by the chief executive officer, or by any other officer authorized by the board of directors. If no location is so determined, any annual or special meeting shall be held at the principal executive office of the corporation. Section 2.04 Notice of Meetings. Notice of each annual or special ------------------ meeting of shareholders shall contain such information, and shall be given to such persons at such time, and in such manner, as the board of directors shall determine, or if no such determination is made, as the chief executive officer, or any other officer so authorized by the board of directors or the chief executive officer, shall determine, subject to the requirements of applicable law. Section 2.05 Conduct of Meetings. Subject to the requirements of ------------------- applicable law, all annual and special meetings of shareholders shall be conducted in accordance with such rules and procedures as the board of directors may determine and, as to matters not governed by such rules and procedures, as the chairman of such meeting shall determine. The chairman of any annual or special meeting of shareholders shall be designated by the board of directors and, in the absence of any such designation, shall be the chief executive officer of the corporation. ARTICLE III Directors --------- Section 3.01 Number of Directors. The Corporation shall have not less ------------------- than three (3) nor more than five (5) directors. The exact number of directors shall be fixed from time to time, within the limits specified above, by resolution of the shareholders in accordance with applicable law. Subject to the foregoing provisions for changing the number of directors, the number of directors of the Corporation shall be three (3). Section 3.02 Meetings of the Board. Each regular and special meeting of --------------------- the board shall be held at a location determined as follows: The board of directors may designate any place, within or without the State of California, for the holding of any meeting. If no such designation is made, (i) any meeting called by a majority of the directors shall be held at such location, within the county of the corporation's principal executive office, as the directors calling the meeting shall designate; and (ii) any other meeting shall be held at such location, within the county of the corporation's principal executive office, as the chief executive officer may designate, or in the absence of such designation, at the corporation's principal executive office. Subject to the requirements of applicable law, all regular and special meetings of the board of directors shall be conducted in accordance with such rules and procedures as the board of directors may approve and, as to matters not governed by such rules and procedures, as the chairman of such meeting shall determine. The chairman of any regular or special meeting shall be designated by the directors and, in the absence of any such designation, shall be the chief executive officer of the corporation. ARTICLE IV Indemnification of Directors, Officers, and Other Corporate Agents ------------------------------------ Section 4.01 Indemnification. This corporation shall indemnify and hold --------------- harmless each "agent" of the corporation, as the term "agent" is defined in Section 317(a) of the California General Corporation Law, (the "Law") from and against any expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any "proceeding" (as defined in said Section 317(a) to the full extent permitted by applicable law. The corporation shall advance to its agents expenses incurred in defending any proceeding prior to the final disposition thereof to the full extent and in the manner permitted by applicable law. Section 4.02 Right to Indemnification. This section shall create a right ------------------------ of indemnification for each person referred to in section, whether or not the proceeding to which the indemnification relates arose in whole or in part prior to adoption of such section and in the event of death such right shall extend to such person' s legal representatives. The right of indemnification hereby given shall not be exclusive of any other rights such person may have whether by law or under any agreement, insurance policy, vote of directors or shareholders, or otherwise. 2 Section 4.03 Insurance. The corporation shall have power to purchase and --------- maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not the corporation would have the power to indemnify the agent against such liability. ARTICLE V Officers -------- Section 5.01 Officers. The corporation shall have a chief executive -------- officer, a president, a chief financial officer, a secretary and may have such other officers, including a chairman of the board, as may be designated by the board. officers shall have such powers and duties as may be specified by, or in accordance with, resolutions of the board of directors. In the absence of any contrary determination by the board of directors, the chief executive officer shall, subject to the power and authority of the board of directors, have general supervision, direction, and control of the officers, employees, business, and affairs of the corporation. Section 5.02 Limited Authority of Officers. No officers of the ----------------------------- corporation shall have any power or authority outside the normal day-to-day business of the corporation to bind the corporation by any contract or engagement or to pledge its credit or to render it liable in connection with any transaction unless so authorized by the board of directors. ARTICLE VI Waiver of Annual Reports ------------------------ So long as the corporation has less than 100 holders of record of its shares (determined as provided in Section 605 of the California General Corporation Law), no annual report to shareholders shall be required, and the requirement to the contrary of Section 1501 of the California General Corporation Law is hereby expressly waived. ARTICLE VII Amendments ---------- New bylaws may be adopted or these bylaws may be amended or repealed by the shareholders or, except for Section 3.01, by the directors. 3 EX-4.1 6 INDENTURE DATED AS OF 4-7-98 Exhibit 4.1 EXECUTION COPY ================================================================================ HUDSON RESPIRATORY CARE INC. 9 1/8% Senior Subordinated Notes due 2008 ___________________________________________ INDENTURE Dated as of April 7, 1998 __________________________________________ UNITED STATES TRUST COMPANY OF NEW YORK, Trustee ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE 1 Definitions and Incorporation by Reference ------------------------------------------ SECTION 1.01. Definitions......................................... 1 SECTION 1.02. Other Definitions................................... 29 SECTION 1.03. Incorporation by Reference of Trust Indenture Act... 30 SECTION 1.04. Rules of Construction............................... 30 ARTICLE 2 The Securities -------------- SECTION 2.01. Amount of Securities; Issuable in Series............ 31 SECTION 2.02. Form and Dating..................................... 31 SECTION 2.03. Execution and Authentication........................ 32 SECTION 2.04. Registrar and Paying Agent.......................... 33 SECTION 2.05. Paying Agent To Hold Money in Trust................. 34 SECTION 2.06. Securityholder Lists................................ 34 SECTION 2.07. Replacement Securities.............................. 34 SECTION 2.08. Outstanding Securities.............................. 35 SECTION 2.09. Temporary Securities................................ 35 SECTION 2.10. Cancelation......................................... 36 SECTION 2.11. Defaulted Interest.................................. 36 SECTION 2.12. CUSIP Numbers....................................... 36 ARTICLE 3 Redemption ---------- SECTION 3.01. Notices to Trustee.................................. 37 SECTION 3.02. Selection of Securities To Be Redeemed.............. 37 SECTION 3.03. Notice of Redemption................................ 37 SECTION 3.04. Effect of Notice of Redemption...................... 38 SECTION 3.05. Deposit of Redemption Price......................... 39 SECTION 3.06. Securities Redeemed in Part......................... 40
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Page ---- ARTICLE 4 Covenants --------- SECTION 4.01. Payment of Securities............................... 40 SECTION 4.02. SEC Reports......................................... 40 SECTION 4.03. Limitation on Company and Subsidiary Guarantor Debt............................................. 41 SECTION 4.04. Limitation on Non-Guarantor Subsidiary Debt......... 41 SECTION 4.05. Limitation on Restricted Payments................... 41 SECTION 4.06. Limitation on Restrictions on Distributions from Restricted Subsidiaries......................... 45 SECTION 4.07. Limitation on Asset Sales........................... 46 SECTION 4.08. Limitation on Transactions with Affiliates.......... 50 SECTION 4.09. Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries......................... 51 SECTION 4.10. Repurchase at the Option of Holders Upon a Change of Control...................................... 51 SECTION 4.11. Limitation on Liens................................. 54 SECTION 4.12. Compliance Certificate.............................. 54 SECTION 4.13. Further Instruments and Acts........................ 54 SECTION 4.14. Limitation on Layered Debt.......................... 54 SECTION 4.15. Designation of Restricted and Unrestricted Subsidiaries.................................... 55 SECTION 4.16. Limitation on Holding's Business.................... 56 ARTICLE 5 Successor Company ----------------- SECTION 5.01. When Company May Merge or Transfer Assets........... 56 ARTICLE 6 Defaults and Remedies --------------------- SECTION 6.01. Events of Default................................... 57 SECTION 6.02. Acceleration........................................ 60 SECTION 6.03. Other Remedies...................................... 60 SECTION 6.04. Waiver of Defaults.................................. 60 SECTION 6.05. Control by Majority................................. 61 SECTION 6.06. Limitation on Suits................................. 61
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Page ---- SECTION 6.07. Rights of Holders To Receive Payment................ 62 SECTION 6.08. Collection Suit by Trustee.......................... 62 SECTION 6.09. Trustee May File Proofs of Claim.................... 62 SECTION 6.10. Priorities.......................................... 62 SECTION 6.11. Undertaking for Costs............................... 63 SECTION 6.12. Waiver of Stay or Extension Laws.................... 63 ARTICLE 7 Trustee ------- SECTION 7.01. Duties of Trustee................................... 64 SECTION 7.02. Rights of Trustee................................... 65 SECTION 7.03. Individual Rights of Trustee........................ 66 SECTION 7.04. Trustee's Disclaimer................................ 66 SECTION 7.05. Notice of Defaults.................................. 66 SECTION 7.06. Reports by Trustee to Holders....................... 66 SECTION 7.07. Compensation and Indemnity.......................... 67 SECTION 7.08. Replacement of Trustee.............................. 68 SECTION 7.09. Successor Trustee by Merger......................... 69 SECTION 7.10. Eligibility; Disqualification....................... 69 SECTION 7.11. Preferential Collection of Claims Against Company... 70 ARTICLE 8 Discharge of Indenture; Defeasance ---------------------------------- SECTION 8.01. Discharge of Liability on Securities; Defeasance.... 70 SECTION 8.02. Conditions to Defeasance............................ 71 SECTION 8.03. Application of Trust Money.......................... 73 SECTION 8.04. Repayment to Company................................ 73 SECTION 8.05. Indemnity for Government Obligations................ 73 SECTION 8.06. Reinstatement....................................... 73 ARTICLE 9 Amendments ---------- SECTION 9.01. Without Consent of Holders.......................... 74 SECTION 9.02. With Consent of Holders............................. 75 SECTION 9.03. Compliance with Trust Indenture Act................. 76 SECTION 9.04. Revocation and Effect of Consents
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Page ---- and Waivers....................................... 76 SECTION 9.05. Notation on or Exchange of Securities............... 77 SECTION 9.06. Trustee To Sign Amendments.......................... 77 SECTION 9.07. Payment for Consent................................. 78 ARTICLE 10 Subordination ------------- SECTION 10.01. Agreement To Subordinate........................... 78 SECTION 10.02. Liquidation, Dissolution, Bankruptcy............... 78 SECTION 10.03. Default on Senior Debt............................. 79 SECTION 10.04. Acceleration of Payment of Securities.............. 80 SECTION 10.05. When Distribution Must Be Paid Over................ 80 SECTION 10.06. Subrogation........................................ 80 SECTION 10.07. Relative Rights.................................... 80 SECTION 10.08. Subordination May Not Be Impaired by Company....... 80 SECTION 10.09. Rights of Trustee and Paying Agent................. 81 SECTION 10.10. Distribution or Notice to Representative........... 81 SECTION 10.11. Article 10 Not To Prevent Events of Default or Limit Right To Accelerate............................. 81 SECTION 10.12. Trust Moneys Not Subordinated...................... 81 SECTION 10.13. Trustee Entitled To Rely........................... 82 SECTION 10.14. Trustee To Effectuate Subordination................ 82 SECTION 10.15. Trustee Not Fiduciary for Holders of Senior Debt... 82 SECTION 10.16. Reliance by Holders of Senior Debt on Subordination Provisions...................................... 83 ARTICLE 11 Subsidiary Guaranties --------------------- SECTION 11.01. Guaranties......................................... 83 SECTION 11.02. Contribution....................................... 85 SECTION 11.03. Successors and Assigns............................. 86 SECTION 11.04. No Waiver.......................................... 86 SECTION 11.05. Modification....................................... 86 SECTION 11.06. Execution of Supplemental
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Page ---- Indenture for Future Subsidiary Guarantors......... 86 ARTICLE 12 Subordination of Subsidiary Guaranties -------------------------------------- SECTION 12.01. Agreement To Subordinate........................... 87 SECTION 12.02. Liquidation, Dissolution, Bankruptcy............... 87 SECTION 12.03. Default on Senior Debt of Subsidiary Guarantor..... 88 SECTION 12.04. Demand for Payment................................. 88 SECTION 12.05. When Distribution Must Be Paid Over................ 88 SECTION 12.06. Subrogation........................................ 89 SECTION 12.07. Relative Rights.................................... 89 SECTION 12.08. Subordination May Not Be Impaired by Subsidiary Guarantor....................................... 89 SECTION 12.09. Rights of Trustee and Paying Agent................. 89 SECTION 12.10. Distribution or Notice to Representative........... 90 SECTION 12.11. Article 12 Not To Prevent Defaults Under a Subsidiary Guaranty or Limit Right To Demand Payment....... 90 SECTION 12.12. Trustee Entitled To Rely........................... 90 SECTION 12.13. Trustee To Effectuate Subordination................ 91 SECTION 12.14. Trustee Not Fiduciary for Holders of Senior Debt of Subsidiary Guarantor........................... 91 SECTION 12.15. Reliance by Holders of Senior Debt on Subordination Provisions..................................... 91 ARTICLE 13 Miscellaneous ------------- SECTION 13.01. Trust Indenture Act Controls....................... 92 SECTION 13.02. Notices............................................ 92 SECTION 13.03. Communication by Holders with Other Holders........ 93 SECTION 13.04. Certificate and Opinion as to Conditions Precedent. 93 SECTION 13.05. Statements Required in Certificate or Opinion...... 94 SECTION 13.06. When Securities Disregarded; Acts
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Page ---- of Holder...................................... 95 SECTION 13.07. Rules by Trustee, Paying Agent and Registrar....... 95 SECTION 13.08. Legal Holidays..................................... 95 SECTION 13.09. Governing Law...................................... 95 SECTION 13.10. No Recourse Against Others......................... 95 SECTION 13.11. Successors......................................... 96 SECTION 13.12. Multiple Originals................................. 96 SECTION 13.13. Table of Contents; Headings........................ 96
Appendix A Provisions Relating to Initial Securities and Exchange Securities Exhibit 1 to Appendix A Form of Initial Security Exhibit A Form of Exchange Security Exhibit B Form of Supplemental Indenture CROSS-REFERENCE TABLE
TIA Indenture Section Section - ------- --------- 310(a)(1).................................... 7.10 (a)(2)....................................... 7.10 (a)(3)....................................... N.A. (a)(4)....................................... N.A. (b).......................................... 7.08; 7.10 (c).......................................... N.A. 311(a)....................................... 7.11 (b).......................................... 7.11 (c).......................................... N.A. 312(a)....................................... 2.06 (b).......................................... 13.03 (c).......................................... 13.03 313(a)....................................... 7.06 (b)(1)....................................... N.A. (b)(2)....................................... 7.06 (c).......................................... 13.02 (d).......................................... 7.06 314(a)....................................... 4.02; 4.12; 13.02 (b).......................................... N.A. (c)(1)....................................... 13.04 (c)(2)....................................... 13.04 (c)(3)....................................... N.A. (d).......................................... N.A. (e).......................................... 13.05 (f).......................................... 4.12 315(a)....................................... 7.01 (b).......................................... 7.05; 13.02 (c).......................................... 7.01 (d).......................................... 7.01 (e).......................................... 6.11 316(a) (last sentence).................................... 13.06 (a)(1)(A).................................... 6.05 (a)(1)(B).................................... 6.04 (a)(2)....................................... N.A. (b).......................................... 6.07 317(a)(1).................................... 6.08 (a)(2)....................................... 6.09 (b).......................................... 2.05 318(a)....................................... 13.01
N.A. Means Not Applicable. ___________________ Note: This Cross-Reference Table shall not, for any purposes, be deemed to be part of this Indenture. INDENTURE dated as of April 7, 1998, among HUDSON RESPIRATORY CARE INC., a California corporation (the "Company"), RIVER HOLDING CORP., a Delaware corporation ("Holding") and UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee (the "Trustee"). Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders of the Company's 9 1/8% Senior Subordinated Notes due 2008 (the "Initial Securities") and, if and when issued pursuant to a registered or private exchange for the Initial Securities, the Company's 9 1/8% Senior Subordinated Notes due 2008 (the "Exchange Securities" and, together with the Initial Securities, the "Securities"): ARTICLE 1 Definitions and Incorporation by Reference ------------------------------------------ SECTION 1.01. Definitions. ------------ "Additional Assets" means (a) any Property (other than cash, cash ----------------- equivalents and securities) to be owned by the Company or any Restricted Subsidiary and used in a Related Business; or (b) Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary from any Person other than an Affiliate of the Company; provided, however, that, in the case of clause (b), -------- ------- such Restricted Subsidiary is primarily engaged in a Related Business. "Affiliate" of any specified Person means (a) any other Person --------- directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person or (b) any other Person who is a director or officer of (i) such specified Person, (ii) any Subsidiary of such specified Person or (iii) any Person described in clause (a) above. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of Section 4.07, Section 4.08 and the definition of "Additional Assets" only, "Affiliate" shall also mean any beneficial owner of shares representing 5% or more of the total voting power of the 2 Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Voting Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. "Agent Member" means any member of, or participant in, the Depository. ------------ "Applicable Procedures" means, with respect to any transfer or --------------------- transaction involving a Temporary Regulation S Global Note or beneficial interest therein, the rules and procedures of the Depository, Euroclear and Cedel for such Global Note, in each case to the extent applicable to such transaction and as in effect from time to time. "Asset Sale" means any sale, lease, transfer, issuance or other ---------- disposition (or series of related sales, leases, transfers, issuances or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of (a) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares) or (b) any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary other than, in the case of clauses (a) and (b) above, (i) any disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (ii) for purposes of Section 4.07 only, any disposition that constitutes a Permitted Investment or Restricted Payment permitted by Section 4.05, (iii) any disposition effected in compliance with Section 5.01(a), (iv) any Sale and Leaseback Transaction completed within 180 days following the original acquisition of the subject assets where such Sale and Leaseback Transaction represents the intended financing of Property acquired after the Issue Date and (v) any disposition or series of related dispositions of assets having a Fair Market Value and sale price of less than $500,000. "Attributable Debt" in respect of a Sale and Leaseback Transaction ----------------- means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). 3 "Average Life" means, as of any date of determination, with respect ------------ to any Debt or Preferred Stock, the quotient obtained by dividing (a) the sum of the product of the numbers of years (rounded to the nearest one-twelfth of one year) from the date of determination to the dates of each successive scheduled principal payment of such Debt or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (b) the sum of all such payments. "Board of Directors" means the Board of Directors of the Company or ------------------ any committee thereof duly authorized to act on behalf of such Board. "Business Day" means each day which is not a Legal Holiday. ------------ "Capital Lease Obligations" means any obligation under a lease that is ------------------------- required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of Debt represented by such obligation shall be the capitalized amount of such obligations determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. For purposes of Section 4.11, a Capital Lease Obligation shall be deemed secured by a Lien on the Property being leased. "Capital Stock" means, with respect to any Person, any shares or other ------------- equivalents (however designated) of corporate stock, partnership interests or any other participations, rights, warrants, options or other interests in the nature of an equity interest in such Person, including Preferred Stock, but excluding any debt security convertible or exchangeable into such equity interest. "Capital Stock Sale Proceeds" means the aggregate cash proceeds --------------------------- received by the Company from the issuance or sale (other than to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any of its Subsidiaries for the benefit of their employees) by the Company of any class of its Capital Stock (other than Disqualified Stock) after the Issue Date, net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. 4 "Change of Control" means the occurrence of any of the following ----------------- events: (a) prior to the first Public Equity Offering, the Permitted Holders cease to be the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of a majority of the voting power of the Voting Stock of the Company, whether as a result of the issuance of securities of the Company, any merger, consolidation, liquidation or dissolution of the Company, any direct or indirect transfer of securities by the Permitted Holders or otherwise (for purposes of this clause (a), the Permitted Holders will be deemed to beneficially own any Voting Stock of a corporation (the "specified corporation") held by any other corporation (the "parent corporation") so long as the Permitted Holders beneficially own, directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of such parent corporation); or (b) after the first Public Equity Offering, any "Person" or "group" (as such terms are used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provisions to either of the foregoing), including any group acting for the purpose of acquiring, holding, voting or disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act, other than any one or more of the Permitted Holders, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 35% or more of the voting power of the Voting Stock of the Company; provided, however, that the Permitted Holders are the "beneficial -------- ------- owners" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, in the aggregate of a lesser percentage of the total voting power of all classes of the Voting Stock of the Company than such other Person or group (for purposes of this clause (b), 5 such Person or group shall be deemed to beneficially own any Voting Stock of a specified corporation held by a parent corporation so long as such Person or group beneficially owns, directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of such parent corporation); or (c) the sale, transfer, assignment, lease, conveyance or other disposition, directly or indirectly, of all or substantially all the assets of the Company and the Restricted Subsidiaries, considered as a whole (other than a disposition of such assets as an entirety or virtually as an entirety to a Wholly Owned Subsidiary or one or more Permitted Holders) shall have occurred, or the Company merges, consolidates or amalgamates with or into any other Person (other than one or more Permitted Holders) or any other Person (other than one or more Permitted Holders) merges, consolidates or amalgamates with or into the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is reclassified into or exchanged for cash, securities or other Property, other than any such transaction where (i) the outstanding Voting Stock of the Company is reclassified into or exchanged for Voting Stock of the surviving corporation and (ii) the holders of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the surviving corporation immediately after such transaction and in substantially the same proportion as before the transaction; or (d) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election or appointment by such Board or whose nomination for election by the shareholders of the Company was approved by a vote of 66 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 members of the Board of Directors then in office; or (e) the shareholders of the Company shall have approved any plan of liquidation or dissolution of the Company. 6 "Code" means the Internal Revenue Code of 1986, as amended. ---- "Consolidated Interest Coverage Ratio" means, as of any date of ------------------------------------ determination, the ratio of (a) the aggregate amount of EBITDA for the most recent four consecutive fiscal quarters ending at least 45 days prior to such determination date to (b) Consolidated Interest Expense for such four fiscal quarters; provided, however, that (i) if the Company or any Restricted -------- ------- Subsidiary has Incurred any Debt since the beginning of such period that remains outstanding or if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio is an Incurrence of Debt, or both, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Debt as if such Debt had been Incurred on the first day of such period and the discharge of any other Debt repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Debt as if such discharge had occurred on the first day of such period, (ii) if since the beginning of such period the Company or any Restricted Subsidiary shall have repaid, repurchased, legally defeased or otherwise discharged any Debt with Capital Stock Sale Proceeds, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such discharge as if such discharge had occurred on the first day of such period, (iii) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Sale or if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio is an Asset Sale, or both, EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the Property which is the subject of such Asset Sale for such period, or increased by an amount equal to the EBITDA (if negative) directly attributable thereto for such period, in either case as if such Asset Sale had occurred on the first day of such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Debt of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Asset Sale, as if such Asset Sale had occurred on the first day of such period (or, if the Capital Stock of any Restricted Subsidiary is sold, by an amount equal to the Consolidated Interest Expense for such period directly attributable to the Debt of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Debt after such sale), (iv) if since the beginning of such period the 7 Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of Property, including any acquisition of Property occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Debt) as if such Investment or acquisition occurred on the first day of such period and (v) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Sale, Investment or acquisition of Property that would have required an adjustment pursuant to clause (iii) or (iv) above if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Sale, Investment or acquisition occurred on the first day of such period. For purposes of this definition, pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company and as further contemplated by the definition of the term "pro forma". If any Debt bears a floating rate of interest and is being given pro forma effect, the interest expense on such Debt shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Debt if such Interest Rate Agreement has a remaining term in excess of 12 months). "Consolidated Interest Expense" means, for any period, the total ----------------------------- interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent Incurred by the Company or its Restricted Subsidiaries, (a) interest expense attributable to capital leases, (b) amortization of debt discount and debt issuance cost, including commitment fees, other than with respect to Debt Incurred in connection with the Recapitalization, (c) capitalized interest, (d) non-cash interest expenses, (e) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (f) net costs associated with Hedging Obligations (including amortization of fees), (g) Disqualified Dividends other than Disqualified Dividends paid with shares of Capital Stock of the Company which is not Disqualified Stock, (h) Preferred Stock dividends in respect of all 8 Preferred Stock of Restricted Subsidiaries held by Persons other than the Company or a Wholly Owned Subsidiary, (i) interest Incurred in connection with Investments in discontinued operations, (j) interest accruing on any Debt of any other Person to the extent such Debt is Guaranteed by the Company or any Restricted Subsidiary and (k) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Debt Incurred by such plan or trust. "Consolidated Net Income" means, for any period, the net income (loss) ----------------------- of the Company and its consolidated Subsidiaries; provided, however, that there -------- ------- shall not be included in such Consolidated Net Income (a) any net income (loss) of any Person (other than the Company) if such Person is not a Restricted Subsidiary, except that (i) subject to the exclusion contained in clause (d) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to a Restricted Subsidiary, to the limitations contained in clause (c) below) and (ii) the Company's equity in a net loss of any such Person other than an Unrestricted Subsidiary for such period shall be included in determining such Consolidated Net Income, (b) for the purposes of Section 4.05 only, any net income (loss) of any Person acquired by the Company or any of its consolidated Subsidiaries in a pooling of interests transaction for any period prior to the date of such acquisition, (c) any net income (but not loss) of any Restricted Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions, directly or indirectly, to the Company, except that subject to the exclusion contained in clause (d) below, the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to another Restricted Subsidiary, to the limitation contained in this clause), (d) any gain (or, for purposes of Section 4.03 and Section 5.01 only, loss) realized upon the sale or other disposition of any Property of the Company or any of its consolidated Subsidiaries (including pursuant to any Sale 9 and Leaseback Transaction) which is not sold or otherwise disposed of in the ordinary course of business, provided, that any tax benefit or tax liability -------- resulting therefrom shall be excluded in such Consolidated Net Income, (e) any extraordinary gain or loss, provided, that any tax benefit or tax liability -------- resulting therefrom shall be excluded in such Consolidated Net Income, (f) the cumulative effect of a change in accounting principles and (g) (i) any non-cash compensation expense realized for grants of performance shares, stock options or other stock awards to officers, directors and employees of the Company or any Restricted Subsidiary or (ii) compensation expense realized with respect to periods prior to the Issue Date in respect of payments under the Company's 1994 Amended and Restated Equity Participation Plan or compensation expense, to the extent accrued in 1998, related to contingent payments to existing managers of the Company pursuant to the Merger Agreement in an aggregate amount not in excess of $2.4 million. Notwithstanding the foregoing, for the purposes of Section 4.05 only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such Section pursuant to clause (a)(iii)(D) thereof. "Credit Facility" means, with respect to the Company or any Restricted --------------- Subsidiary, one or more debt or commercial paper facilities with banks or other institutional lenders (including the New Credit Facility) providing for revolving credit loans, term loans, receivables or inventory financing (including through the sale of receivables or inventory to such lenders or to special purpose, bankruptcy remote entities formed to borrow from such lenders against such receivables or inventory) or trade letters of credit, in each case together with any amendments, supplements, modifications (including by any extension of the maturity thereof), refinancings or replacements thereof by a lender or syndicate of lenders in one or more successive transactions (including any such transaction that changes the amount available thereunder, replaces such agreement or document, or provides for other agents or lenders). "Currency Exchange Protection Agreement" means, in respect of a -------------------------------------- Person, any foreign exchange contract, currency swap agreement, currency option or other similar agreement or arrangement designed to protect such Person against fluctuations in currency exchange rates. 10 "Debt" means, with respect to any Person on any date of determination ---- (without duplication), (a) the principal of and premium (if any) in respect of (i) debt of such Person for money borrowed and (ii) debt evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (b) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale and Leaseback Transactions entered into by such Person; (c) all obligations of such Person issued or assumed as the deferred purchase price of Property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (d) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in (a) through (c) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit); (e) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person, any Preferred Stock (but excluding, in each case, any accrued dividends); (f) all obligations of the type referred to in clauses (a) through (e) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee; (g) all obligations of the type referred to in clauses (a) through (f) of other Persons secured by any Lien on any Property of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such Property or the amount of the obligation so secured; and (h) to the extent not otherwise included in this definition, Hedging Obliga tions of such Person. The amount of Debt of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided -------- that the amount outstanding at any time of any Debt issued with original issue discount is the face amount of such Debt less the remaining unamortized portion of the original issue discount of such Debt at such time as determined in accordance with GAAP. 11 "Default" means any event which is, or after notice or passage of time ------- or both would be, an Event of Default. "Designated Senior Debt" means any Senior Debt which has, at the time ---------------------- of determination, an aggregate principal amount outstanding of at least $10.0 million (including the amount of all undrawn commitments and matured and contingent reimbursement obligations pursuant to letters of credit thereunder) that is specifically designated in the instrument evidencing such Senior Debt and is designated in a notice delivered by the Company to the holders or a Representative of the holders of such Senior Debt and in an Officers' Certificate delivered to the Trustee as "Designated Senior Debt" of the Company for purposes of this Indenture; provided that the New Credit Facility shall be -------- deemed to be Designated Senior Debt under this Indenture. "Disqualified Dividends" means, for any dividend with respect to ---------------------- Disqualified Stock, the quotient of the dividend divided by the difference between one and the maximum statutory federal income tax rate (expressed as a decimal number between 1 and 0) then applicable to the issuer of such Disqualified Stock. "Disqualified Stock" means, with respect to any Person, Redeemable ------------------ Stock of such Person as to which (i) the maturity, (ii) mandatory redemption or (iii) redemption, repurchase, conversion or exchange at the option of the holder thereof occurs, or may occur, on or prior to the first anniversary of the Stated Maturity of the Securities; provided, however, that Redeemable Stock of such -------- ------- Person that would not otherwise be characterized as Disqualified Stock under this definition shall not constitute Disqualified Stock (a) if such Redeemable Stock is convertible or exchangeable into Debt or Disqualified Stock solely at the option of the issuer thereof or (b) solely as a result of provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Redeemable Stock upon the occurrence of a "change of control" occurring prior to the first anniversary of the Stated Maturity of the Securities, if (x) such repurchase obligation may not be triggered in respect of such Redeemable Stock unless a corresponding obligation also arises with respect to the Securities and (y) no such repurchase or redemption is permitted to be consummated unless and until such Person shall have satisfied all repurchase or redemption obligations with respect to any required purchase offer made with respect to the Securities. 12 "Domestic Restricted Subsidiary" means any Restricted Subsidiary other ------------------------------ than (a) a Foreign Restricted Subsidiary or (b) a Subsidiary of a Foreign Restricted Subsidiary. "EBITDA" means, for any period, an amount equal to, for the Company ------ and its consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income for such period, plus the following to the extent reducing Consolidated Net Income for such period: (i) the provision for taxes based on income or profits or utilized in computing net loss, (ii) Consolidated Interest Expense, (iii) depreciation, (iv) amortization expense and (v) any other non-cash items (other than any such non-cash item to the extent that it represents an accrual of or reserve for cash expenditures in any future period), minus (b) all non- cash items increasing Consolidated Net Income for such period (other than any such non-cash item to the extent that it will result in the receipt of cash payments in any future period). Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its shareholders. "Employee Notes" means promissory notes of employees of the Company, -------------- Holding or any of their Subsidiaries payable to the Company or Holding and received in connection with the substantially concurrent purchase of common stock of the Company or Holding by such employees. "Event of Default" has the meaning set forth in Section 6.01. ---------------- "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ "Fair Market Value" means, with respect to any Property, the price ----------------- which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair 13 Market Value will be determined, except as otherwise provided, (a) if such -------- Property has a Fair Market Value equal to or less than $2.5 million, by any Officer of the Company or (b) if such Property has a Fair Market Value in excess of $2.5 million, by a majority of the Board of Directors and evidenced by a Board Resolution, dated within 30 days of the relevant transaction, delivered to the Trustee. "Foreign Restricted Subsidiary" means any Restricted Subsidiary which ----------------------------- is not organized under the laws of the United States of America or any State thereof or the District of Columbia. "GAAP" means United States generally accepted accounting principles as ---- in effect on the Issue Date, including those set forth (a) in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (b) in the statements and pronouncements of the Financial Accounting Standards Board, (c) in such other statements by such other entity as approved by a significant segment of the accounting profession and (d) the rules and regulations of the Commission governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the Commission. "Guarantee" means any obligation, contingent or otherwise, of any --------- Person directly or indirectly guaranteeing any Debt of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for - -------- ------- collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing any obligation. "Hedging Obligation" of any Person means any obligation of such Person ------------------ pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement or any other similar agreement or arrangement. 14 "Holder" or "Securityholder" means the Person in whose name a Security ------ -------------- is registered on the Security Register. "Holding" means River Holding Corp., the corporate parent of the ------- Company, and any successor thereto. "Incur" means, with respect to any Debt or other obligation of any ----- Person, to create, issue, incur (by merger, conversion, exchange or otherwise), extend, assume, Guarantee or become liable in respect of such Debt or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Debt or obligation on the balance sheet of such Person (and "Incurrence" and "Incurred" shall have meanings correlative to the foregoing); provided, -------- however, that a change in GAAP that results in an obligation of such Person that - ------- exists at such time, and is not thereto fore classified as Debt, becoming Debt shall not be deemed an Incurrence of such Debt; provided further, however, that -------- ------- ------- solely for purposes of determining compliance with Section 4.03 and Section 4.04, amortization of debt discount shall not be deemed to be the Incurrence of Debt, provided that in the case of Debt sold at a discount, the amount of such -------- Debt Incurred shall at all times be the aggregate principal amount at Stated Maturity. "Indenture" means this Indenture as amended or supplemented from time --------- to time. "Industrias Hudson" means Industrias Hudson S.A. de C.V. ----------------- "Independent Appraiser" means an investment banking firm of national --------------------- standing or any third party appraiser of national standing, provided that such -------- firm or appraiser is not an Affiliate of the Company. "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 15 obligation of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person. For purposes of Section 4.05, Section 4.15 and the definition of "Restricted Payment", "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a -------- ------- redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary equal to an amount (if positive) equal to (a) the Company's "Investment" in such Subsidiary at the time of such redesignation less (b) the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the time of such redesignation. In determining the amount of any Investment made by transfer of any Property other than cash, such Property shall be valued at its Fair Market Value at the time of such Investment. "Issue Date" means the date on which the Initial Securities are ---------- issued. "Lien" means, with respect to any Property of any Person, any mortgage ---- or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property (including any Capital Lease Obligation, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing or any Sale and Leaseback Transaction). "Merger" means the merger of River Acquisition Corp. with and into the ------ Company pursuant to the Merger Agreement. "Merger Agreement" means the Amended and Restated Merger Agreement ---------------- between Holding, River Acquisition Corp., the Company and shareholders of the Company dated as of March 15, 1998, as in effect on the Issue Date. "Mirror Preferred Stock" means the 11-1/2% Senior PIK Preferred Stock ---------------------- due 2010 of the Company. "Moody's" means Moody's Investors Service, Inc. or any successor to ------- the rating agency business thereof. 16 "Net Available Cash" from any Asset Sale means cash payments received ------------------ therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Debt or other obligations relating to the Property that is the subject of such Asset Sale or received in any other noncash form), in each case net of (a) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such Asset Sale, (b) all payments made on any Debt which is secured by any Property subject to such Asset Sale, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such Property, or which must by its terms, or in order to obtain a necessary consent to such Asset Sale, or by applicable law, be repaid out of the proceeds from such Asset Sale, (c) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Sale and (d) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the Property disposed in such Asset Sale and retained by the Company or any Restricted Subsidiary after such Asset Sale. "New Credit Facility" means the credit facilities made available ------------------- pursuant to the Credit Agreement dated as of the Issue Date among the Company, Holding, the lenders party thereto, Salomon Smith Barney Inc, as Arranger, Advisor and Syndication Agent and Bankers Trust Company, as Administrative Agent. "Officer" means the Chief Executive Officer, the President, the Chief ------- Financial Officer or any Executive Vice President of the Company. "Officers' Certificate" means a certificate signed by two Officers of --------------------- the Company, at least one of whom shall be the principal executive officer or principal financial officer of the Company, and delivered to the Trustee. "Opinion of Counsel" means a written opinion from legal counsel who is ------------------ acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. 17 "Permitted Debt" means: -------------- (a) Debt evidenced by the Securities and of Subsidiary Guarantors evidenced by Subsidiary Guaranties; (b) (i) Debt under the Credit Facility; provided that the aggregate -------- principal amount of all such Debt under the Credit Facility comprised of (A) term loans at any one time outstanding shall not exceed $40.0 million minus all principal amounts repaid in respect of such term loans and (B) revolving credit loans or obligations at any one time outstanding shall not exceed the greater of (x) $60.0 million, which amount shall be permanently reduced by the amount of Net Available Cash used to repay Debt under the Credit Facility, and not subsequently reinvested in Additional Assets or used to purchase Securities pursuant to Section 4.07 and (y) the sum of the amounts equal to (1) 60% of the net book value of the inventory of the Company and the Restricted Subsidiaries and (2) 85% of the net book value of the accounts receivable of the Company and the Restricted Subsidiaries, in each case as of the most recent fiscal quarter ending at least 45 days prior to the date of determination and (ii) subject to the proviso contained in clause (iii) of Section 4.04, Guarantees of Debt under the Credit Facility; (c) Debt in respect of Capital Lease Obligations and Purchase Money Debt; provided that (i) the aggregate principal amount of such Debt does -------- not exceed the Fair Market Value (on the date of the Incurrence thereof) of the Property acquired, constructed or leased (including costs of installation, taxes and delivery charges with respect to such acquisition, construction or lease) and (ii) the aggregate principal amount of all Debt Incurred and then outstanding pursuant to this clause (c) (together with all Permitted Refinancing Debt Incurred in respect of Debt previously Incurred pursuant to this clause (c) and then outstanding) does not exceed $15.0 million; (d) Debt of the Company owing to and held by any Wholly Owned Subsidiary and Debt of a Wholly Owned Subsidiary owing to and held by the Company or any Wholly Owned Subsidiary; provided, however, that any -------- ------- subsequent issue or transfer of Capital Stock or other event that results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of any such Debt (except to the 18 Company or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Debt by the issuer thereof; (e) Debt of a Wholly Owned Subsidiary Incurred and outstanding on or prior to the date on which such Wholly Owned Restricted Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary (other than Debt Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of transactions pursuant to which such Wholly Owned Restricted Subsidiary became a Subsidiary of the Company or was otherwise acquired by the Company); provided that at the time such Wholly Owned Restricted -------- Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary and after giving pro forma effect to the Incurrence of such Debt, the Company would have been able to Incur $1.00 of additional Debt pursuant to clause (a) in the first paragraph of Section 4.03; (f) Debt under Interest Rate Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting interest rate risk in the ordinary course of the financial management of the Company or such Restricted Subsidiary and not for speculative purposes, provided that the -------- obligations under such agreements are directly related to payment obligations on Debt otherwise permitted by the terms of Section 4.03; (g) Debt under Currency Exchange Protection Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting currency exchange rate risks directly related to transactions entered into by the Company or such Restricted Subsidiary in the ordinary course of business and not for speculative purposes; (h) Debt in connection with one or more standby letters of credit or performance bonds issued for the account of the Company or a Restricted Subsidiary in the ordinary course of business or pursuant to self-insurance obligations and not in connection with the borrowing of money or the obtaining of advances; (i) Debt outstanding on the Issue Date not otherwise described in clauses (a) through (h) above; 19 (j) Debt not otherwise described in clauses (a) through (i) above in an aggregate principal amount outstanding at any one time not to exceed $15.0 million; and (k) Permitted Refinancing Debt Incurred in respect of Debt Incurred pursuant to clause (a) of the first paragraph of Section 4.03 and clauses (a), (c), (e) and (i) above, subject, in the case of clause (c) above, to the limitations set forth in the proviso thereto. "Permitted Holders" means Helen Hudson Lovaas, any member of the ----------------- senior management of the Company or Holding on the Issue Date and Freeman Spogli & Co. Incorporated or any successor entity thereof controlled by the principals of Freeman Spogli & Co. Incorporated or any entity controlled by, or under common control with, Freeman Spogli & Co. Incorporated. "Permitted Investment" means any Investment by the Company or a -------------------- Restricted Subsidiary in (a) any Restricted Subsidiary or any Person that will, upon the making of such Investment, become a Restricted Subsidiary; provided -------- that the primary business of such Restricted Subsidiary is a Related Business; (b) any Person if as a result of such Investment such Person is merged or consolidated with or into, or transfers or conveys all or substantially all its Property to, the Company or a Restricted Subsidiary; provided that such Person's -------- primary business is a Related Business; (c) Temporary Cash Investments; (d) receivables owing to the Company or a Restricted Subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms -------- ------- may include such concessionary trade terms as the Company or such Restricted Subsidiary deems reasonable under the circumstances; (e) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (f) (i) loans and advances to employees made in the ordinary course of business consistent with past practices of the Company or such Restricted Subsidiary, as the case may be; provided that such loans and -------- advances do not exceed $1.0 million at any one time outstanding and (ii) loans and advances to, or the receipt of Employee Notes from, employees of Holding, the Company or any of their Subsidiaries made or received in connection with the substantially concurrent purchase of common stock of Holding or the Company by such employees; provided that the aggregate principal amount of such loans, -------- advances and notes payable shall not exceed $1.0 million at 20 any one time outstanding; (g) stock, obligations or other securities received in settlement of debts created in the ordinary course of business and owing to the Company or a Restricted Subsidiary or in satisfaction of judgments; (h) any Person to the extent such Investment represents the non-cash portion of the consideration received in connection with an Asset Sale consummated in compliance with Section 4.07; and (i) Investments in Persons engaged in a Related Business not to exceed $10.0 million at any one time outstanding (it being agreed that an Investment shall cease to be outstanding to the extent of dividends, repayments of loans or advances or other transfers of Property received by the Company or any Restricted Subsidiary from such Persons, provided -------- that such amounts do not increase the amount of Restricted Payments which the Company and the Restricted Subsidiaries may make pursuant to clause (a)(iii)(D)(1) of Section 4.05). "Permitted Liens" means: --------------- (a) Liens securing Senior Debt of the Company or any Subsidiary Guarantor; (b) Liens for taxes, assessments or governmental charges or levies on the Property of the Company or any Restricted Subsidiary if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings; (c) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens, on the Property of the Company or any Restricted Subsidiary arising in the ordinary course of business and securing payment of obligations which are not more than 60 days past due or are being contested in good faith and by appropriate proceedings; (d) Liens on the Property of the Company or any Restricted Subsidiary Incurred in the ordinary course of business to secure performance of obligations with respect to statutory or regulatory requirements, performance or return-of-money bonds, surety or indemnity bonds or other obligations of a like nature and Incurred in a manner consistent with industry practice, in each case which are not Incurred in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of Property and which do not in the aggregate impair in any material respect the use of Property in the operation of the business of the 21 Company and the Restricted Subsidiaries taken as a whole; (e) Liens on Property at the time the Company or any Restricted Subsidiary acquired such Property, including any acquisition by means of a merger or consolidation with or into the Company or any Restricted Subsidiary; provided, however, that any such Lien may not extend to any -------- ------- other Property of the Company or any Restricted Subsidiary; provided -------- further, however, that such Liens shall not have been Incurred in ------- ------- anticipation of or in connection with the transaction or series of transactions pursuant to which such Property was acquired by the Company or any Restricted Subsidiary; (f) Liens on the Property of a Person at the time such Person becomes a Restricted Subsidiary; provided, however, that any such Lien may not -------- ------- extend to any other Property of the Company or any other Restricted Subsidiary which is not a direct Subsidiary of such Person; provided -------- further, however, that any such Lien was not Incurred in anticipation of or ------- ------- in connection with the transaction or series of transactions pursuant to which such Person became a Restricted Subsidiary; (g) pledges or deposits by the Company or any Restricted Subsidiary under worker's compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Debt) or leases to which the Company or any Restricted Subsidiary is party, or deposits to secure public or statutory obligations of the Company, or deposits for the payment of rent, in each case Incurred in the ordinary course of business; (h) utility easements, building restrictions and such other encumbrances or charges against real Property as are of a nature generally existing with respect to properties of a similar character; (i) judgment and attachment Liens in connection with (A) judgments that do not constitute an Event of Default so long as the judgment creditor is not seeking enforcement thereof and reserves have been established to the extent required by GAAP as in effect at such time and (B) litigation and legal proceedings that are being contested in good faith by appropriate proceedings (or as to which the Company or Restricted Subsidiary, as the case may be, is preparing to 22 promptly initiate appropriate proceedings) so long as reserves have been established to the extent required by GAAP as in effect at such time and so long as such Liens do not encumber assets by an aggregate amount (together with the amount of any unstayed judgments against the Company or any Restricted Subsidiary) in excess of $7.5 million; (j) Liens existing on the Issue Date not otherwise described in clauses (a) through (i) above; and (k) Liens on the Property of the Company or any Restricted Subsidiary to secure any Refinancing, in whole or in part, of any Debt secured by Liens referred to in clause (a), (e), (f) or (j) above; provided, however, -------- ------- that any such Lien shall be limited to all or part of the same Property that secured the original Lien (together with improvements and accessions to such Property) and the aggregate principal amount of Debt that is secured by such Lien shall not be increased to an amount greater than the sum of (i) the outstanding principal amount, or, if greater, the committed amount, of the Debt secured by Liens described under clause (a), (e), (f) or (j) above, as the case may be, at the time the original Lien became a Permitted Lien under this Indenture and (ii) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, Incurred by the Company or such Restricted Subsidiary in connection with such Refinancing. "Permitted Refinancing Debt" means any Debt that Refinances any other -------------------------- Debt, including any successive Refinancings, so long as (a) such Debt is in an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) not in excess of the sum of (i) the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding of the Debt being Refinanced and (ii) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, related to such Refinancing, (b) the Average Life of such Debt is equal to or greater than the Average Life of the Debt being Refinanced, (c) the Stated Maturity of such Debt is no earlier than the Stated Maturity of the Debt being Refinanced and (d) such Debt is subordinated in right of payment to Senior Debt and the Securities to at least the same extent, if any, as the Debt being Refinanced; provided, however, that Permitted Refinancing Debt shall not include -------- ------- (x) Debt of a Subsidiary that Refinances Debt of the Company or (y) Debt of the 23 Company or a Restricted Subsidiary that Refinances Debt of an Unrestricted Subsidiary. "Person" means any individual, corporation, company (including any ------ limited liability company), partnership, joint venture, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock" means any Capital Stock of a Person, however --------------- designated, which entitles the holder thereof to a preference with respect to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of any other class of Capital Stock issued by such Person. "principal" of any Debt (including the Securities) means the principal --------- amount of such Debt plus the premium, if any, on such Debt. "pro forma" means, with respect to any calculation made or required to --------- be made pursuant to the terms hereof, a calculation performed in accordance with Article 11 of Regulation S-X promulgated under the Securities Act, as interpreted in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, or otherwise a calculation made in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, as the case may be. "Property" means, with respect to any Person, any interest of such -------- Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including Capital Stock in, and other securities of, any other Person. "Public Equity Offering" means an underwritten public offering of ---------------------- common stock of the Company pursuant to an effective registration statement under the Securities Act. "Purchase Money Debt" means Debt (a) consisting of the deferred ------------------- purchase price of property, conditional sale obligations, obligations under any title retention agreement, other purchase money obligations and obligations in respect of industrial revenue bonds, in each case where the maturity of such Debt does not exceed the anticipated useful life of the asset being financed, and (b) Incurred to finance the acquisition or construction by the Company or a 24 Restricted Subsidiary of such asset, including remodeling thereof and additions and improvements thereto; provided, however, that such Debt is Incurred within -------- ------- 180 days after such acquisition of such asset by the Company or a Restricted Subsidiary or completion of such construction, remodeling, addition or improvement, as the case may be. "Recapitalization" means the recapitalization of the Company to be ---------------- effected on the Issue Date, as described in the Offering Memorandum of the Company dated April 7, 1998, including the Merger. "Redeemable Stock" means, with respect to any Person, any Capital ---------------- Stock that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable, in either case at the option of the holder thereof) or otherwise (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b) is or may become redeemable or repurchaseable at the option of the holder thereof, in whole or in part, or (c) is convertible or exchangeable, in either case at the option of the holder thereof, for Debt or Disqualified Stock. "Refinance" means, in respect of any Debt, to refinance, extend, --------- renew, refund, repay, prepay, redeem, defease or retire, or to issue other Debt, in exchange or replacement for, such Debt. "Refinanced" and "Refinancing" shall have correlative meanings. "Related Business" means any business that is related, ancillary or ---------------- complementary to the businesses of the Company and the Restricted Subsidiaries on the Issue Date. "Representative" means the trustee, agent or representative expressly -------------- authorized to act in such capacity, if any, for an issue of Senior Debt. "Restricted Payment" means (a) any dividend or distribution (whether ------------------ made in cash, securities or other Property) declared or paid on or with respect to any shares of Capital Stock of the Company or any Restricted Subsidiary (including any payment in connection with any merger or consolidation with or into the Company or any Restricted Subsidiary), except for any dividend or distribution which is made solely to the Company or a Restricted Subsidiary (and, if such Restricted Subsidiary is not a Wholly Owned Subsidiary, to the other shareholders of such Restricted Subsidiary on a pro rata basis or on a basis that results in the receipt by the Company or a Restricted Subsidiary of dividends or distributions of greater value than it would 25 receive on a pro rata basis) or any dividend or distribution payable solely in shares of Capital Stock (other than Disqualified Stock) of the Company; (b) the purchase, repurchase, redemption, acquisition or retirement for value of any Capital Stock of the Company or any Affiliate of the Company (other than from the Company or a Restricted Subsidiary) or any securities exchangeable for or convertible into any such Capital Stock, including the exercise of any option to exchange any Capital Stock (other than for or into Capital Stock of the Company that is not Disqualified Stock); (c) the purchase, repurchase, redemption, acquisition or retirement for value, prior to any scheduled maturity, scheduled sinking fund or mandatory redemption payment, any Subordinated Obligation (other than the purchase, repurchase or other acquisition of any Subordinated Obligation 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 (d) any Investment (other than Permitted Investments) in any Person. "Restricted Subsidiary" means (a) any Subsidiary of the Company unless --------------------- such Subsidiary shall have been designated an Unrestricted Subsidiary as permitted or required pursuant to Section 4.15 and (b) an Unrestricted Subsidiary which is redesignated as a Restricted Subsidiary as permitted pursuant to Section 4.15. "S&P" means Standard & Poor's Ratings Service or any successor to the --- rating agency business thereof. "Sale and Leaseback Transaction" means any arrangement relating to ------------------------------ Property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such Property to another Person and the Company or a Restricted Subsidiary leases it from such Person. "Securities Act" means the Securities Act of 1933, as amended. -------------- "Senior Debt" of the Company means (a) all obligations consisting of ----------- the principal, premium, if any, and accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company to the extent post-filing interest is allowed in such proceeding) in respect of (i) Debt of the Company for borrowed money and (ii) Debt of the Company evidenced by notes, debentures, bonds or other similar instruments permitted under this Indenture for the payment of which the Company is responsible or liable; (b) all Capital Lease Obligations of the Company; (c) all 26 obligations of the Company (i) for the reimbursement of any obligor on any letter of credit, bankers' acceptance or similar credit transaction, (ii) under Hedging Obligations or (iii) issued or assumed as the deferred purchase price of Property and all conditional sale obligations of the Company and all obligations under any title retention agreement permitted under this Indenture; and (d) all obligations of other Persons of the type referred to in clauses (a), (b) and (c) for the payment of which the Company is responsible or liable as Guarantor; provided, however, that Senior Debt shall not include (A) Debt of the Company - -------- ------- that is by its terms subordinate or pari passu in right of payment to the Securities, including any Senior Subordinated Debt or any Subordinated Obligations; (B) any Debt Incurred in violation of the provisions of this Indenture; (C) accounts payable or any other obligations of the Company to trade creditors created or assumed by the Company in the ordinary course of business in connection with the obtaining of materials or services (including Guarantees thereof or instruments evidencing such liabilities); (D) any liability for Federal, state, local or other taxes owed or owing by the Company; (E) any obligation of the Company to any Subsidiary; or (F) any obligations with respect to any Capital Stock. "Senior Debt" of any Subsidiary Guarantor has a correlative meaning. "Senior Subordinated Debt" of the Company means the Securities and any ------------------------ other subordinated Debt of the Company that specifically provides that such Debt is to rank pari passu with the Securities and is not subordinated by its terms to any other subordinated Debt or other obligation of the Company which is not Senior Debt. "Senior Subordinated Debt" of any "Subsidiary Guarantor" has a correlative meaning. "Significant Subsidiary" means any Subsidiary that would be a ---------------------- "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the Commission. "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). 27 "Subordinated Obligation" means any Debt of the Company or any ----------------------- Subsidiary Guarantor (whether outstanding on the Issue Date or thereafter Incurred) which is subordinate or junior in right of payment to the Securities or the applicable Subsidiary Guarantee pursuant to a written agreement to that effect. "Subsidiary" means, in respect of any Person, any corporation, ---------- company, association, partnership, joint venture or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled directly or indirectly, by (a) such Person, (b) such Person and one or more Subsidiaries of such Person or (c) one or more Subsidiaries of such Person. "Subsidiary Guarantor" means each Domestic Restricted Subsidiary that -------------------- becomes a Subsidiary Guarantor pursuant to Section 4.04. "Subsidiary Guaranty" means a Guarantee on the terms set forth in this ------------------- Indenture by a Subsidiary Guarantor of the Company's obligations with respect to the Securities. "Temporary Cash Investments" means any of the following: (a) -------------------------- Investments in U.S. Government Obligations; (b) Investments in time deposit accounts, certificates of deposit and money market deposits maturing within 90 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America or any state thereof having capital, surplus and undivided profits aggregating in excess of $500.0 million and whose long-term debt is rate "A-3" or "A-" or higher according to Moody's or S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act); (c) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (a) entered into with a bank meeting the qualifications described in clause (b) above; (d) Investments in commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America with a rating at the time as of which any Investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P (or such similar equivalent rating by at least one 28 "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act); (e) direct obligations (or certificates representing an ownership interest in such obligations) of any state of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of such state is pledged and which are not callable or redeemable at the issuer's option, provided that (i) the long-term -------- debt of such state is rated "A-3" or "A-" or higher according to Moody's or S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)) and (ii) such obligations mature within 180 days of the date of acquisition thereof; and (f) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (a) through (e) above. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa- --- ------ 77bbbb) as in effect on the date of this Indenture except as required by Section 9.03 hereof; provided that in the event the Trust Indenture Act of 1939 is -------- amended after such date, "Trust Indenture Act" means, to the extent required by ------------------- any such amendment, the Trust Indenture Act of 1939, as so amended. "Trustee" means the party named as such in this Indenture until a ------- successor replaces it and, thereafter, means the successor. "Trust Officer" means the Chairman of the Board, the President or any ------------- other officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "Uniform Commercial Code" means the New York Uniform Commercial Code ----------------------- as in effect from time to time. "Unrestricted Subsidiary" means (a) any Subsidiary of the Company in ----------------------- existence on the Issue Date that is not a Restricted Subsidiary; (b) any Subsidiary of an Unrestricted Subsidiary; and (c) any Subsidiary of the Company that is designated after the Issue Date as an Unrestricted Subsidiary as permitted or required pursuant to Section 4.15 and not thereafter redesignated as a Restricted Subsidiary as permitted pursuant thereto. "U.S. Government Obligations" means direct obligations (or --------------------------- certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) 29 for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "Voting Stock" of a corporation means all classes of Capital Stock of ------------ such corporation then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means, at any time, a Restricted Subsidiary ----------------------- all the Voting Stock of which (except directors' qualifying shares) is at such time owned, directly or indirectly, by the Company and its other Wholly Owned Subsidiaries. SECTION 1.02. Other Definitions. ------------------
Term Section ---- ------- "Bankruptcy Law"............................ 6.01 "Change of Control Offer"................... 4.10 "Change of Control Purchase Price".......... 4.10 "Claiming Guarantor"........................ 11.02 "Contributing Party"........................ 11.02 "covenant defeasance option"................ 8.01(b) "Custodian"................................. 6.01 "Event of Default".......................... 6.01 "Excess Proceeds"........................... 4.07 "Global Security"........................... Appendix A "legal defeasance option"................... 8.01(b) "Legal Holiday"............................. 13.08 "Obligations"............................... 11.01 "Offer Amount".............................. 4.07 "Offer Period".............................. 4.07 "pay its Subsidiary Guaranty"............... 12.03 "pay the Securities"........................ 10.03 "Paying Agent".............................. 2.04 "Payment Blockage Notice"................... 10.03 "Payment Blockage Period"................... 10.03 "Prepayment Offer".......................... 4.07 "Prepayment Offer Notice"................... 4.07 "Purchase Date"............................. 4.07
30 "Registrar".................................. 2.04 "Successor Company".......................... 5.01
SECTION 1.03. Incorporation by Reference of Trust Indenture Act. -------------------------------------------------- This Indenture is subject to the mandatory provisions of the TIA which are incorporated by reference in and made a part of this Indenture. The following TIA terms have the following meanings: "Commission" means the SEC. "indenture securities" means the Securities. "indenture security holder" means a Securityholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company, each Subsidiary Guarantor and any other obligor on the indenture securities. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings assigned to them by such definitions. SECTION 1.04. Rules of Construction. Unless the context otherwise ---------------------- requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) "including" means including without limitation; (5) words in the singular include the plural and words in the plural include the singular; (6) unsecured Debt shall not be deemed to be subordinate or junior to secured Debt merely by virtue of its nature as unsecured Debt; 31 (7) the principal amount of any noninterest bearing or other discount security at any date shall be the principal amount thereof that would be shown on a balance sheet of the issuer dated such date prepared in accordance with GAAP; and (8) the principal amount of any Preferred Stock shall be the greater of (i) the maximum liquidation value of such Preferred Stock or (ii) the maximum mandatory redemption or mandatory repurchase price with respect to such Preferred Stock. ARTICLE 2 The Securities -------------- SECTION 2.01. Amount of Securities; Issuable in Series. The ----------------------------------------- aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is $115,000,000. Subject to Section 2.03, the Trustee shall authenticate Initial Securities for original issue on the Issue Date in the aggregate principal amount of $115,000,000. SECTION 2.02. Form and Dating. (a) Provisions relating to the ---------------- Initial Securities and the Exchange Securities are set forth in Appendix A, which is hereby incorporated in and expressly made a part of this Indenture. The Initial Securities of each series and the Trustee's certificate of authentication shall be substantially in the form of Exhibit 1 to Appendix A which is hereby incorporated in and expressly made a part of this Indenture. The Exchange Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A, which is hereby incorporated in and expressly made a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject, if any, or usage, provided that any such notation, -------- legend or endorsement is in a form reasonably acceptable to the Company. Each Security shall be dated the date of its authentication. The terms of the Securities set forth in Exhibit 1 to Appendix A and Exhibit A are part of the terms of this Indenture. (b) Upon their original issuance, Rule 144A Securities shall be issued in the form of one or more Global Notes registered in the name of the Depository or its 32 nominee and deposited with the Trustee, as custodian for the Depository, duly executed by the Company and authenticated by the Trustee, for credit by the Depository to the respective accounts of beneficial owners of the Securities represented thereby (or such other accounts as they may direct). Such Global Notes are collectively herein called the "Rule 144A Global Note". Upon their original issuance, Regulation S Securities shall be issued in the form of one or more temporary Global Notes registered in the name of the Depository or its nominee and deposited with the Trustee as custodian for the Depository, duly executed by the Company and authenticated by the Trustee, for credit to the Agent Member accounts at the Depository of Euroclear and/or Cedel for further credit by Euroclear and Cedel, as the case may be, to the respective accounts of the beneficial owners of the Securities represented thereby (or such other accounts as they may direct) (the "Temporary Regulation S Global Notes"). Interests in the Temporary Regulation S Global Notes may only be held by the Agent Members of the Depository for Euroclear and Cedel. SECTION 2.03. Execution and Authentication. Two Officers shall sign ----------------------------- the Securities for the Company by manual or facsimile signature. If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together with a written order of the Company signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of the Company for the authentication and delivery of such Securities, and the Trustee in accordance with such written order of the Company shall authenticate and deliver such Securities. A Security shall not be valid until an authorized officer or signatory of the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate the Securities. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities 33 whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authen tication by such agent. An authenticating agent has the same rights as any Registrar, Paying Agent or agent for service of notices and demands. SECTION 2.04. Registrar and Paying Agent. The Company shall maintain --------------------------- in the Borough of Manhattan, the City of New York, an office or agency where Securities may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Securities may be presented for payment (the "Paying Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company may also from time to time designate one or more other offices or agencies (in or outside the Borough of Manhattan, the City of Mew York) where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, -------- ------- that no such designation or recision shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York, for such purposes. The Company will give written notice to the Trustee of any such designation or recision and of any change in the location of any such other office or agency. The Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent or co-registrar not a party to this Indenture, which shall incorporate the terms of the TIA. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of any such agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.07. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar, co-registrar or transfer agent. The Company may change any Paying Agent or Registrar upon notice to the Trustee but without notice to any Holder. The Company initially appoints the Trustee as Registrar and Paying Agent in connection with the Securities. SECTION 2.05. Paying Agent To Hold Money in Trust. No later than ------------------------------------ 11:00 a.m., New York City time, on 34 each due date of the principal and interest on any Security, the Company shall deposit with the Paying Agent a sum sufficient to pay such principal and interest then so becoming due. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Securityholders or the Trustee all money held by the Paying Agent for the payment of principal of or interest on the Securities and shall notify the Trustee of any default by the Company in making any such payment. If the Company or a Wholly Owned Subsidiary acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed by the Paying Agent. Upon complying with this Section, the Paying Agent shall have no further liability for the money delivered to the Trustee. SECTION 2.06. Securityholder Lists. The Trustee shall preserve in as --------------------- current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee, in writing at least five Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Securityholders. SECTION 2.07. Replacement Securities. If a mutilated Security is ----------------------- surrendered to the Registrar or if the Holder of a Security claims that such Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the requirements of Section 8-405 of the Uniform Commercial Code are met and the Holder satisfies any other reasonable requirements of the Trustee and the Company. If required by the Trustee or the Company, such Holder shall furnish an indemnity bond sufficient in the judgment of the Company and the Trustee to protect the Company, the Trustee, the Paying Agent, the Registrar and any co-registrar from any loss which any of them may suffer if a Security is replaced. The Company and the Trustee may charge the Holder for their expenses in replacing a Security. Every replacement Security is an additional obligation of the Company. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and 35 remedies with respect to the replacement of mutilated, lost, destroyed or wrongfully taken Securities. SECTION 2.08. Outstanding Securities. Securities outstanding at any ----------------------- time are all Securities authenticated by the Trustee except for those canceled by it, those delivered to it for cancelation and those described in this Section as not outstanding. A Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the Security. If a Security is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee and the Company receive proof satisfactory to them that the replaced Security is held by a bona fide purchaser. If the Paying Agent segregates and holds in trust, in accordance with this Indenture, on a redemption date or maturity date money sufficient to pay all principal and interest payable on that date with respect to the Securities (or portions thereof) to be redeemed or maturing, as the case may be, and the Paying Agent is not prohibited from paying such money to the Securityholders on that date pursuant to the terms of this Indenture, then on and after that date such Securities (or portions thereof) cease to be outstanding and interest on them ceases to accrue. SECTION 2.09. Temporary Securities. Until definitive Securities are --------------------- ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Every such temporary Security shall be authenticated upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities and deliver them in exchange for temporary Securities. Such exchange shall be made by the Company at its own expense and without any charge therefor. Until so exchanged, the temporary Securities shall in all respects be entitled to the same rights, privileges and benefits under this Indenture as definitive Securities authenticated and delivered hereunder. SECTION 2.10. Cancelation. The Company at any time may deliver ------------ Securities to the Trustee for cancelation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee and no one 36 else shall cancel and destroy (subject to the record retention requirements of the Exchange Act) all Securities surrendered for registration of transfer, exchange, payment or cancelation and deliver a certificate of such destruction to the Company, unless the Company directs the Trustee to deliver canceled Securities to the Company. If the Company shall acquire any of the Securities, such acquisition shall not operate as a redemption or satisfaction of the Debt represented by such Securities unless and until the same are delivered to the Trustee for cancelation. The Company may not issue new Securities to replace Securities it has redeemed, paid or delivered to the Trustee for cancelation. SECTION 2.11. Defaulted Interest. If the Company defaults on a ------------------- payment of interest on the Securities, the Company shall pay defaulted interest (plus interest on such defaulted interest to the extent lawful) in any lawful manner. The Company may pay the defaulted interest to the persons who are Securityholders on a subsequent special record date. The Company shall fix or cause to be fixed any such special record date and payment date to the reasonable satisfaction of the Trustee and shall promptly mail to each Securityholder a notice that states the special record date, the payment date and the amount of defaulted interest to be paid. Notwithstanding the foregoing, any interest which is paid prior to the expiration of the grace period provided for in Section 6.01(1) hereof shall be paid to the Holders of the Securities as of the regular record date for which interest has not been paid. SECTION 2.12. CUSIP Numbers. The Company in issuing the Securities -------------- may use "CUSIP" numbers (if then generally in use) and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided, however, that any such notice may state that no representation is made - -------- ------- as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. ARTICLE 3 Redemption ---------- SECTION 3.01. Notices to Trustee. If the Company redeems Securities ------------------- pursuant to paragraph 5 of the Securities, it shall notify the Trustee in writing of the redemption date, the principal amount of Securities to be 37 redeemed and whether such redemption is being made pursuant to paragraph 5(a) or 5(b) of the Securities. In the event of a redemption pursuant to paragraph 5(a) of the Securities, the Company shall give each notice to the Trustee provided for in this Section at least 45 days before the redemption date unless the Trustee consents to a shorter period. In the event of a redemption pursuant to paragraph 5(b) of the Securities, the Company shall give the notice to the Trustee provided for in this Section no later than 5:00 p.m., New York City time, on April 10, 1998. Any notice pursuant to this Section shall be transmitted by facsimile and confirmed with a Trust Officer by telephone. Such notice shall be accompanied by an Officers' Certificate and an Opinion of Counsel from the Company to the effect that such redemption will comply with the conditions herein. Such Officers' Certificate shall, in addition, specify the redemption price of the Securities. SECTION 3.02. Selection of Securities To Be Redeemed. If less than --------------------------------------- all the Securities are to be redeemed at any time, selection of Securities for redemption may be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Securities are listed, or, if the Securities are not so listed, on a pro rata basis, by lot or by such other method that the Trustee shall deem fair and appropriate (and in a manner that complies with applicable legal requirements, if any). The Trustee shall make the selection from outstanding Securities not previously called for redemption. The Trustee may select for redemption portions of the principal of Securities that have denominations larger than $1,000. Securities and portions of them the Trustee selects shall be in amounts of $1,000 or a whole multiple of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee shall notify the Company and, unless the Trustee is acting as such, the Registrar, promptly of the Securities or portions of Securities to be redeemed. SECTION 3.03. Notice of Redemption. The Company shall mail a notice --------------------- of redemption by first-class mail to each Holder of Securities to be redeemed (i) in the case of a redemption under paragraph 5(a) of the Securities, at least 30 days but not more than 60 days before a date for redemption of Securities, and (ii) in the case of a redemption under paragraph 5(b) of the Securities, on April 10, 1998. 38 The notice shall identify the Securities to be redeemed and shall state: (1) the redemption date; (2) the redemption price, or the calculation thereof described in paragraph 5 of the Securities; (3) the name and address of the Paying Agent; (4) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; (5) if fewer than all the outstanding Securities are to be redeemed, the identification and principal amounts of the particular Securities to be redeemed; (6) that, unless the Company defaults in making such redemption payment or the Paying Agent is prohibited from making such payment pursuant to the terms of this Indenture, interest on Securities (or portion thereof) called for redemption ceases to accrue on and after the redemption date; and (7) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Securities. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. In such event, the Company shall provide the Trustee with the information required by this Section. In the event of a redemption pursuant to paragraph 5(b) of the Securities, the Company will, on April 10, 1998, cause a notice of such redemption to be sent at least once to the Dow Jones News Service or similar business news service in the United States. SECTION 3.04. Effect of Notice of Redemption. Once notice of ------------------------------- redemption is mailed, Securities called for redemption become due and payable on the redemption date and at the redemption price stated in the notice, and from and after such redemption date (unless the Company shall default on the payment of the redemption price and accrued interest) such Securities shall cease to bear interest. Upon surrender to the Paying Agent, such Securities shall be paid at the redemption price stated in the notice, plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive 39 interest due on the relevant interest payment date that is on or prior to the date of redemption). Failure to give notice or any defect in the notice to any Holder shall not affect the validity of the notice to any other Holder. SECTION 3.05. Deposit of Redemption Price. No later than 11:00 a.m., ---------------------------- New York City time, on the redemption date, the Company shall deposit with the Paying Agent (or, if the Company or a Wholly Owned Subsidiary is the Paying Agent, shall segregate and hold in trust) money sufficient to pay the redemption price of and accrued interest (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date that is on or prior to the date of redemption) on all Securities to be redeemed on that date other than Securities or portions of Securities called for redemption which have been delivered by the Company to the Trustee for cancelation. All money earned on funds held in trust by the Trustee or any Paying Agent and any excess or remaining funds shall be remitted to the Company. In the event of a redemption pursuant to paragraph 5(b) of the Securities, Holding will, on April 10, 1998, irrevocably deposit with the Trustee (or a paying agent designated by the Trustee) money sufficient to pay the redemption price. The Trustee (or the paying agent) will invest such funds in cash or Temporary Cash Investments as directed in writing by the Company pending distribution to Holders on April 24, 1998. The Trustee (or the paying agent) shall not be accountable or liable for any losses resulting from the sale or depreciation in value of such investments. Subject to any applicable abandoned property law, the Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of the redemption price of and accrued interest, if any, on the Securities that remains unclaimed for two years or if then held by the Company or a Wholly Owned Subsidiary in trust for the payment thereof, shall be discharged from such trust, and, thereafter, Securityholders entitled to the money must look to the Company for payment as general creditors; provided, -------- however, that the Trustee or such Paying Agent before being required to make any - ------- such repayment shall at the expense of the Company cause to be mailed to each such Holder a notice that said moneys have not been so applied and that after a date named therein any unclaimed balance of said moneys then remaining will be returned to the Company. SECTION 3.06. Securities Redeemed in Part. Upon surrender of a ---------------------------- Security that is redeemed in part, the Company shall execute and the Trustee shall authenticate for 40 the Holder (at the Company's expense) a new Security equal in principal amount to the unredeemed portion of the Security surrendered. ARTICLE 4 Covenants --------- SECTION 4.01. Payment of Securities. The Company shall promptly pay ---------------------- the principal of and interest on the Securities on the dates and in the manner provided in the Securities and in this Indenture. Principal and interest shall be considered paid on the date due if on such date the Trustee or the Paying Agent holds in accordance with this Indenture money sufficient to pay all principal and interest then due and the Trustee or the Paying Agent, as the case may be, is not prohibited from paying such money to the Securityholders on that date pursuant to the terms of this Indenture. The Company shall pay interest on overdue principal at the rate specified therefor in the Securities, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. SECTION 4.02. SEC Reports. Notwithstanding that the Company may not ------------ be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the Commission and provide the Trustee, Holders of Securities and, upon request, security analysts of prospective holders of the Securities with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and reports to be so filed and provided at the times specified for the filing of such information, documents and reports under such Sections; provided, -------- however, that the Company shall not be so obligated to file such information, - ------- documents and reports with the Commission if the Commission does not permit such filings. The Company shall file with the Commission and provide the Trustee, Holders of Securities and, upon request, security analysts of prospective Holders of the Securities with the information, documents and reports described herein whether or not the Exchange Offer Registration Statement has been filed or declared effective. SECTION 4.03. Limitation on Company and Subsidiary Guarantor Debt. ---------------------------------------------------- The Company shall not, and shall not permit any Subsidiary Guarantor to, Incur, directly or 41 indirectly, any Debt unless, after giving pro forma effect to the application of the proceeds thereof, no Default or Event of Default would occur as a consequence of such Incurrence or be continuing following such Incurrence and either (a) after giving effect to the Incurrence of such Debt and the application of the proceeds thereof, the Consolidated Interest Coverage Ratio would be greater than 1.75 to 1.00 if such Debt is Incurred from the Issue Date through April 15, 2000, and 2.00 to 1.00 if such Debt is Incurred thereafter or (b) such Debt is Permitted Debt. Notwithstanding paragraphs (j) and (k) of the definition of "Permitted Debt", (a) the Company shall not, and shall not permit any Subsidiary Guarantor to, Incur any Debt pursuant to such paragraphs if the proceeds thereof are used, directly or indirectly, to Refinance (i) any Subordinated Obligations unless such Debt shall be subordinated to the Securities and the Subsidiary Guaranties, as applicable, to at least the same extent as such Subordinated Obligations or (ii) any Senior Subordinated Debt unless such Debt shall be Senior Subordinated Debt or shall be subordinated to the Securities and the Subsidiary Guaranties, as applicable and (b) the Company shall not permit any Restricted Subsidiary to Incur any Debt pursuant to such paragraphs if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations or Senior Subordinated Debt. SECTION 4.04. Limitation on Non-Guarantor Subsidiary Debt. The -------------------------------------------- Company shall not permit any Restricted Subsidiary which is not a Subsidiary Guarantor to, directly or indirectly, Incur any Debt except: (i) Debt outstanding on the Issue Date and any Permitted Refinancing Debt with respect thereto; (ii) Debt described in clauses (e) or (h) of the definition of Permitted Debt; provided, however, that Industrias Hudson may Incur Debt in an -------- ------- aggregate principal amount outstanding at any one time not to exceed $5.0 million; and (iii) Guarantees of the Company's obligations under the New Credit Facility; provided that any Restricted Subsidiary which Incurs any such -------- Guarantee shall concurrently therewith execute and deliver to the Trustee a Subsidiary Guaranty. SECTION 4.05. Limitation on Restricted Payments. (a) The Company ---------------------------------- shall not make, and shall not permit any Restricted Subsidiary to make, directly or indirectly, any Restricted Payment if at the time of, and after giving pro forma effect to, such proposed Restricted Payment, (i) a Default or Event of Default shall have occurred and be continuing, 42 (ii) the Company could not Incur at least $1.00 of additional Debt pursuant to clause (a) of the first paragraph of Section 4.03, or (iii) the aggregate amount of such Restricted Payment and all other Restricted Payments declared or made since the Issue Date (the amount of any Restricted Payment, if made other than in cash, to be based upon Fair Market Value) would exceed an amount equal to the sum of: (A) 50% of the aggregate amount of Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter during which the Issue Date occurs to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or if the aggregate amount of Consolidated Net Income for such period shall be a deficit, minus 100% of such deficit), (B) Capital Stock Sale Proceeds, (C) the amount by which Debt of the Company Incurred after the Issue Date is reduced on the Company's balance sheet upon the conversion or exchange (other than by the Company or a Subsidiary of the Company) subsequent to the Issue Date of any Debt (other than Subordinated Obligations) of the Company for Capital Stock (other than Disqualified Stock) of the Company (less the amount of any cash or other Property distributed by the Company or any Restricted Subsidiary upon such conversion or exchange), and (D) an amount equal to the sum of (1) the net reduction in Investments in any Person other than the Company or a Restricted Subsidiary resulting from dividends, repayments of loans or advances or other transfers of Property, in each case to the Company or any Restricted Subsidiary from such Person, to the extent such dividends, repayments or transfers do not increase the amount of Permitted Investments permitted to be made pursuant to clause (i) of the definition thereof and (2) the portion (proportionate to the Company's equity interest in such Unrestricted Subsidiary) of the Fair Market Value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a 43 Restricted Subsidiary; provided, however, that the foregoing sum shall -------- ------- not exceed, in the case of any Person, the amount of Investments previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in such Person, and (E) $7.5 million. (b) Notwithstanding the foregoing limitation, the Company may: (i) pay dividends on its Capital Stock within 60 days of the declaration thereof if, on said declaration date, such dividends could have been paid in compliance with this Indenture; provided, however, that at the -------- ------- time of such payment of such dividend, no other Default or Event of Default shall have occurred and be continuing (or result therefrom); provided -------- further, however, that such dividend shall be included in the calculation ------- ------- of the amount of Restricted Payments; (ii) purchase, repurchase, redeem, legally defease, acquire or retire for value Capital Stock of the Company or Subordinated Obligations in exchange for, or in an amount not in excess of the proceeds of the substantially concurrent sale of, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any of its Subsidiaries for the benefit of their employees); provided, however, that (A) such purchase, repurchase, -------- ------- redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments and (B) the Capital Stock Sale Proceeds from such exchange or sale shall be excluded from the calculation pursuant to clause (a)(iii)(B) above; (iii) purchase, repurchase, redeem, legally defease, acquire or retire for value any Subordinated Obligations in exchange for, or in an amount not in excess of the proceeds of the substantially concurrent sale of, Permitted Refinancing Debt; provided, however, that such purchase, -------- ------- repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments; 44 (iv) 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 for value, shares of, or options to purchase shares of, common stock of the Company or Holding from employees or former employees of the Company, Holding or any of their Subsidiaries (or their estates or beneficiaries thereof) upon death, disability, retirement or termination pursuant to the terms of the agreements (including employment agreements) or plans (or amendments thereto) approved by the Board or Directors or the board of directors of 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 common stock; provided, however, -------- ------- that (A) the aggregate amount of such purchases, repurchases, redemptions, defeasances, acquisitions or retirements shall not exceed $1.0 million in any year or $5.0 million during the term of the Securities, except that (1) such amounts shall be increased by the aggregate net amount of cash received by the Company after the Issue Date from the sale of such shares to, or the exercise of options to purchase such shares by, employees of the Company, Holding or any of their Subsidiaries and (2) the Company may forgive or return Employee Notes without regard to the limitation set forth in clause (b)(iv)(A) above and such forgiveness or return shall not be treated as a Restricted Payment for purpose of determining compliance with such clause (b)(iv)(A) and (B) such purchases, repurchases, defeasances, acquisitions or retirements (but not forgiveness or return of Employee Notes) shall be included in the calculation of the amount of Restricted Payments; (v) purchase or redeem Subordinated Obligations pursuant to asset sale or change of control provisions contained in the governing instrument relating thereto; provided, however, that (i) no offer or purchase -------- ------- obligation may be triggered in respect of any such Subordinated Obligation unless a corresponding obligation also arises with respect to the Securities and (ii) in any event, no repurchase or redemption of any such Subordinated Obligation may be consummated unless and until the Company shall have satisfied all repurchase obligations with respect to any required purchase offer made with respect to the Securities; provided, -------- however, that such purchases or redemptions ------- 45 shall be included in the calculation of the amount of Restricted Payments; and (vi) make payments to Helen Hudson Lovaas pursuant to the Merger Agreement in an aggregate amount not to exceed $1.1 million in any fiscal year or $3.3 million during the term of the Securities (plus, in each case, interest due on the unpaid portion of such required payments in accordance with the Merger Agreement); provided, however, that such payments shall be -------- ------- excluded in the calculation of the amount of Restricted Payments. (c) In computing Consolidated Net Income of the Company under paragraph (a) above, (1) the Company shall use audited financial statements for the portions of the relevant period for which audited financial statements are available on the date of determination and unaudited financial statements and other current financial data based on the books and records of the Company for the remaining portion of such period and (2) the Company shall be permitted to rely in good faith on the financial statements and other financial data derived from the books and records of the Company that are available on the date of determination. If the Company makes a Restricted Payment which, at the time of the making of such Restricted Payment, would in the good faith determination of the Company be permitted under the requirements of this Indenture, such Restricted Payment shall be deemed to have been made in compliance with this Indenture notwithstanding any subsequent adjustments made in good faith to the Company's financial statements affecting Consolidated Net Income of the Company for any period. SECTION 4.06. Limitation on Restrictions on Distributions from ------------------------------------------------ Restricted Subsidiaries. The Company shall not, and shall not permit any - ------------------------ Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist any consensual restriction on the right of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, or pay any Debt or other obligation owed, to the Company or any other Restricted Subsidiary (except, with respect to restrictions on dividends of non-cash Property, as permitted pursuant to clause (ii) of the next sentence), (b) make any loans or advances to the Company or any other Restricted Subsidiary or (c) transfer any of its Property to the Company or any other Restricted Subsidiary. The foregoing limitations will not apply (i) with respect to clauses (a), (b) and (c), to restrictions (A) in effect on the Issue Date, (B) relating 46 to Debt of a Restricted Subsidiary and existing at the time it became a Restricted Subsidiary if such restriction was not created in connection with or in anticipation of the transaction or series of transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company or (C) which result from the Refinancing of Debt Incurred pursuant to an agreement referred to in clause (i)(A) or (B) above or in clause (ii)(A) or (B) below, provided such restriction is no less favorable to the holders of -------- Securities than those under the agreement evidencing the Debt so Refinanced, and (ii) with respect to clause (c) only, to restrictions (A) relating to Debt that is permitted to be Incurred and secured without also securing the Securities or the applicable Subsidiary Guaranty without equal and ratable treatment pursuant to Section 4.03 and Section 4.11 that limit the right of the debtor to dispose of the Property securing such Debt, (B) encumbering Property at the time such Property was acquired by the Company or any Restricted Subsidiary, so long as such restriction relates solely to the Property so acquired and was not created in connection with or in anticipation of such acquisition, (C) resulting from customary provisions restricting subletting or assignment of leases or customary provisions in other agreements that restrict assignment of such agreements or rights thereunder or (D) customary restrictions contained in asset sale agreements limiting the transfer of such Property pending the closing of such sale. SECTION 4.07. Limitation on Asset Sales. (a) The Company shall not, -------------------------- and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale unless (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the Property subject to such Asset Sale; (ii) at least 75% of the consideration paid to the Company or such Restricted Subsidiary in connection with such Asset Sale is in the form of cash or cash equivalents or the assumption by the purchaser of liabilities of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Securities or the applicable Subsidiary Guaranty) as a result of which the Company and the Restricted Subsidiaries are no longer obligated with respect to such liabilities; and (iii) the Company delivers an Officers' Certificate to the Trustee certifying that such Asset Sale complies with the foregoing clauses (i) and (ii). (b) The Net Available Cash (or any portion thereof) from Asset Sales may be applied by the Company or a Restricted Subsidiary, to the extent the Company or such 47 Restricted Subsidiary elects (or is required by the terms of any Debt): (i) to prepay, repay, legally defease or purchase Senior Debt of the Company or any Subsidiary Guarantor or Debt of any Restricted Subsidiary that is not a Subsidiary Guarantor (excluding, in any such case, Disqualified Stock and Debt owed to the Company or an Affiliate of the Company); or (ii) to reinvest in Additional Assets (including by means of an Investment in Additional Assets by a Restricted Subsidiary with Net Available Cash received by the Company or another Restricted Subsidiary): provided, however, that in connection with any -------- ------- prepayment, repayment, legal defeasance or purchase of Debt pursuant to clause (i) above, the Company or such Subsidiary Guarantor or other Restricted Subsidiary shall retire such Debt and shall cause the related loan commitment (if any) to be permanently reduced by an amount equal to the principal amount so prepaid, repaid, legally defeased or purchased. (c) Any Net Available Cash from an Asset Sale not applied in accordance with the preceding paragraph within twelve months from the date of the receipt of such Net Available Cash shall constitute "Excess Proceeds". When the aggregate amount of Excess Proceeds exceeds $10.0 million (taking into account income earned on such Excess Proceeds, if any), the Company will be required to make an offer to purchase (the "Prepayment Offer") the Securities which offer shall be in the amount of the Excess Proceeds, on a pro rata basis according to principal amount, at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the purchase date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date) in accordance with the procedures (including prorating in the event of oversubscription) set forth in this Indenture. To the extent that any portion of the amount of Net Available Cash remains after compliance with the preceding sentence and provided that all holders of Securities have been given the opportunity to tender their Securities for purchase in accordance with this Indenture, the Company or such Restricted Subsidiary may use such remaining amount for any purpose permitted by this Indenture and the amount of Excess Proceeds will be reset to zero. (d)(1) Within five business days after the Company is obligated to make a Prepayment Offer as described in the preceding paragraph, the Company shall send a written notice, by first-class mail, to the Trustee and the Holders of Securities (the "Prepayment Offer Notice"), accompanied by such information regarding the Company and its Subsidiaries as the Company in good faith believes will enable such Holders to make an informed decision with respect to 48 such Prepayment Offer. The Prepayment Offer Notice shall state (i) that the Company is offering to purchase Securities pursuant to the provisions of this Indenture, (ii) that any Security (or any portion thereof) accepted for payment (and duly paid on the Purchase Date) pursuant to the Prepayment Offer shall cease to accrue interest on the Purchase Date, (iii) that any Securities (or portions thereof) not properly tendered shall continue to accrue interest, (iv) the purchase price and purchase date, which shall be, subject to any contrary requirements of applicable law, a Business Day no earlier than 30 days nor later than 60 days after the date the Prepayment Offer Notice is mailed (the "Purchase Date"), (v) the aggregate principal amount of Securities to be purchased, (vi) a description of the procedures which Holders of Securities must follow in order to tender their Securities and the procedures that Holders of Securities must follow in order to withdraw an election to tender their Securities for payment and (vii) all other instructions and materials necessary to enable Holders to tender Securities pursuant to the Prepayment Offer. (2) Not later than the date upon which written notice of a Prepayment Offer is delivered to the Trustee as provided above, the Company shall deliver to the Trustee an Officers' Certificate as to (i) the amount of the Prepayment Offer (the "Offer Amount"), (ii) the allocation of the Net Available Cash from the Asset Sales pursuant to which such Prepayment Offer is being made and (iii) the compliance of such allocation with the provisions of Section 4.07(a). On such date or prior to the Purchase Date, the Company shall also irrevocably deposit with the Trustee or with the Paying Agent (or, if the Company or a Wholly Owned Subsidiary is the Paying Agent, shall segregate and hold in trust) in cash or Temporary Cash Investments, maturing on the last day prior to the Purchase Date or on the Purchase Date if funds are immediately available by open of business, an amount equal to the Offer Amount to be held for payment in accordance with the provisions of this Section. Upon the expiration of the period for which the Prepayment Offer remains open (the "Offer Period"), the Company shall deliver to the Trustee for cancelation the Securities or portions thereof which have been properly tendered to and are to be accepted by the Company. The Trustee or the Paying Agent shall, on the Purchase Date, mail or deliver payment to each tendering Holder in the amount of the purchase price. In the event that the aggregate purchase price of the Securities delivered by the Company to the Trustee is less than the Offer Amount, the Trustee or the Paying Agent shall deliver the excess to the Company immediately after the expiration of the Offer Period for application in accordance with this Section. 49 (3) Holders electing to have a Security purchased shall be required to surrender the Security, with an appropriate form duly completed, to the Company or its agent at the address specified in the notice at least three Business Days prior to the Purchase Date. Holders shall be entitled to withdraw their election if the Trustee or the Company receives not later than one Business Day prior to the Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security which was delivered for purchase by the Holder and a statement that such Holder is withdrawing his election to have such Security purchased. If at the expiration of the Offer Period the aggregate principal amount of Securities surrendered by Holders exceeds the Offer Amount, the Company shall select the Securities to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Securities in denominations of $1,000, or integral multiples thereof, shall be purchased). Holders whose Securities are purchased only in part shall be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered. (4) At the time the Company delivers Securities to the Trustee which are to be accepted for purchase, the Company shall also deliver an Officers' Certificate stating that such Securities are to be accepted by the Company pursuant to and in accordance with the terms of this Section 4.07. A Security shall be deemed to have been accepted for purchase at the time the Trustee or the Paying Agent mails or delivers payment therefor to the surrendering Holder. (e) The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Securities as described above. To the extent that the provisions of any securities laws or regulations conflict with the provisions relating to the Prepayment Offer, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described above by virtue thereof. SECTION 4.08. Limitation on Transactions with Affiliates. (a) The ------------------------------------------- Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, conduct any business or enter into or suffer to exist any transaction or series of transactions (including the purchase, sale, transfer, assignment, lease, conveyance or exchange of any Property or the rendering of any service) 50 with, or for the benefit of, any Affiliate of the Company (an "Affiliate Transaction"), unless (a) the terms of such Affiliate Transaction are (i) set forth in writing, (ii) in the interest of the Company or such Restricted Subsidiary, as the case may be, and (iii) no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could be obtained in a comparable arm's-length transaction with a Person that is not an Affiliate of the Company, (b) if such Affiliate Transaction involves aggregate payments or value in excess of $2.5 million, the Board of Directors (including a majority of the disinterested members of the Board of Directors, if any) approves such Affiliate Transaction and, in its good faith judgment, believes that such Affiliate Transaction complies with clauses (a)(ii) and (iii) of this paragraph as evidenced by a Board Resolution promptly delivered to the Trustee and (c) if such Affiliate Transaction involves aggregate payments or value in excess of $5.0 million, the Company obtains a written opinion from an Independent Appraiser to the effect that the consideration to be paid or received in connection with such Affiliate Transaction is fair, from a financial point of view, to the Company or such Restricted Subsidiary, as the case may be and a copy of the written opinion is delivered to the Trustee. (b) Notwithstanding the foregoing limitation, the Company or any Restricted Subsidiary may enter into or suffer to exist the following: (i) any transaction or series of transactions between the Company and one or more Restricted Subsidiaries or between two or more Restricted Subsidiaries in the ordinary course of business, provided that no more than -------- 5% of the total voting power of the Voting Stock (on a fully diluted basis) of any such Restricted Subsidiary is owned by an Affiliate of the Company (other than a Restricted Subsidiary); (ii) any Restricted Payment permitted to be made pursuant to Section 4.05; (iii) the payment of compensation (including amounts paid pursuant to employee benefit plans) for the personal services of officers, directors and employees of the Company or any of the Restricted Subsidiaries, so long as the Board of Directors in good faith shall have approved the terms thereof and deemed the services theretofore or thereafter to be performed for such compensation to be fair consideration therefor; 51 (iv) loans and advances to employees made in the ordinary course of business and consistent with the past practices of the Company or such Restricted Subsidiary, as the case may be; provided that such loans and -------- advances do not exceed $1.0 million in the aggregate at any one time outstanding; (v) the payment of fees and expenses in connection with the Recapitalization pursuant to written agreements in effect on the Issue Date; (vi) the sale of common stock of the Company for cash; provided, -------- that the Company may receive Employee Notes in an aggregate principal amount not in excess of $1.0 million at any one time outstanding; (vii) the payment of dividends in kind in respect of (i) the Mirror Preferred Stock or (ii) any other Preferred Stock issued in compliance with this Section; and (viii) a proportionate split of, or a common stock dividend payable on, the common stock of the Company. SECTION 4.09. Limitation on Issuance or Sale of Capital Stock of -------------------------------------------------- Restricted Subsidiaries. The Company shall not (a) sell, pledge, hypothecate or - ------------------------ otherwise dispose of any shares of Capital Stock of a Restricted Subsidiary or (b) permit any Restricted Subsidiary to, directly or indirectly, issue or sell or otherwise dispose of any shares of its Capital Stock, other than (i) directors' qualifying shares, (ii) to the Company or a Wholly Owned Subsidiary or (iii) a disposition of 100% of the shares of Capital Stock of a Restricted Subsidiary that complies with Section 4.07; provided, however, that, in the case -------- ------- of this clause (iii), upon consummation of such disposition, any such Restricted Subsidiary shall be released from all its obligations under its Subsidiary Guaranty. SECTION 4.10. Repurchase at the Option of Holders Upon a Change of ---------------------------------------------------- Control. (a) Upon the occurrence of a Change of Control, each holder of - -------- Securities shall have the right to require the Company to repurchase all or any part of such holder's Securities pursuant to the offer described below (the "Change of Control Offer") at a purchase price (the "Change of Control Purchase Price") equal to 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the purchase date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). 52 (b) Within 30 days following any Change of Control, the Company shall (a) cause a notice of the Change of Control Offer to be sent at least once to the Dow Jones News Service or similar business news service in the United States and (b) send, by first-class mail, with a copy to the Trustee, to each holder of Securities, at such holder's address appearing in the Security Register, a notice stating: (i) that a Change of Control has occurred and a Change of Control Offer is being made pursuant to this Section and that all Securities timely tendered will be accepted for payment; (ii) the Change of Control Purchase Price and the purchase date, which shall be, subject to any contrary requirements of applicable law, a business day no earlier than 30 days nor later than 60 days from the date such notice is mailed; (iii) the circumstances and relevant facts regarding the Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to the Change of Control); (iv) that any Security (or portion thereof) accepted for payment (and duly paid on the Change of Control Payment Date) pursuant to the Change of Control Offer shall cease to accrue interest on the Change of Control Payment Date; (v) that any Securities (or portions thereof) not properly tendered shall continue to accrue interest; (vi) the procedures that Holders of Securities must follow in order to tender their Securities (or portions thereof) for payment and the procedures that Holders of Securities must follow in order to withdraw an election to tender Securities (or portions thereof) for payment; and (vii) all other instructions and materials necessary to enable Holders to tender Securities pursuant to the Change of Control Offer. (c) Holders electing to have a Security purchased shall be required to surrender the Security, with an appropriate form duly completed, to the Company or its agent at the address specified in the notice at least three Business Days prior to the Change of Control Payment Date. Holders shall be entitled to withdraw their election if the Trustee or the Company receives not later than one Business Day prior to the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security which was delivered for purchase by the Holder and a statement that such Holder is withdrawing his election to have such Security purchased. Holders whose Securities are purchased only in part shall be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered. 53 (d) On or prior to the Change of Control Payment Date, the Company shall irrevocably deposit with the Trustee or with the Paying Agent (or, if the Company or any of its Wholly Owned Subsidiaries is acting as the Paying Agent, segregate and hold in trust) in cash an amount equal to the Change of Control Payment payable to the Holders entitled thereto, to be held for payment in accordance with the provisions of this Section. (e) On the Change of Control Payment Date, the Company shall deliver to the Trustee the Securities or portions thereof which have been properly tendered to and are to be accepted by the Company for payment. The Trustee or the Paying Agent shall, on the Change of Control Payment Date, mail or deliver payment to each tendering Holder of the Change of Control Payment. In the event that the aggregate Change of Control Payment is less than the amount delivered by the Company to the Trustee or the Paying Agent, the Trustee or the Paying Agent, as the case may be, shall deliver the excess to the Company immediately after the Change of Control Payment Date. (f) At the time the Company delivers Securities to the Trustee which are to be accepted for purchase, the Company shall also deliver an Officers' Certificate stating that such Securities are to be accepted by the Company pursuant to and in accordance with the terms of this Section. A Security shall be deemed to have been accepted for purchase at the time the Trustee or the Paying Agent mails or delivers payment therefor to the surrendering Holder. Unless the Company defaults in the payment of the Change of Control Payment, each Security accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest on and after the Change of Control Payment Date. (g) The Company shall comply, to the extent applicable, with the requirements of Rule 14(e) under the Exchange Act and any other securities laws or regulations thereunder in connection with the purchase of Securities pursuant to this Section. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Sec tion by virtue thereof. SECTION 4.11. Limitation on Liens. The Company shall not, and shall -------------------- not permit any Restricted Subsidiary to, directly or indirectly, Incur or suffer to exist, any Lien (other than Permitted Liens) upon any of its Property 54 (including Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired, or any interest therein or any income or profits therefrom, unless (i) if such Lien secures Senior Subordinated Debt, the Securities or the applicable Subsidiary Guaranty are secured on an equal and ratable basis with such Debt and (ii) if such Lien secures Subordinated Obligations, such Lien shall be subordinated to a Lien securing the Securities or the applicable Subsidiary Guaranty in the same Property as that securing such Lien to the same extent as such Subordinated Obligations are subordinated to the Securities and the Subsidiary Guaranties. SECTION 4.12. Compliance Certificate. The Company shall deliver to ----------------------- the Trustee within 120 days after the end of each fiscal year of the Company an Officers' Certificate stating that in the course of the performance by the signers of their duties as Officers of the Company they would normally have knowledge of any Default and whether or not the signers know of any Default that occurred during such period. If they do, the certificate shall describe the Default, its status and what action the Company is taking or proposes to take with respect thereto. The Company also shall comply with TIA (S) 314(a)(4). SECTION 4.13. Further Instruments and Acts. Upon request of the ----------------------------- Trustee, the Company shall execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. SECTION 4.14. Limitation on Layered Debt. The Company shall not, and --------------------------- shall not permit any Subsidiary Guarantor to, Incur, directly or indirectly, any Debt which is subordinate or junior in right of payment to any Debt unless such Debt is Senior Subordinated Debt or is expressly subordinated in right of payment to Senior Subordinated Debt. In addition, no Subsidiary Guarantor shall Guarantee, directly or indirectly, any Debt of the Company that is subordinate or junior in right of payment to any Senior Debt unless such Guarantee is expressly subordinate in right of payment to, or ranks pari passu with, the ---- ----- Subsidiary Guaranty of such Subsidiary Guarantor. SECTION 4.15. Designation of Restricted and Unrestricted ------------------------------------------ Subsidiaries. The Board of Directors may designate any Subsidiary of the - ------------- Company (other than Industrias Hudson) to be an Unrestricted Subsidiary if (a) the Subsidiary to be so designated does not own any Capital Stock or Debt of, or own or hold any Lien on any Property of, the Company or any other Restricted Subsidiary, 55 (b) the Subsidiary to be so designated is not obligated under any Debt, Lien or other obligation that, if in default, would result (with the passage of time or notice or otherwise) in a default on any Debt of the Company or of any Restricted Subsidiary and (c) either (i) the Subsidiary to be so designated has total assets of $1,000 or less or (ii) such designation is effective immediately upon such entity becoming a Subsidiary of the Company. Unless so designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company will be classified as a Restricted Subsidiary; provided, however, that such -------- ------- Subsidiary shall not be designated a Restricted Subsidiary and shall be automatically classified as an Unrestricted Subsidiary if either of the requirements set forth in clauses (x) and (y) of the immediately following paragraph will not be satisfied after giving pro forma effect to such classification. Except as provided in the first sentence of this paragraph, no Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary. Upon designation of a Restricted Subsidiary as an Unrestricted Subsidiary in compliance with this Section, such Restricted Subsidiary will, by delivery of a supplemental indenture in form satisfactory to the Trustee, be released from any Subsidiary Guaranty previously made by such Subsidiary. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary if, immediately after giving pro forma effect to such designation, (x) the Company could Incur at least $1.00 of additional Debt pursuant to clause (a) of the first paragraph of Section 4.03 and (y) no Default or Event of Default shall have occurred and be continuing or would result therefrom. Any such designation or redesignation by the Board of Directors will be evidenced to the Trustee by filing with the Trustee a Board Resolution giving effect to such designation or redesignation and an Officers' Certificate (a) certifying that such designation or redesignation complies with the foregoing provisions and (b) giving the effective date of such designation or redesignation, such filing with the Trustee to occur within 45 days after the end of the fiscal quarter of the Company in which such designation or redesignation is made (or, in the case of a designation or redesignation made during the last fiscal quarter of the Company's fiscal year, within 90 days after the end of such fiscal year). SECTION 4.16. Limitation on Holding's Business. Holding shall not, --------------------------------- directly or indirectly, engage in any business or activity other than the ownership of Capital Stock of the Company and business activities incidental thereto. 56 ARTICLE 5 Successor Company ----------------- SECTION 5.01. When Company May Merge or Transfer Assets. (a) The ------------------------------------------ Company shall not merge, consolidate or amalgamate with or into any other Person (other than a merger of a Wholly Owned Subsidiary into the Company) or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all its Property in any one transaction or series of transactions unless: (i) the Company shall be the surviving Person (the "Surviving Person") or the Surviving Person (if other than the Company) formed by such merger, consolidation or amalgamation or to which such sale, transfer, assignment, lease, conveyance or disposition is made shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia; (ii) the Surviving Person (if other than the Company) expressly assumes, by supplemental indenture in form satisfactory to the Trustee, executed and delivered to the Trustee by such Surviving Person, the due and punctual payment of the principal of, and premium, if any, and interest on, all the Securities, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be performed by the Company; (iii) in the case of a sale, transfer, assignment, lease, conveyance or other disposition of all or substantially all the Property of the Company, such Property shall have been transferred as an entirety or virtually as an entirety to one Person; (iv) immediately before and after giving effect to such transaction or series of transactions on a pro forma basis (and treating, for purposes of this clause (iv) and clauses (v) and (vi) below, any Debt which becomes, or is anticipated to become, an obligation of the Surviving Person or any Restricted Subsidiary as a result of such transaction or series of transactions as having been Incurred by the Surviving Person or such Restricted Subsidiary at the time of such transaction or series of transactions), no Default or Event of Default shall have occurred and be continuing; (v) immediately after giving effect to such transaction or series of transactions on a pro forma basis, the Company or the Surviving Person, as the case may be, would be able to Incur at least $1.00 of additional Debt under clause (a) of the first paragraph of Section 4.03; provided, however, that this clause (v) shall -------- ------- not apply to a merger between the Company and a Wholly Owned Subsidiary of the Company or Holding incorporated in another state of the United States solely for the purpose of reincorporating the Company as long as the total amount of Debt of the Company and its 57 Restricted Subsidiaries is not increased as a result thereof; and (vi) the Company shall deliver, or cause to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that such transaction and the supplemental indenture, if any, in respect thereto comply with this Section and that all conditions precedent herein provided for relating to such transaction have been satisfied and that the supplemental indenture, if any, has been duly authorized, executed and delivered and is enforceable against the Surviving Person. (b) The Surviving Person shall succeed to, and be substituted for, and may exercise every right and power of the Company under this Indenture, but the predecessor Company in the case of a sale, transfer, assignment, lease, conveyance or other disposition shall not be released from the obligation to pay the principal of, and premium, if any, and interest on, the Securities. ARTICLE 6 Defaults and Remedies --------------------- SECTION 6.01. Events of Default. The following events shall be ------------------ "Events of Default": (1) the Company defaults in any payment of inter est on the Securities when the same becomes due and payable, whether or not such payment shall be prohibited by Article 10, and such default continues for a period of 30 days; (2) the failure to make the payment of any principal of or premium, if any, on any of the Securities when the same become due and payable at its Stated Maturity, upon acceleration, redemption, optional redemption, upon required repurchase or otherwise, whether or not such payment shall be prohibited by Article 10; (3) the Company or any Subsidiary Guarantor fails to comply with Article 5; (4) the Company fails to comply with any other covenant or agreement in the Securities or in this Indenture (other than a failure which is the subject of the foregoing clause (1), (2) or (3)) and continuance of such failure for a period of 30 days after the notice specified below; 58 (5) default by the Company or any Restricted Subsidiary under any Debt of the Company or any Restricted Subsidiary which results in acceleration of the stated maturity of such Debt, or the failure to pay such Debt at final maturity, in an aggregate amount greater than $7.5 million or its foreign currency equivalent at the time; (6) any judgment or judgments for the payment of money in an aggregate amount in excess of $7.5 million (or its foreign currency equivalent at the time) shall be rendered against the Company or any Restricted Subsidiary and shall not be waived, satisfied or discharged for any period of 30 consecutive days during which a stay of enforcement shall not be in effect; (7) the Company or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case; (B) consents to the entry of an order for relief against it in an involuntary case; (C) consents to the appointment of a Custodian of it or for any substantial part of its property; or (D) makes a general assignment for the benefit of its creditors; or takes any comparable action under any foreign laws relating to insolvency; (8) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any Significant Subsidiary in an involuntary case; (B) appoints a Custodian of the Company or any Significant Subsidiary or for any substantial part of its property; (C) orders the winding up or liquidation of the Company or any Significant Subsidiary; or (D) grants any similar relief under any foreign laws; 59 and in each such case the order or decree remains unstayed and in effect for 60 days; or (9) the Subsidiary Guaranty of any Significant Subsidiary or, if issued, Industrias Hudson ceases to be in full force and effect (other than in accordance with the terms thereof) or any Significant Subsidiary or, if applicable, Industrias Hudson denies or disaffirms its obligations under its Subsidiary Guaranty. The foregoing shall constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body. The term "Bankruptcy Law" means Title 11, United States Code, or any ------------------ similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. A Default under clause (4) is not an Event of Default until the Trustee or the Holders of at least 25% in aggregate principal amount of the outstanding Securities notify the Company (and in the case of such notice by Holders, the Trustee) in writing of such Default and the Company does not cure such Default within the time specified after receipt of such notice. Such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default." The Company shall deliver to the Trustee, within 30 days after the occurrence thereof, written notice in the form of an Officers' Certificate of any Event of Default and event which with the giving of notice or the lapse of time would become an Event of Default, its status and what action the Company is taking or proposes to take with respect thereto. SECTION 6.02. Acceleration. If an Event of Default (other than an ------------- Event of Default specified in Section 6.01(7) or (8)) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding by notice to the Company and the Trustee, may declare the principal amount of all the Securities then outstanding, plus accrued but unpaid interest to be due and payable. Upon such a declaration, such principal shall be 60 due and payable immediately. If an Event of Default specified in Section 6.01(7) or (8) occurs, the principal of the Securities shall automatically and without any action by the Trustee or any Holder, become immediately due and payable. The Holders of a majority in aggregate principal amount of the outstanding Securities by notice to the Trustee and the Company may rescind and annul any declaration of acceleration if the rescission would not conflict with any judgment or decree, and if all existing Events of Default have been cured or waived except nonpayment of principal, premium or interest that has become due solely because of the acceleration. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 6.03. Other Remedies. If an Event of Default occurs and is --------------- continuing, the Trustee may pursue any available remedy to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 6.04. Waiver of Defaults. The Holders of a majority in ------------------- aggregate principal amount of the Securities by notice to the Trustee may waive, on behalf of the Holders of all outstanding Securities, a past or an existing Default and its consequences or compliance with any provision of this Indenture or the Securities except (i) a Default in the payment of the principal of or interest on a Security or (ii) a Default in respect of a provision that under Section 9.02 cannot be amended without the consent of each Securityholder affected. When a Default is waived, it is deemed cured and not to have occurred for every purpose of this Indenture and the Securities, but no such waiver shall extend to any subsequent or other Default or impair any consequent right. SECTION 6.05. Control by Majority. The Holders of a majority in -------------------- aggregate principal amount of the Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee with respect to the Securities. However, the 61 Trustee may refuse to follow any direction that conflicts with law or this Indenture or, subject to Section 7.01, that the Trustee determines is unduly prejudicial to the rights of other Securityholders or would involve the Trustee in personal liability; provided, however, that the Trustee may take any other -------- ------- action deemed proper by the Trustee that is not inconsistent with such direction. Prior to taking any action hereunder, the Trustee shall be entitled to reasonable indemnity against all losses and expenses caused by taking or not taking such action. SECTION 6.06. Limitation on Suits. A Security holder may not pursue -------------------- any remedy with respect to this Indenture or the Securities unless: (1) such Holder shall have previously given to the Trustee written notice of a continuing Event of Default; (2) the Holders of at least 25% in aggregate principal amount of the Securities then outstanding shall have made a written request, and such Holder of or Holders shall have offered reasonable indemnity, to the Trustee to pursue such proceeding as trustee; and (3) the Trustee has failed to institute such proceeding and has not received from the Holders of at least a majority in aggregate principal amount of the Securities outstanding a direction inconsistent with such request, within 60 days after such notice, request and offer. The foregoing limitations on the pursuit of remedies by a Securityholder shall not apply to a suit instituted by a Holder of Securities for the enforcement of payment of the principal of or interest on such Security on or after the applicable due date specified in such Security. A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder. SECTION 6.07. Rights of Holders To Receive Payment. Notwithstanding ------------------------------------- any other provision of this Indenture, the right of any Holder to receive payment of principal of and interest on the Securities held by such Holder, on or after the respective due dates expressed in this Securities, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. 62 SECTION 6.08. Collection Suit by Trustee. If an Event of Default --------------------------- specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount then due and owing (together with interest on any unpaid interest to the extent lawful) and the amounts provided for in Section 7.07. SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file --------------------------------- such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Securityholders allowed in any judicial proceedings relative to the Company, its creditors or its property and, unless prohibited by law or applicable regulations, may vote on behalf of the Holders in any election of a trustee in bankruptcy or other Person performing similar functions, is empowered to participate as a member, voting or otherwise, of any official committee of creditors appointed in such matter, and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and its counsel, and any other amounts due the Trustee under Section 7.07. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10. Priorities. If the Trustee collects any money or ----------- property pursuant to this Article 6, it shall pay out the money or property in the following order: FIRST: to the Trustee for amounts due under Section 7.07; SECOND: to holders of Senior Debt of the Company to the extent required by Article 10; THIRD: to Securityholders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively; and 63 FOURTH: to the Company. The Trustee may fix a record date and payment date for any payment to Securityholders pursuant to this Section. At least 15 days before such record date, the Company shall mail to each Securityholder and the Trustee a notice that states the record date, the payment date and amount to be paid. SECTION 6.11. Undertaking for Costs. In any suit for the enforcement ---------------------- of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, the Company, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of more than 10% in aggregate principal amount of the Securities. SECTION 6.12. Waiver of Stay or Extension Laws. The Company (to the --------------------------------- extent it may lawfully do so) shall not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE 7 Trustee ------- SECTION 7.01. Duties of Trustee. (a) If an Event of Default has ------------------ occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent Person would exercise or use under the circumstances in the conduct of such Person's own affairs. 64 (b) Except during the continuance of an Event of Default: (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture, but shall not be obligated to verify the contents thereof. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that: (1) this paragraph does not limit the effect of paragraph (b) of this Section; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (3) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. (f) Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (g) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise 65 incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (h) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section and to the provisions of the TIA. SECTION 7.02. Rights of Trustee. (a) The Trustee may rely on any ------------------ document reasonably believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on the Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent (other than an agent who is an employee of the Trustee) appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it reasonably believes to be authorized or within its rights or powers; provided, however, that the Trustee's conduct does not -------- ------- constitute wilful misconduct or negligence. (e) The Trustee may consult with counsel, and the written advice or written opinion of counsel with respect to legal matters relating to this Indenture and the Securities shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with such advice or opinion of such counsel. (f) Unless otherwise specifically provided herein, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. (g) The Company, the Paying Agent, the Registrar, the Trustee and any agent of the Company, the Paying Agent, the Registrar or the Trustee may deem and treat the Person in whose name any Security is registered as the absolute 66 owner of such Security for the purpose of receiving payment of or on account of the principal of and, subject to the provisions of this Indenture, interest on such Security and for all other purposes; and neither the Company, the Paying Agent, the Registrar nor the Trustee nor any agent of the Company, the Paying Agent, the Registrar or the Trustee shall be affected by any notice to the contrary. SECTION 7.03. Individual Rights of Trustee. The Trustee in its ----------------------------- individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent, Registrar or co- registrar may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be --------------------- responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement of the Company or any Subsidiary Guarantor in this Indenture or in any document issued in connection with the sale of the Securities or in the Securities other than the Trustee's certificate of authentication. SECTION 7.05. Notice of Defaults. If a Default occurs and is ------------------- continuing and if it is known to the employees of the Trustee with responsibility for the Securities, the Trustee shall mail to each Securityholder notice of the Default within 90 days after it is known to such employees of the Trustee or written notice of it is received by the Trustee. Except in the case of a Default in payment of principal of or interest on any Security, the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Securityholders. SECTION 7.06. Reports by Trustee to Holders. As promptly as ------------------------------ practicable after each May 15 beginning with May 15, 1999, and in any event prior to July 15 in each year, the Trustee shall mail to each Securityholder a brief report dated as of May 15 each year that complies with TIA (S) 313(a), if and to the extent required by said subsection. The Trustee also shall comply with TIA (S) 313(b). A copy of each report at the time of its mailing to Securityholders shall be filed with the SEC and each stock exchange (if any) on which the Securities are listed. 67 The Company agrees to notify promptly the Trustee whenever the Securities become listed on any stock exchange and of any delisting thereof. SECTION 7.07. Compensation and Indemnity. The Company shall pay to --------------------------- the Trustee from time to time reasonable compensation for its services. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred or made by it, including costs of collection, in addition to the compensation for its services. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Trustee's agents, counsel, accountants and experts. The Company shall indemnify the Trustee against any and all loss, liability or expense (including reasonable attorneys' fees, but excluding any franchise taxes imposed on the Trustee and any taxes based on the income of the Trustee) incurred by it in connection with the acceptance and administration of this trust, including the reasonable costs and expenses of enforcing this Indenture against the Company (including Section 7.07) and of defending itself against any claim (whether asserted by any Holder, the Company or any Subsidiary Guarantor) and the performance of its duties hereunder. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder, except to the extent such failure shall have materially prejudiced the Company. The Company shall defend the claim and the Trustee shall cooperate in the defense. If the Trustee is advised by counsel in writing that it may have available to it defenses which are in conflict with the defenses available to the Company, then the Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not reimburse any expense or indemnify against any loss, liability or expense incurred by the Trustee or any of its agents, counsel, accountants or experts which is judicially determined to be the result of the Trustee's or any such agent's, counsel's, accountant's or expert's own wilful misconduct, negligence or bad faith. The Company need not pay for any settlement made by the Trustee without the Company's consent, such consent not to be unreasonably withheld or delayed. The Trustee's right to receive payment of any amounts due under this Section 7.07 shall not be subordinated to any other liability or indebtedness of the Company (even though the Securities may be so subordinated). 68 To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee other than money or property held in trust to pay principal of and interest on particular Securities. The Company's payment obligations pursuant to this Section shall survive the discharge of this Indenture. When the Trustee incurs expenses after the occurrence of a Default specified in Section 6.01(7) or (8), the expenses are intended to constitute expenses of administration under the Bankruptcy Law. SECTION 7.08. Replacement of Trustee. The Trustee may resign at any ----------------------- time by so notifying the Company. The Holders of a majority in aggregate principal amount of the Securities may remove the Trustee by so notifying the Trustee and may appoint a successor Trustee. The Company shall remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged bankrupt or insolvent; (3) a receiver or other public officer takes charge of the Trustee or its property; or (4) the Trustee otherwise becomes incapable of acting. If the Trustee resigns, is removed by the Company or by the Holders of a majority in aggregate principal amount of the Securities and such Holders do not reasonably promptly appoint a successor Trustee, or if a vacancy exists in the office of Trustee for any reason (the Trustee in such event being referred to herein as the retiring Trustee), the Company shall promptly appoint a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Securityholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.07. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, 69 the retiring Trustee, the Company or the Holders of 10% in aggregate principal amount of the Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Securityholder who has been a bona fide Holder of a Security for at least six months may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding the replacement of the Trustee pursuant to this Section, the Company's obligations under Section 7.07 shall continue for the benefit of the retiring Trustee. SECTION 7.09. Successor Trustee by Merger. If the Trustee ---------------------------- consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation or banking association without any further act shall be the successor Trustee. In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any such successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have. SECTION 7.10. Eligibility; Disqualification. The Trustee shall at ------------------------------ all times satisfy the requirements of TIA (S) 310(a). The Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA (S) 310(b), subject to the penultimate paragraph thereof; provided, however, -------- ------- that there shall be excluded from the operation of TIA (S) 310(b)(1) any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company are outstanding if the requirements for such exclusion set forth in TIA (S) 310(b)(1) are met. 70 SECTION 7.11. Preferential Collection of Claims Against Company. The -------------------------------------------------- Trustee shall comply with TIA (S) 311(a), excluding any creditor relationship listed in TIA (S) 311(b). A Trustee who has resigned or been removed shall be subject to TIA (S) 311(a) to the extent indicated. ARTICLE 8 Discharge of Indenture; Defeasance ---------------------------------- SECTION 8.01. Discharge of Liability on Securities; Defeasance. (a) ------------------------------------------------- When (i) the Company delivers to the Trustee all outstanding Securities (other than Securities replaced pursuant to Section 2.07) for cancelation or (ii) all outstanding Securities have become due and payable, whether at maturity or as a result of the mailing of a notice of redemption pursuant to Article 3 and the Company irrevocably deposits with the Trustee funds sufficient to pay at maturity or upon redemption all outstanding Securities, including interest thereon to maturity or such redemption date (other than Securities replaced pursuant to Section 2.07), and if in either case the Company pays all other sums payable hereunder by the Company, then this Indenture shall, subject to Sections 8.01(c), cease to be of further effect. The Trustee shall acknowledge satisfaction and discharge of this Indenture on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Company. (b) Subject to Sections 8.01(c) and 8.02, the Company at any time may terminate (i) all its obligations under the Securities and this Indenture ("legal defeasance option") or (ii) its obligations under Sections 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.14, 4.15 and 4.16 the operation of Sections 6.01(4) (to the extent relating to such other Sections), 6.01(5), 6.01(6), 6.01(7), 6.01(8) and 6.01(9) (but, in the case of Sections 6.01(6) and (7), with respect only to Significant Subsidiaries), its obligations under Sections 5.01(a)(iv), 5.01(a)(v) and the related operation of Section 6.01(3) ("covenant defeasance option"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Securities may not be accelerated because of an Event of Default with respect thereto. If the Company exercises its covenant defeasance option, payment of the Securities may not be accelerated because of an Event of Default specified in Sections 6.01(3) and 6.01(4) (with 71 respect to the provisions of Articles 4 and 5 referred to in the immediately preceding paragraph) and Sections 6.01(5), 6.01(6), 6.01(7), 6.01(8) and 6.01(9) (but, in the case of Sections 6.01(6) and (7), with respect only to Significant Subsidiaries). If the Company exercises its legal defeasance option or its covenant defeasance option, each Subsidiary Guarantor, if any, shall be released from all its obligations under its Subsidiary Guaranty. Upon satisfaction of the conditions set forth herein and upon request of the Company, the Trustee shall acknowledge in writing the discharge of those obligations that the Company terminates. (c) Notwithstanding clauses (a) and (b) above, the Company's obligations in Sections 2.04, 2.05, 2.06, 2.07, 7.07, 7.08, 8.05 and 8.06 and Appendix A shall survive until the Securities have been paid in full. Thereafter, the Company's obligations in Sections 7.07 and 8.05 shall survive. SECTION 8.02. Conditions to Defeasance. The Company may exercise its ------------------------- legal defeasance option or its covenant defeasance option only if: (1) the Company irrevocably deposits in trust with the Trustee money or U.S. Government Obligations for the payment of principal of and interest on the Securities to maturity or redemption, as the case may be; (2) the Company delivers to the Trustee a certificate from a nationally recognized firm of independent accountants expressing their opinion that the payments of principal and interest when due and without reinvestment on the deposited U.S. Government Obligations plus any deposited money without investment will provide cash at such times and in such amounts as will be sufficient to pay principal and interest when due on all the Securities to maturity or redemption, as the case may be; (3) 123 days pass after the deposit is made and during the 123-day period no Default specified in Section 6.01(6) or (7) with respect to the Company occurs which is continuing at the end of the period; (4) the deposit does not constitute a default under any other material agreement binding on the Company and is not prohibited by Article 10; 72 (5) the Company delivers to the Trustee an Opinion of Counsel to the effect that the trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940; (6) in the case of the legal defeasance option, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (ii) since the date of this Indenture there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Securityholders will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (7) in the case of the covenant defeasance option, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Securityholders will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and (8) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance and discharge of the Securities as contemplated by this Article 8 have been complied with. Opinions of Counsel required to be delivered to the Trustee may have assumptions customary for opinions of the type required and counsel delivering such Opinions of Counsel may rely on certificates of the Company or government or other officials customary for opinions of the type required, including certificates certifying as to matters of fact, including that various financial covenants have been complied with. Before or after a deposit, the Company may make arrangements satisfactory to the Trustee for the redemption of Securities at a future date in accordance with Article 3. 73 SECTION 8.03. Application of Trust Money. The Trustee shall hold in --------------------------- trust money or U.S. Government Obligations deposited with it pursuant to this Article 8. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal of and interest on the Securities. Money and securities so held in trust are not subject to Article 10. SECTION 8.04. Repayment to Company. The Trustee and the Paying Agent --------------------- shall promptly turn over to the Company upon request any excess money or securities held by them at any time. Subject to any applicable abandoned property law, the Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal or interest that remains unclaimed for two years (or if then held by the Company or a Wholly Owned Subsidiary in trust for the payment thereof) shall be discharged from such trust, and, thereafter, Securityholders entitled to the money must look to the Company for payment as general creditors; provided, however, that the Trustee or such Paying Agent before being required - -------- ------- to make any such repayment, may at the expense of the Company cause to be mailed to each such Holder a notice that said moneys have not been so applied and that after a date named therein any unclaimed balance of said moneys then remaining will be returned to the Company. SECTION 8.05. Indemnity for Government Obligations. The Company shall ------------------------------------- pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against deposited U.S. Government Obligations or the principal and interest received on such U.S. Government Obligations. SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is -------------- unable to apply any money or U.S. Government Obligations in accordance with this Article 8 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article 8 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article 8; provided, however, that, if the --------- ------- Company has made any payment of interest on or principal of any Securities because of the reinstatement of its obligations, the Company shall be 74 subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE 9 Amendments ---------- SECTION 9.01. Without Consent of Holders. The Company and the --------------------------- Trustee may amend this Indenture or the Securities without notice to or consent of any Securityholder: (1) to cure any ambiguity, omission, defect or inconsistency; (2) to comply with Article 5; (3) to provide for uncertificated Securities in addition to or in place of certificated Securities (provided that the uncertificated Securities are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Securities are described in Section 163(f)(2)(B) of the Code); (4) to make any change in Article 10 or Article 12 that would limit or terminate the benefits available to any holder of Senior Debt of the Company or any Subsidiary Guarantor (or Representatives therefor) under Article 10 or Article 12, respectively; (5) to add or to remove Subsidiary Guarantors when permitted by the terms hereof, or to secure the Securities; (6) to add to the covenants of the Company for the benefit of the Holders or to surrender any right or power herein conferred upon the Company; (7) to comply with any requirements of the SEC in connection with qualifying, or maintaining the qualification of, this Indenture under the TIA; or (8) to make any change that does not adversely affect the rights of any Securityholder in any material respect. An amendment under this Section may not make any change that adversely affects the rights under Article 10 or 75 Article 12 of any holder of Senior Debt then outstanding unless the holders of such Senior Debt (or their Representative) consent in writing to such change, it being understood that any amendment the purpose of which is to permit the Incurrence of additional Debt shall not be construed as impairing the rights of the holders of Senior Debt pursuant to such subordination provisions. After an amendment under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment. The failure to give such notice to all Securityholders, or any defect therein, shall not impair or affect the validity of an amendment under this Section. SECTION 9.02. With Consent of Holders. The Company and the Trustee ------------------------ may amend this Indenture or the Securities without notice to any Securityholder but with the written consent of the Holders of at least a majority in aggregate principal amount of the Securities. However, without the consent of each Holder of an outstanding Security affected thereby an amendment or waiver may not: (1) reduce the amount of Securities whose holders must consent to an amendment or waiver, (2) reduce the rate of or extend the time for payment of interest on any Security, (3) reduce the principal of or extend the Stated Maturity of any Security, (4) make any Security payable in money other than that stated in the Security, (5) impair the right of any holder of the Securities to receive payment of principal of and interest on such holder's Securities on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such holder's Securities or any Subsidiary Guaranty, (6) release any security interest that may have been granted in favor of the holders of the Securities, (7) reduce the premium payable upon the redemption or repurchase of any Security, or change the time at which any Security may be redeemed, as described under Article 3, 76 (8) reduce the premium payable upon a Change of Control or, at any time after a Change of Control or Asset Sale has occurred, change the time at which the Change of Control Offer or Prepayment Offer relating thereto must be made or at which the Securities must be repurchased pursuant to such Change of Control Offer, or (9) make any change to the subordination provisions of this Indenture that would adversely affect the holders of the Securities or make any change in any Subsidiary Guaranty that would adversely affect the holders of the Securities. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. An amendment under this Section may not make any change that adversely affects the rights under Article 10 or Article 12 of any holder of Senior Debt then outstanding unless the holders of such Senior Debt (or their Representative) consent in writing to such change, it being understood that any amendment the purpose of which is to permit the Incurrence of additional Debt shall not be construed as impairing the rights of the holders of Senior Debt pursuant to such subordination provisions. After an amendment under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment. The failure to give such notice to all Securityholders, or any defect therein, shall not impair or affect the validity of an amendment under this Section. SECTION 9.03. Compliance with Trust Indenture Act. Every amendment ------------------------------------ to this Indenture or the Securities shall comply with the TIA as then in effect. SECTION 9.04. Revocation and Effect of Consents and Waivers. A ---------------------------------------------- consent to an amendment or a waiver by a Holder of a Security shall bind the Holder and every subsequent Holder of that Security or portion of the Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent or waiver is not made on the Security. However, any such Holder or subsequent Holder may revoke the consent or waiver as to such Holder's Security or portion of the Security if the Trustee receives the notice of revocation before the date the amendment or waiver becomes effective. After an amendment 77 or waiver becomes effective, it shall form a part of this Indenture for all purposes and shall bind every Securityholder. An amendment or waiver becomes effective upon the execution of such amendment or waiver by the Trustee. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Securityholders entitled to give their consent or take any other action described above or required or permitted to be taken pursuant to this Indenture. If a record date is fixed, then notwithstanding the immediately preceding paragraph, those Persons who were Securityholders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to give such consent or to revoke any consent previously given or to take any such action, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 120 days after such record date. SECTION 9.05. Notation on or Exchange of Securities. If an -------------------------------------- amendment changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security regarding the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate notation or to issue a new Security shall not affect the validity of such amendment. SECTION 9.06. Trustee To Sign Amendments. The Trustee shall sign any --------------------------- amendment authorized pursuant to this Article 9 if such amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may but need not sign it. In signing such amendment the Trustee shall be entitled to receive indemnity reasonably satisfactory to it and to receive, and (subject to Section 7.01) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that such amendment is authorized or permitted by this Indenture. SECTION 9.07. Payment for Consent. Neither the Company nor any -------------------- Affiliate of the Company shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Securities unless such consideration is offered to be paid to all Holders that so consent, waive or agree to amend in 78 the time frame set forth in solicitation documents relating to such consent, waiver or agreement. ARTICLE 10 Subordination ------------- SECTION 10.01. Agreement To Subordinate. The Company agrees, and ------------------------- each Securityholder by accepting a Security agrees, that the Securities are senior subordinated obligations of the Company and that the Debt evidenced by the Securities is subordinated in right of payment, to the extent and in the manner provided in this Article 10, to the payment when due of all Senior Debt of the Company and that the subordination is for the benefit of and enforceable by the holders of such Senior Debt. The Securities shall in all respects rank pari passu in right of payment with any future Senior Subordinated Debt of the - ---- ----- Company and senior to any future Subordinated Obligations of the Company, and only Senior Debt of the Company shall rank senior to the Securities in accordance with the provisions set forth herein. All provisions of this Article 10 shall be subject to Section 10.12. SECTION 10.02. Liquidation, Dissolution, Bankruptcy. Upon any ------------------------------------- payment or distribution of the assets of the Company upon a total or partial liquidation, dissolution or winding up of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property: (1) holders of Senior Debt of the Company shall be entitled to receive payment in full in cash of such Senior Debt before Securityholders shall be entitled to receive any payment of principal of or interest on the Securities, except that Holders of Securities may receive and retain shares of stock and any debt securities that are subordinated to Senior Debt to at least the same extent as the Securities; and (2) until such Senior Debt is paid in full in cash, any distribution to which Securityholders would be entitled but for this Article 10 shall be made to holders of such Senior Debt as their interests may appear. SECTION 10.03. Default on Senior Debt. The Company may not pay the ----------------------- principal of or interest on the Securities or make any deposit pursuant to Section 8.01 and may not repurchase, redeem or otherwise retire any 79 Securities (collectively, "pay the Securities") if (a) any principal, premium or interest in respect of any Senior Debt is not paid within any applicable grace period (including at maturity) or (b) any other default on Senior Debt occurs and the maturity of such Senior Debt is accelerated in accordance with its terms unless, in either case, (i) the default has been cured or waived and any such acceleration has been rescinded or (ii) such Senior Debt has been paid in full in cash; provided, however, that the Company may pay the Securities without -------- ------- regard to the foregoing if the Company and the Trustee receive written notice approving such payment from the Representative of each issue of Designated Senior Debt. During the continuance of any default (other than a default described in clause (a) or (b) of the preceding sentence) with respect to any Designated Senior Debt pursuant to which the maturity thereof may be accelerated immediately without further notice (except notice required to effect the acceleration) or the expiration of any applicable grace period, the Company may not pay the Securities for a period (a "Payment Blockage Period") commencing upon the receipt by the Company and the Trustee of written notice of such default from the Representative of the holders of such Designated Senior Debt specifying an election to effect a Payment Blockage Period (a "Payment Blockage Notice") and ending 179 days thereafter (unless such Payment Blockage Period is earlier terminated (a) by written notice to the Trustee and the Company from the Representative which gave such Payment Blockage Notice, (b) because such default is no longer continuing or (c) because such Designated Senior Debt has been repaid in full in cash). Unless the holders of such Designated Senior Debt or the Representative of such holders have accelerated the maturity of such Designated Senior Debt and not rescinded such acceleration, the Company may (unless otherwise prohibited as described in the first sentence of this paragraph) resume payments on the Securities after the end of such Payment Blockage Period. Not more than one Payment Blockage Notice with respect to all issues of Designated Senior Debt may be given in any consecutive 360-day period, irrespective of the number of defaults with respect to one or more issues of Designated Senior Debt during such period. SECTION 10.04. Acceleration of Payment of Securities. If payment of -------------------------------------- the Securities is accelerated because of an Event of Default, the Company or the Trustee shall promptly notify the holders of the Designated Senior Debt (or their Representatives) of the acceleration. If payment of the Securities is accelerated when any Designated Senior Debt is outstanding, the Company may not pay the Securities until three Business Days after the 80 Representatives of all issues of Designated Senior Debt receive notice of such acceleration and, thereafter, may pay the Securities only if this Indenture otherwise permits payment at that time. SECTION 10.05. When Distribution Must Be Paid Over. If a ------------------------------------ distribution is made to Securityholders that because of this Article 10 should not have been made to them, the Securityholders who receive the distribution shall hold it in trust for holders of Senior Debt of the Company and pay it over to them as their interests may appear. SECTION 10.06. Subrogation. After all Senior Debt of the Company is ------------ paid in full in cash and until the Securities are paid in full, Securityholders shall be subrogated to the rights of holders of such Senior Debt to receive distributions applicable to such Senior Debt. A distribution made under this Article 10 to holders of such Senior Debt which otherwise would have been made to Securityholders is not, as between the Company and Securityholders, a payment by the Company on such Senior Debt. SECTION 10.07. Relative Rights. This Article 10 defines the relative ---------------- rights of Securityholders and holders of Senior Debt of the Company. Nothing in this Indenture shall: (1) impair, as between the Company and Securityholders, the obligation of the Company, which is absolute and unconditional, to pay principal of and interest on the Securities in accordance with their terms; or (2) prevent the Trustee or any Securityholder from exercising its available remedies upon a Default or an Event of Default, subject to the rights of holders of Senior Debt of the Company to receive distributions otherwise payable to Securityholders. SECTION 10.08. Subordination May Not Be Impaired by Company. No --------------------------------------------- right of any holder of Senior Debt of the Company to enforce the subordination of the Debt evidenced by the Securities shall be impaired by any act or failure to act by the Company or by its failure to comply with this Indenture. SECTION 10.09. Rights of Trustee and Paying Agent. Notwithstanding ----------------------------------- Section 10.03, the Trustee or Paying Agent may continue to make payments on the Securities and shall not be charged with knowledge of the existence of 81 facts that would prohibit the making of any such payments unless, not less than two Business Days prior to the date of such payment, a Trust Officer receives notice satisfactory to it that payments may not be made under this Article 10. The Company, the Registrar or co-registrar, the Paying Agent, a Representative or a holder of Senior Debt may give the notice; provided, however, that, if an -------- ------- issue of Senior Debt of the Company has a Representative, only the Representative may give the notice. The Trustee in its individual or any other capacity may hold Senior Debt of the Company with the same rights it would have if it were not Trustee. The Registrar and co-registrar and the Paying Agent may do the same with like rights. The Trustee shall be entitled to all the rights set forth in this Article 10 with respect to any Senior Debt of the Company which may at any time be held by it, to the same extent as any other holder of such Senior Debt; and nothing in Article 7 shall deprive the Trustee of any of its rights as such holder. Nothing in this Article 10 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 7.07. SECTION 10.10. Distribution or Notice to Representative. Whenever a ----------------------------------------- distribution is to be made or a notice given to holders of Senior Debt of the Company, the distribution may be made and the notice given to their Representative (if any). SECTION 10.11. Article 10 Not To Prevent Events of Default or Limit ---------------------------------------------------- Right To Accelerate. The failure to make a payment pursuant to the Securities - -------------------- by reason of any provision in this Article 10 shall not be construed as preventing the occurrence of a Default. Nothing in this Article 10 shall have any effect on the right of the Securityholders or the Trustee to accelerate the maturity of the Securities. SECTION 10.12. Trust Moneys Not Subordinated. Notwithstanding ------------------------------ anything contained herein to the contrary, payments from money or the proceeds of U.S. Government Obligations held in trust under Article 8 by the Trustee for the payment of principal of and interest on the Securities shall not be subordinated to the prior payment of any Senior Debt or subject to the restrictions set forth in this Article 10, and none of the Securityholders shall be obligated to pay over any such amount to the Company or any holder of Senior Debt of the Company or any other creditor of the Company. 82 SECTION 10.13. Trustee Entitled To Rely. Upon any payment or ------------------------- distribution pursuant to this Article 10, the Trustee and the Securityholders shall be entitled to rely (i) upon any order or decree of a court of competent jurisdiction in which any proceedings of the nature referred to in Section 10.02 are pending, (ii) upon a certificate of the liquidating trustee or agent or other Person making such payment or distribution to the Trustee or to the Securityholders or (iii) upon the Representatives for the holders of Senior Debt of the Company for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of such Senior Debt and other Debt of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 10. In the event that the Trustee determines, in good faith, that evidence is required with respect to the right of any Person as a holder of Senior Debt of the Company to participate in any payment or distribution pursuant to this Article 10, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Debt held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and other facts pertinent to the rights of such Person under this Article 10, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. The provisions of Sections 7.01 and 7.02 shall be applicable to all actions or omissions of actions by the Trustee pursuant to this Article 10. SECTION 10.14. Trustee To Effectuate Subordination. Each ------------------------------------ Securityholder by accepting a Security authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination between the Securityholders and the holders of Senior Debt of the Company as provided in this Article 10 and appoints the Trustee as attorney-in-fact for any and all such purposes. SECTION 10.15. Trustee Not Fiduciary for Holders of Senior Debt. The ------------------------------------------------- Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt and shall not be liable to any such holders if it shall mistakenly pay over or distribute to Securityholders or the Company or any other Person, money or assets to which any holders of Senior Debt of the Company shall be entitled by virtue of this Article 10 or otherwise. SECTION 10.16. Reliance by Holders of Senior Debt on Subordination --------------------------------------------------- Provisions. Each Securityholder by accept- - ----------- 83 ing a Security acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to each holder of any Senior Debt of the Company, whether such Senior Debt was created or acquired before or after the issuance of the Securities, to acquire and continue to hold, or to continue to hold, such Senior Debt and such holder of such Senior Debt shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Debt. ARTICLE 11 Subsidiary Guaranties --------------------- SECTION 11.01. Guaranties. Subject to the provisions of this Article ----------- 11, each Subsidiary Guarantor hereby unconditionally guarantees on a senior subordinated basis, jointly and severally, to each Holder and to the Trustee, on behalf of the Holders, and its successors and assigns (a) the full and punctual payment of principal of and interest, within any applicable grace period, on the Securities when due, whether at maturity, by acceleration, by redemption or otherwise, and all other monetary obligations of the Company under this Indenture and the Securities and (b) the full and punctual performance within applicable grace periods of all other obligations of the Company under this Indenture and the Securities (all the foregoing being hereinafter collectively called the "Obligations"). Each Subsidiary Guarantor further agrees that the Obligations may be extended or renewed, in whole or in part, without notice or further assent from such Subsidiary Guarantor and that such Subsidiary Guarantor will remain bound under this Article 11 notwithstanding any extension or renewal of any Obligation. Each Subsidiary Guarantor waives presentation to, demand of, payment from and protest to the Company of any of the Obligations and also waives notice of protest for nonpayment. Each Subsidiary Guarantor waives notice of any default under the Securities or the Obligations. The obligations of each Subsidiary Guarantor hereunder shall not be affected by (a) the failure of any Holder or the Trustee to assert any claim or demand or to enforce any right or remedy against the Company or any other Person under this Indenture, the Securities or any other agreement or otherwise; (b) any extension or renewal of any thereof; (c) any rescission, waiver, amendment or modification of any of the terms or provisions of this Indenture, the Securities or any other agreement; (d) the release of any security held 84 by any Holder or the Trustee for the Obligations or any of them; (e) the failure of any Holder or the Trustee to exercise any right or remedy against any other guarantor of the Obligations; or (f) any change in the ownership of such Subsidiary Guarantor. Each Subsidiary Guarantor further agrees that its Subsidiary Guaranty herein constitutes a guarantee of payment, performance and compliance when due (and not a guarantee of collection) and waives any right to require that any resort be had by any Holder or the Trustee to any security held for payment of the Obligations. Each Subsidiary Guaranty is, to the extent and in the manner set forth in Article 12, subordinated and subject in right of payment to the prior payment in full in cash of all Senior Debt of the Subsidiary Guarantor giving such Subsidiary Guaranty and each Subsidiary Guaranty is made subject to such provisions of this Indenture. Except as expressly set forth in Sections 4.09, 4.15, 5.01 and 8.01(b), the obligations of each Subsidiary Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense of setoff, counterclaim, recoupment or termination whatsoever or by reason of the invalidity, illegality or unenforceability of the Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of each Subsidiary Guarantor herein shall not be discharged or impaired or otherwise affected by the failure of any Holder or the Trustee to assert any claim or demand or to enforce any remedy under this Indenture, the Securities or any other agreement, by any waiver or modification of any thereof, by any default, failure or delay, willful or otherwise, in the performance of the obligations, or by 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 Subsidiary Guarantor or would otherwise operate as a discharge of such Subsidiary Guarantor as a matter of law or equity. Each Subsidiary Guarantor further agrees that its Subsidiary Guaranty herein shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by any Holder or the Trustee upon the bankruptcy or reorganization of the Company or otherwise. 85 In furtherance of the foregoing and not in limitation of any other right which any Holder or the Trustee has at law or in equity against any Subsidiary Guarantor by virtue hereof, upon the failure of the Company to pay the principal of or interest on any Obligation when and as the same shall become due, whether at maturity, by acceleration, by redemption or otherwise, or to perform or comply with any other Obligation, each Subsidiary Guarantor hereby promises to and will, upon receipt of written demand by the Trustee, forthwith pay, or cause to be paid, in cash, to the Holders or the Trustee an amount equal to the sum of (i) the unpaid amount of such Obligations, (ii) accrued and unpaid interest on such Obligations (but only to the extent not prohibited by law) and (iii) all other monetary Obligations of the Company to the Holders and the Trustee. Each Subsidiary Guarantor agrees that it shall not be entitled to any right of subrogation in respect of any Obligations guaranteed hereby until payment in full in cash of all Obligations and all obligations to which the Obligations are subordinated as provided in Article 12. Each Subsidiary Guarantor further agrees that, as between it, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the Obligations guaranteed hereby may be accelerated as provided in Article 6 for the purposes of such Subsidiary Guarantor's Subsidiary Guaranty herein, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such obligations as provided in Article 6, such Obligations (whether or not due and payable) shall forthwith become due and payable by such Subsidiary Guarantor for the purposes of this Section. Each Subsidiary Guarantor also agrees to pay any and all reasonable costs and expenses (including reasonable attorneys' fees) incurred by the Trustee or any Holder in enforcing any rights under this Section. SECTION 11.02. Contribution. Each of the Company and any Subsidiary ------------- Guarantor (a "Contributing Party") agrees (subject to Articles 10 and 12) that, in the event a payment shall be made by any other Subsidiary Guarantor under any Subsidiary Guaranty (the "Claiming Guarantor"), the Contributing Party shall indemnify the Claiming Guarantor in an amount equal to the amount of such payment multiplied by a fraction, the numerator of which shall be the net worth of the Contributing Party on the date of such payment and the denominator of which shall be the aggregate net worth of the Company and all the Subsidiary Guarantors on the date of such payment. 86 SECTION 11.03. Successors and Assigns. This Article 11 shall be ----------------------- binding upon each Subsidiary Guarantor and its successors and assigns and shall enure to the benefit of the successors and assigns of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges conferred upon that party in this Indenture and in the Securities shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions of this Indenture. SECTION 11.04. No Waiver. Neither a failure nor a delay on the part ---------- of either the Trustee or the Holders in exercising any right, power or privilege under this Article 11 shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Trustee and the Holders herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which either may have under this Article 11 at law, in equity, by statute or otherwise. SECTION 11.05. Modification. No modification, amendment or waiver of ------------- any provision of this Article 11, nor the consent to any departure by any Subsidiary Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Trustee, 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 Subsidiary Guarantor in any case shall entitle such Subsidiary Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 11.06. Execution of Supplemental Indenture for Future ---------------------------------------------- Subsidiary Guarantors. Each Subsidiary which is required to become a Subsidiary - ---------------------- Guarantor shall promptly execute and deliver to the Trustee a supplemental indenture in the form of Exhibit B hereto pursuant to which such Subsidiary shall become a Subsidiary Guarantor under this Article 11 and shall guarantee the Obligations. Concurrently with the execution and delivery of such supplemental indenture, the Company shall deliver to the Trustee an Opinion of Counsel to the effect that such supplemental indenture has been duly authorized, executed and delivered by such Subsidiary and that, subject to the application of bankruptcy, insolvency, moratorium, fraudulent conveyance or transfer and other similar laws relating to creditors' rights generally and to the principles of equity, whether considered in a proceeding at 87 law or in equity, the Subsidiary Guaranty of such Subsidiary Guarantor is a legal, valid and binding obligation of such Subsidiary Guarantor, enforceable against such Subsidiary Guarantor in accordance with its terms. ARTICLE 12 Subordination of Subsidiary Guaranties -------------------------------------- SECTION 12.01. Agreement To Subordinate. Each Subsidiary Guarantor ------------------------- agrees, and each Securityholder by accepting a Security agrees, that the Subsidiary Guarantees are senior subordinated obligations of the Subsidiary Guarantor and that the Obligations of such Subsidiary Guarantor are subordinated in right of payment, to the extent and in the manner provided in this Article 12, to the payment when due of all Senior Debt of such Subsidiary Guarantor and that the subordination is for the benefit of and enforceable by the holders of such Senior Debt. The Obligations of a Subsidiary Guarantor shall in all respects rank pari passu in right of payment with any future Senor Subordinated ---- ----- Debt of such Subsidiary Guarantor and senior to any future Subordinated Obligations of such Subsidiary Guarantor. SECTION 12.02. Liquidation, Dissolution, Bankruptcy. Upon any ------------------------------------- payment or distribution of the assets of any Subsidiary Guarantor upon a total or partial liquidation, dissolution or winding up of such Subsidiary Guarantor or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to such Subsidiary Guarantor or its property: (1) holders of Senior Debt of such Subsidiary Guarantor shall be entitled to receive payment in full in cash of such Senior Debt before Securityholders shall be entitled to receive any payment pursuant to any Obligations of such Subsidiary Guarantor , except that Securityholders may receive shares of stock and any debt securities of such Subsidiary Guarantor that are subordinated to Senior Debt of such Subsidiary Guarantor to at least the same extent as the Obligations of such Subsidiary Guarantor are subordinated to Senior Debt of such Subsidiary Guarantor; and (2) until the Senior Debt of any Subsidiary Guarantor is paid in full in cash, any distribution to which Securityholders would be entitled but for this Article 12 shall be made to holders of such Senior Debt as their interests may appear. 88 SECTION 12.03. Default on Senior Debt of Subsidiary Guarantor. No ----------------------------------------------- Subsidiary Guarantor may make any payment pursuant to any of its Obligations or repurchase, redeem or otherwise retire or defease any Securities or other Obligations (collectively, "pay its Subsidiary Guaranty") if (i) any principal, premium or interest in respect of Senior Debt of such Subsidiary Guarantor is not paid within any applicable grace period (including at maturity) or (ii) any other default on Senior Debt of such Subsidiary Guarantor occurs and the maturity of such Senior Debt is accelerated in accordance with its terms unless, in either case, (x) the default has been cured or waived and any such acceleration has been rescinded or (y) such Senior Debt has been paid in full in cash; provided, however, that any Subsidiary Guarantor may pay its Subsidiary -------- ------- Guaranty without regard to the foregoing if such Subsidiary Guarantor and the Trustee receive written notice approving such payment from the Representatives of each issue of Senior Debt of such Subsidiary Guarantor. No Subsidiary Guarantor may pay its Subsidiary Guaranty during the continuance of any Payment Blockage Period commencing upon the receipt by the Company and the Trustee of a Payment Blockage Notice under Section 10.03. Unless the holders of Designated Senior Debt giving such Payment Blockage Notice or the Representative of such holders shall have accelerated the maturity of such Designated Senior Debt and not rescinded such acceleration, any Subsidiary Guarantor may resume (unless otherwise prohibited as described in the first sentence of this paragraph) payments pursuant to its Subsidiary Guaranty after the end of such Payment Blockage Period. SECTION 12.04. Demand for Payment. If a demand for payment is made ------------------- on a Subsidiary Guarantor pursuant to Article 11, the Trustee shall promptly notify the holders of the Designated Senior Debt (or their Representatives) of such demand. SECTION 12.05. When Distribution Must Be Paid Over. If a ------------------------------------ distribution is made to Securityholders that because of this Article 12 should not have been made to them, the Securityholders who receive the distribution shall hold it in trust for holders of the relevant Senior Debt and pay it over to them or their Representatives as their interests may appear. SECTION 12.06. Subrogation. After all Senior Debt of a Subsidiary ------------ Guarantor is paid in full in cash and until the Securities are paid in full, Securityholders shall be subrogated to the rights of holders of such Senior Debt to receive distributions applicable to such Senior Debt. A 89 distribution made under this Article 12 to holders of such Senior Debt which otherwise would have been made to Securityholders is not, as between the relevant Subsidiary Guarantor and Securityholders, a payment by such Subsidiary Guarantor on such Senior Debt. SECTION 12.07. Relative Rights. This Article 12 defines the relative ---------------- rights of Securityholders and holders of Senior Debt of a Subsidiary Guarantor. Nothing in this Indenture shall: (1) impair, as between a Subsidiary Guarantor and Securityholders, the obligation of such Subsidiary Guarantor, which is absolute and unconditional, to pay the Obligations to the extent set forth in Article 11 or the relevant Subsidiary Guaranty; or (2) prevent the Trustee or any Securityholder from exercising its available remedies upon a default by such Subsidiary Guarantor under the Obligations, subject to the rights of holders of Senior Debt of such Subsidiary Guarantor to receive distributions otherwise payable to Securityholders. SECTION 12.08. Subordination May Not Be Impaired by Subsidiary ----------------------------------------------- Guarantor. No right of any holder of Senior Debt of any Subsidiary Guarantor to - ---------- enforce the subordination of the Obligations of such Subsidiary Guarantor shall be impaired by any act or failure to act by such Subsidiary Guarantor or by its failure to comply with this Indenture. SECTION 12.09. Rights of Trustee and Paying Agent. Notwithstanding ----------------------------------- Section 12.03, the Trustee or Paying Agent may continue to make payments on any Subsidiary Guaranty and shall not be charged with knowledge of the existence of facts that would prohibit the making of any such payments unless, not less than two Business Days prior to the date of such payment, a Trust Officer receives written notice satisfactory to it that payments may not be made under this Article 12. The Company, the relevant Subsidiary Guarantor, the Registrar or co-registrar, the Paying Agent, a Representative or a holder of Senior Debt of any Subsidiary Guarantor may give the notice; provided, however, that, if an -------- ------- issue of Senior Debt of any Subsidiary Guarantor has a Representative, only the Representative may give the notice. The Trustee in its individual or any other capacity may hold Senior Debt of any Subsidiary Guarantor with the same rights it would have if it were not the Trustee. 90 The Registrar and co-registrar and the Paying Agent may do the same with like rights. The Trustee shall be entitled to all the rights set forth in this Article 12 with respect to any Senior Debt of any Subsidiary Guarantor which may at any time be held by it, to the same extent as any other holder of such Senior Debt; and nothing in Article 7 shall deprive the Trustee of any of its rights as such holder. Nothing in this Article 12 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 7.07. SECTION 12.10. Distribution or Notice to Representative. Whenever a ----------------------------------------- distribution is to be made or a notice given to holders of Senior Debt of any Subsidiary Guarantor, the distribution may be made and the notice given to their Representative (if any). SECTION 12.11. Article 12 Not To Prevent Defaults Under a Subsidiary ----------------------------------------------------- Guaranty or Limit Right To Demand Payment. The failure to make a payment - ------------------------------------------ pursuant to a Subsidiary Guaranty by reason of any provision in this Article 12 shall not be construed as preventing the occurrence of a default under such Subsidiary Guaranty. Nothing in this Article 12 shall have any effect on the right of the Securityholders or the Trustee to make a demand for payment on any Subsidiary Guarantor pursuant to Article 11 or the relevant Subsidiary Guaranty. SECTION 12.12. Trustee Entitled To Rely. Upon any payment or ------------------------- distribution pursuant to this Article 12, the Trustee and the Securityholders shall be entitled to rely (i) upon any order or decree of a court of competent jurisdiction in which any proceedings of the nature referred to in Section 12.02 are pending, (ii) upon a certificate of the liquidating trustee or agent or other Person making such payment or distribution to the Trustee or to the Securityholders or (iii) upon the Representatives for the holders of Senior Debt of any Subsidiary Guarantor for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of such Senior Debt and other Debt of such Subsidiary Guarantor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 12. In the event that the Trustee determines, in good faith, that evidence is required with respect to the right of any Person as a holder of Senior Debt of any Subsidiary Guarantor to participate in any payment or distribution pursuant to this Article 12, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Debt of such Subsidiary Guarantor held by such Person, the extent to which such Person is entitled to participate in such 91 payment or distribution and other facts pertinent to the rights of such Person under this Article 12, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. The provisions of Sections 7.01 and 7.02 shall be applicable to all actions or omissions of actions by the Trustee pursuant to this Article 12. SECTION 12.13. Trustee To Effectuate Subordination. Each ------------------------------------ Securityholder by accepting a Security authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination between the Securityholders and the holders of Senior Debt of any Subsidiary Guarantor as provided in this Article 12 and appoints the Trustee as attorney-in-fact for any and all such purposes. SECTION 12.14. Trustee Not Fiduciary for Holders of Senior Debt of --------------------------------------------------- Subsidiary Guarantor. The Trustee shall not be deemed to owe any fiduciary duty - --------------------- to the holders of Senior Debt of any Subsidiary Guarantor and shall not be liable to any such holders if it shall mistakenly pay over or distribute to Securityholders or the Company or any other Person, money or assets to which any holders of such Senior Debt shall be entitled by virtue of this Article 12 or otherwise. SECTION 12.15. Reliance by Holders of Senior Debt on Subordination --------------------------------------------------- Provisions. Each Securityholder by accepting a Security acknowledges and - ----------- agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to each holder of any Senior Debt of any Subsidiary Guarantor, whether such Senior Debt was created or acquired before or after the issuance of the Securities, to acquire and continue to hold, or to continue to hold, such Senior Debt and such holder of Senior Debt shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Debt. 92 ARTICLE 13 Miscellaneous ------------- SECTION 13.01. Trust Indenture Act Controls. If any provision of ----------------------------- this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. If any provision of this Indenture modifies or excludes any provision of the TIA that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. SECTION 13.02. Notices. Any notice or communication shall be in -------- writing and delivered in person or mailed by first-class mail or recognized overnight courier or sent by facsimile (with a hard copy delivered in person or by mail promptly thereafter) and addressed as follows: if to the Company or any Subsidiary Guarantor: Hudson Respiratory Care Inc. 27711 Diaz Road Temecula, California 92589 Attention: Jay R. Ogram if to the Trustee: (1) for payment, registration, transfer, exchange and tender of the Securities: By Hand: ------- United States Trust Company of New York 111 Broadway New York, NY 10006 Attention: Corporate Trust Window Lower Level By Mail: ------- United States Trust Company of New York 770 Broadway, 13th Floor New York, NY 10003 Attention: Corporate Trust Services Telephone No.: (800) 548-6565 93 (2) for all other communications relating to the Securities: United States Trust Company of New York Attention: Corporate Trust Administration - Hudson RCI 114 West 47th Street, 25th Floor New York, NY 10036 Telephone No.: (212) 852-1663 Telecopy No.: (212) 852-1626 The Company or any Subsidiary Guarantor, on the one hand, or the Trustee, on the other hand, by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Securityholder shall be mailed to the Securityholder at the Securityholder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. All such notices and communications shall be deemed to have been duly received: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail with first-class postage prepaid, if mailed; when receipt acknowledged, if sent by facsimile; and the next Business Day after timely delivery to the courier, if sent by recognized overnight courier guaranteeing next-day delivery. Notices to the Trustee will be deemed effective only upon actual receipt. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. Notices to the Trustee shall be effective only upon receipt. SECTION 13.03. Communication by Holders with Other Holders. -------------------------------------------- Securityholders may communicate pursuant to TIA (S) 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA (S) 312(c). SECTION 13.04. Certificate and Opinion as to Conditions Precedent. --------------------------------------------------- Upon any request or application by the Company to the Trustee to take or refrain from taking 94 any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 13.05. Statements Required in Certificate or Opinion. Each ---------------------------------------------- certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture shall include: (1) a statement that the individual making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such individual, such covenant or condition has been complied with. Any certificate or opinion of an Officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such Officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous, and provided that any such certificate or opinion names the Trustee as an addressee and is furnished to the Trustee at the time of delivery of such certificate or opinion. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer 95 or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Opinions of Counsel required to be delivered to the Trustee may have qualifications customary for opinions of the type required and counsel delivering such Opinions of Counsel may rely on certificates of the Company or government or other officials customary for opinions of the type required, including certificates certifying as to matters of fact, including that various financial covenants have been complied with. SECTION 13.06. When Securities Disregarded; Acts of Holder. In -------------------------------------------- determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which the Trustee knows are so owned shall be so disregarded. Also, subject to the foregoing, only Securities outstanding at the time shall be considered in any such determination. SECTION 13.07. Rules by Trustee, Paying Agent and Registrar. The --------------------------------------------- Trustee may make reasonable rules for action by or a meeting of Securityholders. The Registrar, the Paying Agent and any co-registrar may make reasonable rules for their functions. SECTION 13.08. Legal Holidays. A "Legal Holiday" is a Saturday, a --------------- Sunday or a day on which banking institutions are not required to be open in New York City and Los Angeles. If a payment date is a Legal Holiday, payment shall be made on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. If a regular record date is a Legal Holiday, the record date shall not be affected. SECTION 13.09. Governing Law. THIS INDENTURE AND THE SECURITIES -------------- SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW. SECTION 13.10. No Recourse Against Others. A director, officer, --------------------------- employee or stockholder, as such, of the Company or any Subsidiary Guarantor shall not have any 96 liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Securities. SECTION 13.11. Successors. All agreements of the Company and any ----------- Subsidiary Guarantors in this Indenture and the Securities shall bind their successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 13.12. Multiple Originals. The parties may sign any number ------------------- of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. SECTION 13.13. Table of Contents; Headings. The table of contents, ---------------------------- cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. SECTION 13.14. Separability Clause. In case any provision of this -------------------- Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 13.15. Benefits of Indenture. Nothing in this Indenture or ---------------------- in the Securities, express or implied, shall give to any Person, other than the parties hereto, the holders of Senior Debt (subject to Articles 10 and 12 hereof) and the Holders of the Securities and their successors, any benefit or any legal or equitable right, remedy or claim under this Indenture or the Securities. 97 IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. HUDSON RESPIRATORY CARE INC., by /s/ Richard W. Johansen ___________________________________ Name: Richard W. Johansen Title: President and Chief Executive Officer by /s/ Jay R. Ogram ___________________________________ Name: Jay R. Ogram Title: Chief Financial Officer RIVER HOLDING CORP., by /s/ Charles P. Rullman ___________________________________ Name: Charles P. Rullman Title: President by /s/ Sanjay K. Morey ___________________________________ Name: Sanjay K. Morey Title: Assistant Secretary UNITED STATES TRUST COMPANY OF NEW YORK, by /s/ James E. Logan ___________________________________ Name: James E. Logan Title: Vice President EX-4.2 7 EXCHANGE INDENTURE DATED AS OF 4-7-98 EXHIBIT 4.2 ================================================================================ HUDSON RESPIRATORY CARE INC. 11 1/2% Subordinated Exchange Debentures due 2010 ------------------------------------------ EXCHANGE INDENTURE Dated as of April 7, 1998 ------------------------------------------- UNITED STATES TRUST COMPANY OF NEW YORK, Trustee ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE 1 Definitions and Incorporation by Reference ------------------------------------------ SECTION 1.01. Definitions...................................... 1 SECTION 1.02. Other Definitions................................29 SECTION 1.03. Incorporation by Reference of Trust Indenture Act.................................29 SECTION 1.04. Rules of Construction............................30 ARTICLE 2 The Securities -------------- SECTION 2.01. Amount of Securities.............................31 SECTION 2.02. Form and Dating..................................31 SECTION 2.03. Execution and Authentication.....................32 SECTION 2.04. Registrar and Paying Agent.......................33 SECTION 2.05. Paying Agent To Hold Money in Trust..............34 SECTION 2.06. Securityholder Lists.............................34 SECTION 2.07. Replacement Securities...........................34 SECTION 2.08. Outstanding Securities...........................35 SECTION 2.09. Temporary Securities.............................35 SECTION 2.10. Cancelation......................................36 SECTION 2.11. Defaulted Interest...............................36 SECTION 2.12. CUSIP Numbers....................................36 ARTICLE 3 Redemption ---------- SECTION 3.01. Notices to Trustee...............................37 SECTION 3.02. Selection of Securities To Be Redeemed................................37 SECTION 3.03. Notice of Redemption.............................38 SECTION 3.04. Effect of Notice of Redemption...................38 SECTION 3.05. Deposit of Redemption Price......................39 SECTION 3.06. Securities Redeemed in Part......................40 ARTICLE 4 Covenants --------- SECTION 4.01. Payment of Securities............................40 SECTION 4.02. SEC Reports......................................40 SECTION 4.03. Limitation on Debt...............................41
Contents, p. 2 Page ---- SECTION 4.04. Limitation on Restricted Payments................41 SECTION 4.05. Limitation on Restrictions on Distributions from Restricted Subsidiaries..................................45 SECTION 4.06. Limitation on Asset Sales........................46 SECTION 4.07. Limitation on Transactions with Affiliates...............................49 SECTION 4.08. Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries..................................51 SECTION 4.09. Repurchase at the Option of Holders Upon a Change of Control......................51 SECTION 4.10. Limitation on Liens..............................53 SECTION 4.11. Compliance Certificate...........................54 SECTION 4.12. Further Instruments and Acts.....................54 SECTION 4.13. Designation of Restricted and Unrestricted Subsidiaries.....................54 SECTION 4.14. Limitation on Holding's Business.................55 ARTICLE 5 Successor Company ----------------- SECTION 5.01. When Company May Merge or Transfer Assets........................................55 ARTICLE 6 Defaults and Remedies --------------------- SECTION 6.01. Events of Default................................57 SECTION 6.02. Acceleration.....................................59 SECTION 6.03. Other Remedies...................................59 SECTION 6.04. Waiver of Defaults...............................60 SECTION 6.05. Control by Majority..............................60 SECTION 6.06. Limitation on Suits..............................60 SECTION 6.07. Rights of Holders To Receive Payment.......................................61 SECTION 6.08. Collection Suit by Trustee.......................61 SECTION 6.09. Trustee May File Proofs of Claim.................61 SECTION 6.10. Priorities.......................................62 SECTION 6.11. Undertaking for Costs............................62 SECTION 6.12. Waiver of Stay or Extension Laws.................63 ARTICLE 7 Trustee -------
Contents, p. 3 Page ---- SECTION 7.01. Duties of Trustee................................63 SECTION 7.02. Rights of Trustee................................64 SECTION 7.03. Individual Rights of Trustee.....................65 SECTION 7.04. Trustee's Disclaimer.............................65 SECTION 7.05. Notice of Defaults...............................66 SECTION 7.06. Reports by Trustee to Holders....................66 SECTION 7.07. Compensation and Indemnity.......................66 SECTION 7.08. Replacement of Trustee...........................67 SECTION 7.09. Successor Trustee by Merger......................68 SECTION 7.10. Eligibility; Disqualification....................69 SECTION 7.11. Preferential Collection of Claims Against Company...............................69 ARTICLE 8 Discharge of Indenture; Defeasance ---------------------------------- SECTION 8.01. Discharge of Liability on Securities; Defeasance........................69 SECTION 8.02. Conditions to Defeasance.........................70 SECTION 8.03. Application of Trust Money.......................72 SECTION 8.04. Repayment to Company.............................72 SECTION 8.05. Indemnity for Government Obligations...................................72 SECTION 8.06. Reinstatement....................................73 ARTICLE 9 Amendments ---------- SECTION 9.01. Without Consent of Holders.......................73 SECTION 9.02. With Consent of Holders..........................74 SECTION 9.03. Compliance with Trust Indenture Act..............76 SECTION 9.04. Revocation and Effect of Consents and Waivers...................................76 SECTION 9.05. Notation on or Exchange of Securities....................................76 SECTION 9.06. Trustee To Sign Amendments.......................76 SECTION 9.07. Payment for Consent..............................77 ARTICLE 10 Subordination ------------- SECTION 10.01. Agreement To Subordinate........................77 SECTION 10.02. Liquidation, Dissolution, Bankruptcy...................................77 SECTION 10.03. Default on Senior Debt..........................78
Contents, p. 4 Page ---- SECTION 10.04. Acceleration of Payment of Securities................................79 SECTION 10.05. When Distribution Must Be Paid Over....................................79 SECTION 10.06. Subrogation.....................................79 SECTION 10.07. Relative Rights.................................79 SECTION 10.08. Subordination May Not Be Impaired by Company...................................80 SECTION 10.09. Rights of Trustee and Paying Agent..............80 SECTION 10.10. Distribution or Notice to Representative...............................80 SECTION 10.11. Article 10 Not To Prevent Events of Default or Limit Right To Accelerate...................................80 SECTION 10.12. Trust Moneys Not Subordinated...................81 SECTION 10.13. Trustee Entitled To Rely........................81 SECTION 10.14. Trustee To Effectuate Subordination................................81 SECTION 10.15. Trustee Not Fiduciary for Holders of Senior Debt...............................82 SECTION 10.16. Reliance by Holders of Senior Debt on Subordination Provisions..................82 ARTICLE 11 Miscellaneous ------------- SECTION 11.01. Trust Indenture Act Controls....................82 SECTION 11.02. Notices.........................................82 SECTION 11.03. Communication by Holders with Other Holders................................84 SECTION 11.04. Certificate and Opinion as to Conditions Precedent.........................84 SECTION 11.05. Statements Required in Certificate or Opinion...................................84 SECTION 11.06. When Securities Disregarded; Acts of Holder...............................85 SECTION 11.07. Rules by Trustee, Paying Agent and Registrar................................85 SECTION 11.08. Legal Holidays..................................86 SECTION 11.09. Governing Law...................................86 SECTION 11.10. No Recourse Against Others......................86 SECTION 11.11. Successors......................................86 SECTION 11.12. Multiple Originals..............................86 SECTION 11.13. Table of Contents; Headings.....................86 SECTION 11.14. Separability Clause.............................86 SECTION 11.15. Benefits of Indenture...........................86
Contents, p. 5 Page ---- Appendix A Provisions Relating to Initial Securities and Exchange Securities Exhibit 1 to Appendix A Form of Initial Security Exhibit A Form of Exchange Security CROSS-REFERENCE TABLE
TIA Indenture Section Section - ------- --------- 310(a)(1).............................................. 7.10 (a)(2)................................................. 7.10 (a)(3)................................................. N.A. (a)(4)................................................. N.A. (b).................................................... 7.08; 7.10 (c).................................................... N.A. 311(a)................................................. 7.11 (b).................................................... 7.11 (c).................................................... N.A. 312(a)................................................. 2.06 (b).................................................... 11.03 (c).................................................... 11.03 313(a)................................................. 7.06 (b)(1)................................................. N.A. (b)(2)................................................. 7.06 (c).................................................... 11.02 (d).................................................... 7.06 314(a)................................................. 4.02; 4.11; 11.02 (b).................................................... N.A. (c)(1)................................................. 11.04 (c)(2)................................................. 11.04 (c)(3)................................................. N.A. (d).................................................... N.A. (e).................................................... 11.05 (f).................................................... 4.11 315(a)................................................. 7.01 (b).................................................... 7.05; 13.02 (c).................................................... 7.01 (d).................................................... 7.01 (e).................................................... 6.11 316(a) (last sentence).............................................. 11.06 (a)(1)(A).............................................. 6.05 (a)(1)(B).............................................. 6.04 (a)(2)................................................. N.A. (b).................................................... 6.07 317(a)(1).............................................. 6.08 (a)(2)................................................. 6.09 (b).................................................... 2.05 318(a)................................................. 11.01
N.A. Means Not Applicable. _______________ Note: This Cross-Reference Table shall not, for any purposes, be deemed to be part of this Indenture. INDENTURE dated as of April 7, 1998, between HUDSON RESPIRATORY CARE INC., a California corporation (the "Company") and UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee (the "Trustee"). Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders of the Company's 11 1/2% Subordinated Exchange Debentures due 2010 (the "Initial Securities") and, if and when issued pursuant to a registered or private exchange for the Initial Securities, the Company's 11 1/2% Subordinated Exchange Debentures due 2010 (the "Exchange Securities" and, together with the Initial Securities, the "Securities"): ARTICLE 1 Definitions and Incorporation by Reference ------------------------------------------ SECTION 1.01. Definitions. ------------ "Additional Assets" means (a) any Property (other than cash, cash equivalents and securities) to be owned by the Company or any Restricted Subsidiary and used in a Related Business; or (b) Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary from any Person other than an Affiliate of the Company; provided, however, that, in the case of clause (b), -------- ------- such Restricted Subsidiary is primarily engaged in a Related Business. "Affiliate" of any specified Person means (a) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person or (b) any other Person who is a director or officer of (i) such specified Person, (ii) any Subsidiary of such specified Person or (iii) any Person described in clause (a) above. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of Section 4.06, Section 4.07 and the definition of "Additional Assets" only, "Affiliate" shall also mean any beneficial owner of shares representing 5% or more of the total voting power of the 2 Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Voting Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. "Agent Member" means any member of, or participant in, the Depository. "Applicable Procedures" means, with respect to any transfer or transaction involving a Temporary Regulation S Global Note or beneficial interest therein, the rules and procedures of the Depository for such Global Note, Euroclear and Cedel, in each case to the extent applicable to such transaction and as in effect from time to time. "Asset Sale" means any sale, lease, transfer, issuance or other disposition (or series of related sales, leases, transfers, issuances or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of (a) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares) or (b) any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary (other than, in the case of clauses (a) and (b) above, (i) any disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (ii) for purposes of Section 4.06 only, any disposition that constitutes a Permitted Investment or Restricted Payment permitted by Section 4.04, (iii) any disposition effected in compliance with Section 5.01(a), (iv) any Sale and Leaseback Transaction completed within 180 days following the original acquisition of the subject assets where such Sale and Leaseback Transaction represents the intended financing of Property acquired after the Issue Date and (v) any disposition or series of related dispositions of assets having a Fair Market Value and sale price of less than $500,000. "Attributable Debt" in respect of a Sale and Leaseback Transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction (including any period 3 for which such lease has been extended or may, at the option of the lessor, be extended). "Average Life" means, as of any date of determination, with respect to any Debt or Preferred Stock, the quotient obtained by dividing (a) the sum of the product of the numbers of years (rounded to the nearest one twelfth of one year) from the date of determination to the dates of each successive scheduled principal payment of such Debt or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (b) the sum of all such payments. "Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "Business Day" means each day which is not a Legal Holiday. "Capital Lease Obligations" means any obligation under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of Debt represented by such obligation shall be the capitalized amount of such obligations determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. For purposes of Section 4.10, a Capital Lease Obligation shall be deemed secured by a Lien on the Property being leased. "Capital Stock" means, with respect to any Person, any shares or other equivalents (however designated) of corporate stock, partnership interests or any other participations, rights, warrants, options or other interests in the nature of an equity interest in such Person, including Preferred Stock, but excluding any debt security convertible or exchangeable into such equity interest. "Capital Stock Sale Proceeds" means the aggregate cash proceeds received by the Company from the issuance or sale (other than to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any of its Subsidiaries for the benefit of their employees) by the Company of any class of its Capital Stock (other than Disqualified Stock) after the Issue Date, net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and 4 brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Change of Control" means the occurrence of any of the following events: (a) prior to the first Public Equity Offering, the Permitted Holders cease to be the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of a majority of the voting power of the Voting Stock of the Company, whether as a result of the issuance of securities of the Company, any merger, consolidation, liquidation or dissolution of the Company, any direct or indirect transfer of securities by the Permitted Holders or otherwise (for purposes of this clause (a), the Permitted Holders will be deemed to beneficially own any Voting Stock of a corporation (the "specified corporation") held by any other corporation (the "parent corporation") so long as the Permitted Holders beneficially own, directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of such parent corporation); or (b) after the first Public Equity Offering, any "Person" or "group" (as such terms are used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provisions to either of the foregoing), including any group acting for the purpose of acquiring, holding, voting or disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act, other than any one or more of the Permitted Holders, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 35% or more of the voting power of the Voting Stock of the Company; provided, however, that the Permitted Holders are the "beneficial -------- ------- owners" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is 5 exercisable immediately or only after the passage of time), directly or indirectly, in the aggregate of a lesser percentage of the total voting power of all classes of the Voting Stock of the Company than such other Person or group (for purposes of this clause (b), such Person or group shall be deemed to beneficially own any Voting Stock of a specified corporation held by a parent corporation so long as such Person or group beneficially owns, directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of such parent corporation); or (c) the sale, transfer, assignment, lease, conveyance or other disposition, directly or indirectly, of all or substantially all the assets of the Company and the Restricted Subsidiaries, considered as a whole (other than a disposition of such assets as an entirety or virtually as an entirety to a Wholly Owned Subsidiary or one or more Permitted Holders) shall have occurred, or the Company merges, consolidates or amalgamates with or into any other Person (other than one or more Permitted Holders) or any other Person (other than one or more Permitted Holders) merges, consolidates or amalgamates with or into the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is reclassified into or exchanged for cash, securities or other Property, other than any such transaction where (i) the outstanding Voting Stock of the Company is reclassified into or exchanged for Voting Stock of the surviving corporation and (ii) the holders of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the surviving corporation immediately after such transaction and in substantially the same proportion as before the transaction; or (d) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election or appointment by such Board or whose nomination for election by the shareholders of the Company was approved by a vote of 66 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 members of the Board of Directors then in office; or 6 (e) the shareholders of the Company shall have approved any plan of liquidation or dissolution of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Company Preferred Stock" means the 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010 of the Company. "Consolidated Interest Coverage Ratio" means, as of any date of determination, the ratio of (a) the aggregate amount of EBITDA for the most recent four consecutive fiscal quarters ending at least 45 days prior to such determination date to (b) Consolidated Interest Expense for such four fiscal quarters; provided, however, that (i) if the Company or any Restricted -------- ------- Subsidiary has Incurred any Debt since the beginning of such period that remains outstanding or if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio is an Incurrence of Debt, or both, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Debt as if such Debt had been Incurred on the first day of such period and the discharge of any other Debt repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Debt as if such discharge had occurred on the first day of such period, (ii) if since the beginning of such period the Company or any Restricted Subsidiary shall have repaid, repurchased, legally defeased or otherwise discharged any Debt with Capital Stock Sale Proceeds, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such discharge as if such discharge had occurred on the first day of such period, (iii) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Sale or if the transaction giving rise to the need to calculate the Consolidated Interest Coverage Ratio is an Asset Sale, or both, EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the Property which is the subject of such Asset Sale for such period, or increased by an amount equal to the EBITDA (if negative) directly attributable thereto for such period, in either case as if such Asset Sale had occurred on the first day of such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Debt of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such 7 Asset Sale, as if such Asset Sale had occurred on the first day of such period (or, if the Capital Stock of any Restricted Subsidiary is sold, by an amount equal to the Consolidated Interest Expense for such period directly attributable to the Debt of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Debt after such sale), (iv) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of Property, including any acquisition of Property occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Debt) as if such Investment or acquisition occurred on the first day of such period and (v) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Sale, Investment or acquisition of Property that would have required an adjustment pursuant to clause (iii) or (iv) above if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Sale, Investment or acquisition occurred on the first day of such period. For purposes of this definition, pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company and as further contemplated by the definition of the term "pro forma". If any Debt bears a floating rate of interest and is being given pro forma effect, the interest expense on such Debt shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Debt if such Interest Rate Agreement has a remaining term in excess of 12 months). "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent Incurred by the Company or its Restricted Subsidiaries, (a) interest expense attributable to capital leases, (b) amortization of debt discount and debt issuance cost, including commitment fees, other than with respect to 8 Debt Incurred in connection with the Recapitalization, (c) capitalized interest, (d) non-cash interest expenses, (e) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (f) net costs associated with Hedging Obligations (including amortization of fees), (g) Disqualified Dividends other than Disqualified Dividends paid with shares of Capital Stock of the Company which is not Disqualified Stock, (h) Preferred Stock dividends in respect of all Preferred Stock of Restricted Subsidiaries held by Persons other than the Company or a Wholly Owned Subsidiary, (i) interest Incurred in connection with Investments in discontinued operations, (j) interest accruing on any Debt of any other Person to the extent such Debt is Guaranteed by the Company or any Restricted Subsidiary and (k) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Debt Incurred by such plan or trust. "Consolidated Net Income" means, for any period, the net income (loss) of the Company and its consolidated Subsidiaries; provided, however, that there -------- ------- shall not be included in such Consolidated Net Income (a) any net income (loss) of any Person (other than the Company) if such Person is not a Restricted Subsidiary, except that (i) subject to the exclusion contained in clause (d) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to a Restricted Subsidiary, to the limitations contained in clause (c) below) and (ii) the Company's equity in a net loss of any such Person other than an Unrestricted Subsidiary for such period shall be included in determining such Consolidated Net Income, (b) for the purposes of Section 4.04 only, any net income (loss) of any Person acquired by the Company or any of its consolidated Subsidiaries in a pooling of interests transaction for any period prior to the date of such acquisition, (c) any net income (but not loss) of any Restricted Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions, directly or indirectly, to the Company, except that subject to the exclusion contained in clause (d) below, the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such 9 Consolidated Net Income up to the aggregate amount of cash distributed by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to another Restricted Subsidiary, to the limitation contained in this clause), (d) any gain (or, for purposes of Section 4.03 and Section 5.01 only, loss) realized upon the sale or other disposition of any Property of the Company or any of its consolidated Subsidiaries (including pursuant to any Sale and Leaseback Transaction) which is not sold or otherwise disposed of in the ordinary course of business, provided, that any tax benefit -------- or tax liability resulting therefrom shall be excluded in such Consolidated Net Income, (e) any extraordinary gain or loss, provided that any tax benefit or tax liability resulting therefrom shall be excluded in such Consolidated Net Income, (f) the cumulative effect of a change in accounting principles and (g) (i) any non-cash compensation expense realized for grants of performance shares, stock options or other stock awards to officers, directors and employees of the Company or any Restricted Subsidiary or (ii) compensation expense realized with respect to periods prior to Issue Date in respect of payments under the Company's 1994 Amended and Restated Equity Participation Plan or compensation expense, to the extent accrued in 1998, related to contingent payments to existing managers of the Company pursuant to the Merger Agreement in an aggregate amount not in excess of $2.4 million. Notwithstanding the foregoing, for the purposes of Section 4.04 only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such Section pursuant to clause (a)(iii)(D) thereof. "Credit Facility" means, with respect to the Company or any Restricted Subsidiary, one or more debt or commercial paper facilities with banks or other institutional lenders (including the New Credit Facility) providing for revolving credit loans, term loans, receivables or inventory financing (including through the sale of receivables or inventory to such lenders or to special purpose, bankruptcy remote entities formed to borrow from such lenders against such receivables or inventory) or trade letters of credit, in each case together with any amendments, supplements, modifications (including by any extension of the maturity thereof), refinancings or replacements thereof by a lender or syndicate of lenders in 10 one or more successive transactions (including any such transaction that changes the amount available thereunder, replaces such agreement or document, or provides for other agents or lenders). "Currency Exchange Protection Agreement" means, in respect of a Person, any foreign exchange contract, currency swap agreement, currency option or other similar agreement or arrangement designed to protect such Person against fluctuations in currency exchange rates. "Debt" means, with respect to any Person on any date of determination (without duplication), (a) the principal of and premium (if any) in respect of (i) debt of such Person for money borrowed and (ii) debt evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (b) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale and Leaseback Transactions entered into by such Person; (c) all obligations of such Person issued or assumed as the deferred purchase price of Property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (d) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in (a) through (c) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit); (e) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person, any Preferred Stock (but excluding, in each case, any accrued dividends); (f) all obligations of the type referred to in clauses (a) through (e) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee; (g) all obligations of the type referred to in clauses (a) through (f) of other Persons secured by any Lien on any Property of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such Property or the 11 amount of the obligation so secured; and (h) to the extent not otherwise included in this definition, Hedging Obligations of such Person. The amount of Debt of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided, that the amount outstanding at -------- any time of any Debt issued with original issue discount is the face amount of such Debt less the remaining unamortized portion of the original issue discount of such Debt at such time as determined in accordance with GAAP. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Designated Senior Debt" means any Senior Debt which has, at the time of determination, an aggregate principal amount outstanding of at least $10.0 million (including the amount of all undrawn commitments and matured and contingent reimbursement obligations pursuant to letters of credit thereunder) that is specifically designated in the instrument evidencing such Senior Debt and is designated in a notice delivered by the Company to the holders or a Representative of the holders of such Senior Debt and in an Officers' Certificate delivered to the Trustee as "Designated Senior Debt" of the Company for purposes of this Indenture; provided that the New Credit Facility shall be -------- deemed to be Designated Senior Debt under this Indenture. "Disqualified Dividends" means, for any dividend with respect to Disqualified Stock, the quotient of the dividend divided by the difference between one and the maximum statutory federal income tax rate (expressed as a decimal number between 1 and 0) then applicable to the issuer of such Disqualified Stock. "Disqualified Stock" means, with respect to any Person, Redeemable Stock of such Person as to which (i) the maturity, (ii) mandatory redemption or (iii) redemption, repurchase, conversion or exchange at the option of the holder thereof occurs, or may occur, on or prior to the first anniversary of the Stated Maturity of the Securities; 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 12 provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Redeemable Stock upon the occurrence of a "change of control" occurring prior to the first anniversary of the Stated Maturity of the Securities, if (x) such repurchase obligation may not be triggered in respect of such Redeemable Stock unless a corresponding obligation also arises with respect to the Securities and (y) no such repurchase or redemption is permitted to be consummated unless and until such Person shall have satisfied all repurchase or redemption obligations with respect to any required purchase offer made with respect to the Securities. "EBITDA" means, for any period, an amount equal to, for the Company and its consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income for such period, plus the following to the extent reducing Consolidated Net Income for such period: (i) the provision for taxes based on income or profits or utilized in computing net loss, (ii) Consolidated Interest Expense, (iii) depreciation, (iv) amortization expense and (v) any other non-cash items (other than any such non-cash item to the extent that it represents an accrual of or reserve for cash expenditures in any future period), minus (b) all non- cash items increasing Consolidated Net Income for such period (other than any such non-cash item to the extent that it will result in the receipt of cash payments in any future period). Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its shareholders. "Employee Notes" means promissory notes of employees of Holding, the Company or any of their Subsidiaries payable to the Company or Holding and received in connection with the substantially concurrent purchase of common stock of the Company or Holding by such employees. "Event of Default" has the meaning set forth in Section 6.01. 13 "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Date" means the date on which the Securities are issued in exchange for the Holding Preferred Stock or Company Preferred Stock. "Fair Market Value" means, with respect to any Property, the price which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair Market Value will be determined, except as otherwise provided, (a) if such Property has a Fair Market Value equal to or less than $2.5 million, by any Officer of the Company or (b) if such Property has a Fair Market Value in excess of $2.5 million, by a majority of the Board of Directors and evidenced by a Board Resolution, dated within 30 days of the relevant transaction, delivered to the Trustee. "GAAP" means United States generally accepted accounting principles as in effect on the Issue Date, including those set forth (a) in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (b) in the statements and pronouncements of the Financial Accounting Standards Board, (c) in such other statements by such other entity as approved by a significant segment of the accounting profession and (d) the rules and regulations of the Commission governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the Commission. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Debt of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for - -------- ------- collection or deposit in the 14 ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing any obligation. "Hedging Obligation" of any Person means any obligation of such Person pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement or any other similar agreement or arrangement. "Holder" or "Securityholder" means the Person in whose name a Security is registered on the Security Register. "Holding" means River Holding Corp., the corporate parent of the Company, and any successor thereto. "Holding Preferred Stock" means the 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010 of Holding. "Incur" means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by merger, conversion, exchange or otherwise), extend, assume, Guarantee or become liable in respect of such Debt or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Debt or obligation on the balance sheet of such Person (and "Incurrence" and "Incurred" shall have meanings correlative to the foregoing); provided, -------- however, that a change in GAAP that results in an obligation of such Person that - ------- exists at such time, and is not theretofore classified as Debt, becoming Debt shall not be deemed an Incurrence of such Debt; provided further, however, that ---------------- ------- solely for purposes of determining compliance with Section 4.03, amortization of debt discount shall not be deemed to be the Incurrence of Debt, provided, -------- however, that in the case of Debt sold at a discount, the amount of such Debt - ------- Incurred shall at all times be the aggregate principal amount at Stated Maturity. "Indenture" means this Indenture as amended or supplemented from time to time. "Independent Appraiser" means an investment banking firm of national standing or any third party appraiser of national standing, provided, however, -------- ------- that such firm or appraiser is not an Affiliate of the Company. "Industrias Hudson" means Industrias Hudson S.A. de C.V. 15 "Interest Rate Agreement" means, for any Person, any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement designed to protect against fluctuations in interest rates. "Investment" by any Person means any direct or indirect loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of such Person), advance or other extension of credit or capital contribution (by means of transfers of cash or other Property to others or payments for Property or services for the account or use of others, or otherwise) to, or Incurrence of a Guarantee of any obligation of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person. For purposes of Section 4.04, Section 4.13 and the definition of "Restricted Payment", "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such -------- ------- Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary equal to an amount (if positive) equal to (a) the Company's "Investment" in such Subsidiary at the time of such redesignation less (b) the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the time of such redesignation. In determining the amount of any Investment made by transfer of any Property other than cash, such Property shall be valued at its Fair Market Value at the time of such Investment. "Issue Date" means April 7, 1998. "Lien" means, with respect to any Property of any Person, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property (including any Capital Lease Obligation, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing or any Sale and Leaseback Transaction). 16 "Merger" means the merger of River Acquisition Corp. with and into the Company pursuant to the Merger Agreement. "Merger Agreement" means the Amended and Restated Merger Agreement between Holding, River Acquisition Corp., the Company and shareholders of the Company dated as of March 15, 1998, as in effect on the Issue Date. "Mirror Preferred Stock" means the 11 1/2% Senior PIK Preferred Stock due 2010 of the Company. "Moody's" means Moody's Investors Service, Inc. or any successor to the rating agency business thereof. "Net Available Cash" from any Asset Sale means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Debt or other obligations relating to the Property that is the subject of such Asset Sale or received in any other noncash form), in each case net of (a) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such Asset Sale, (b) all payments made on any Debt which is secured by any Property subject to such Asset Sale, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such Property, or which must by its terms, or in order to obtain a necessary consent to such Asset Sale, or by applicable law, be repaid out of the proceeds from such Asset Sale, (c) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Sale and (d) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the Property disposed in such Asset Sale and retained by the Company or any Restricted Subsidiary after such Asset Sale. "New Credit Facility" means the credit facilities made available pursuant to the Credit Agreement dated as of the Issue Date among the Company, Holding, the lenders party thereto, Salomon Smith Barney Inc, as Arranger, Advisor and Syndication Agent and Bankers Trust Company, as Administrative Agent. 17 "9 1/8% Indenture" means the Indenture dated as of the Issue Date among Holding, the Company and United States Trust Company of New York, as Trustee, governing the Notes. "Notes" means the 9 1/8% Senior Subordinated Notes due 2008 of the Company. "Officer" means the Chief Executive Officer, the President, the Chief Financial Officer or any Executive Vice President of the Company. "Officers' Certificate" means a certificate signed by two Officers of the Company, at least one of whom shall be the principal executive officer or principal financial officer of the Company, and delivered to the Trustee. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company. "Permitted Debt" means: (a) Debt evidenced by the Securities and the Notes and Subsidiary Guaranties of the Notes; (b)(i) Debt under the Credit Facility; provided that the aggregate principal amount of all such Debt under the Credit Facility comprised of (A) term loans at any one time outstanding shall not exceed $40.0 million minus all principal amounts repaid in respect of such term loans and (B) revolving credit loans and obligations at any one time outstanding shall not exceed the greater of (x) $60.0 million and (y) the sum of the amounts equal to (1) 60% of the net book value of the inventory of the Company and the Restricted Subsidiaries and (2) 85% of the net book value of the accounts receivable of the Company and the Restricted Subsidiaries, in each case as of the most recent fiscal quarter ending at least 45 days prior to the date of determination and (ii) Guarantees of Debt under the Credit Facility; (c) Debt in respect of Capital Lease Obligations and Purchase Money Debt; provided, however, that (i) the aggregate principal amount of such -------- ------- Debt does not exceed the Fair Market Value (on the date of the Incurrence thereof) of the Property acquired, constructed or leased (including costs of installation, taxes and delivery charges with respect to such acquisition, construction or lease) and (ii) the 18 aggregate principal amount of all Debt Incurred and then outstanding pursuant to this clause (c) (together with all Permitted Refinancing Debt Incurred in respect of Debt previously Incurred pursuant to this clause (c) and then outstanding) does not exceed $15.0 million; (d) Debt of the Company owing to and held by any Wholly Owned Subsidiary and Debt of a Wholly Owned Subsidiary owing to and held by the Company or any Wholly Owned Subsidiary; provided, however, that any -------- ------- subsequent issue or transfer of Capital Stock or other event that results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of any such Debt (except to the Company or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Debt by the issuer thereof; (e) Debt of a Wholly Owned Subsidiary Incurred and outstanding on or prior to the date on which such Wholly Owned Restricted Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary (other than Debt Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of transactions pursuant to which such Wholly Owned Restricted Subsidiary became a Subsidiary of the Company or was otherwise acquired by the Company); provided, however, that at the time such Wholly Owned -------- ------- Restricted Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary and after giving pro forma effect to the Incurrence of such Debt, the Company would have been able to Incur $1.00 of additional Debt pursuant to clause (a) in the first paragraph of Section 4.03; (f) Debt under Interest Rate Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting interest rate risk in the ordinary course of the financial management of the Company or such Restricted Subsidiary and not for speculative purposes, provided, however, -------- ------- that the obligations under such agreements are directly related to payment obligations on Debt otherwise permitted by the terms of Section 4.03; (g) Debt under Currency Exchange Protection Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting currency exchange rate risks directly related to transactions 19 entered into by the Company or such Restricted Subsidiary in the ordinary course of business and not for speculative purposes; (h) Debt in connection with one or more standby letters of credit or performance bonds issued for the account of the Company or any Restricted Subsidiary in the ordinary course of business or pursuant to self-insurance obligations and not in connection with the borrowing of money or the obtaining of advances; (i) Debt outstanding on the Issue Date not otherwise described in clauses (a) through (h) above; (j) Debt not otherwise described in clauses (a) through (i) above in an aggregate principal amount outstanding at any one time not to exceed $15.0 million; and (k) Permitted Refinancing Debt Incurred in respect of Debt Incurred pursuant to clause (a) of the first paragraph of Section 4.03 and clauses (a), (c), (e) and (i) above, subject, in the case of clause (c) above, to the limitations set forth in the proviso thereto. "Permitted Holders" means Helen Hudson Lovaas, any member of the senior management of the Company or Holding on the Issue Date and Freeman Spogli & Co. Incorporated or any successor entity thereof controlled by the principals of Freeman Spogli & Co. Incorporated or any entity controlled by, or under common control with, Freeman Spogli & Co. Incorporated. "Permitted Investment" means any Investment by the Company or a Restricted Subsidiary in (a) any Restricted Subsidiary or any Person that will, upon the making of such Investment, become a Restricted Subsidiary; provided, -------- however, that the primary business of such Restricted Subsidiary is a Related - ------- Business; (b) any Person if as a result of such Investment such Person is merged or consolidated with or into, or transfers or conveys all or substantially all its Property to, the Company or a Restricted Subsidiary; provided, however, that -------- ------- such Person's primary business is a Related Business; (c) Temporary Cash Investments; (d) receivables owing to the Company or a Restricted Subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that -------- ------- such trade terms may include such concessionary trade terms as the Company or such Restricted Subsidiary deems 20 reasonable under the circumstances; (e) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (f) (i) loans and advances to employees made in the ordinary course of business consistent with past practices of the Company or such Restricted Subsidiary, as the case may be; provided, however, that such loans -------- ------- and advances do not exceed $1.0 million at any one time outstanding and (ii) loans and advances to, or the receipt of Employee Notes from, employees of Holding, the Company or any of their Subsidiaries made or received in connection with the substantially concurrent purchase of common stock of the Company or Holding by such employees; provided, however, that the aggregate principal --------- -------- amount of such loans, advances and notes payable shall not exceed $1.0 million at any one time outstanding; (g) stock, obligations or other securities received in settlement of debts created in the ordinary course of business and owing to the Company or a Restricted Subsidiary or in satisfaction of judgments; (h) any Person to the extent such Investment represents the non-cash portion of the consideration received in connection with an Asset Sale consummated in compliance with Section 4.06; and (i) Investments in Persons engaged in a Related Business not to exceed $10.0 million at any one time outstanding (it being agreed that an Investment shall cease to be outstanding to the extent of dividends, repayments of loans or advances or other transfers of Property received by the Company or any Restricted Subsidiary from such Persons, provided, however, that such amounts do not increase the amount of Restricted - -------- ------- Payments which the Company and the Restricted Subsidiaries may make pursuant to clause (a)(iii)(D)(1) of Section 4.04). "Permitted Liens" means: (a) Liens securing Senior Debt of the Company or any Subsidiary Guarantor; (b) Liens for taxes, assessments or governmental charges or levies on the Property of the Company or any Restricted Subsidiary if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings; (c) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens, on the Property of the Company or any Restricted Subsidiary arising in the ordinary course of business and securing payment of 21 obligations which are not more than 60 days past due or are being contested in good faith and by appropriate proceedings; (d) Liens on the Property of the Company or any Restricted Subsidiary Incurred in the ordinary course of business to secure performance of obligations with respect to statutory or regulatory requirements, performance or return-of-money bonds, surety or indemnity bonds or other obligations of a like nature and Incurred in a manner consistent with industry practice, in each case which are not Incurred in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of Property and which do not in the aggregate impair in any material respect the use of Property in the operation of the business of the Company and the Restricted Subsidiaries taken as a whole; (e) Liens on Property at the time the Company or any Restricted Subsidiary acquired such Property, including any acquisition by means of a merger or consolidation with or into the Company or any Restricted Subsidiary; provided, however, that any such Lien may not extend to any -------- ------- other Property of the Company or any Restricted Subsidiary; provided -------- further, however, that such Liens shall not have been Incurred in ------- ------- anticipation of or in connection with the transaction or series of transactions pursuant to which such Property was acquired by the Company or any Restricted Subsidiary; (f) Liens on the Property of a Person at the time such Person becomes a Restricted Subsidiary; provided, however, that any such Lien may not -------- ------- extend to any other Property of the Company or any other Restricted Subsidiary which is not a direct Subsidiary of such Person; provided -------- further, however, that any such Lien was not Incurred in anticipation of or ------- ------- in connection with the transaction or series of transactions pursuant to which such Person became a Restricted Subsidiary; (g) pledges or deposits by the Company or any Restricted Subsidiary under worker's compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Debt) or leases to which the Company or any Restricted Subsidiary is party, or deposits to secure public or 22 statutory obligations of the Company, or deposits for the payment of rent, in each case Incurred in the ordinary course of business; (h) utility easements, building restrictions and such other encumbrances or charges against real Property as are of a nature generally existing with respect to properties of a similar character; (i) judgment and attachment Liens in connection with (A) judgments that do not constitute an Event of Default so long as the judgment creditor is not seeking enforcement thereof and reserves have been established to the extent required by GAAP as in effect at such time and (B) litigation and legal proceedings that are being contested in good faith by appropriate proceedings (or as to which the Company or Restricted Subsidiary, as the case may be, is preparing to promptly initiate appropriate proceedings) so long as reserves have been established to the extent required by GAAP as in effect at such time and so long as such Liens do not encumber assets by an aggregate amount (together with the amount of any unstayed judgments against the Company or any Restricted Subsidiary) in excess of $7.5 million; (j) Liens existing on the Issue Date not otherwise described in clauses (a) through (i) above; and (k) Liens on the Property of the Company or any Restricted Subsidiary to secure any Refinancing, in whole or in part, of any Debt secured by Liens referred to in clause (a), (e), (f) or (j) above; provided, however, -------- ------- that any such Lien shall be limited to all or part of the same Property that secured the original Lien (together with improvements and accessions to such Property) and the aggregate principal amount of Debt that is secured by such Lien shall not be increased to an amount greater than the sum of (i) the outstanding principal amount, or, if greater, the committed amount, of the Debt secured by Liens described under clause (a), (e), (f) or (j) above, as the case may be, at the time the original Lien became a Permitted Lien under this Indenture and (ii) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, Incurred by the Company or such Restricted Subsidiary in connection with such Refinancing. 23 "Permitted Refinancing Debt" means any Debt that Refinances any other Debt, including any successive Refinancings, so long as (a) such Debt is in an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) not in excess of the sum of (i) the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding of the Debt being Refinanced and (ii) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, related to such Refinancing, (b) the Average Life of such Debt is equal to or greater than the Average Life of the Debt being Refinanced, (c) the Stated Maturity of such Debt is no earlier than the Stated Maturity of the Debt being Refinanced and (d) such Debt is subordinated in right of payment to Senior Debt and the Securities to at least the same extent, if any, as the Debt being Refinanced; provided, however, that Permitted Refinancing Debt shall not include -------- ------- (x) Debt of a Subsidiary that Refinances Debt of the Company or (y) Debt of the Company or a Restricted Subsidiary that Refinances Debt of an Unrestricted Subsidiary. "Person" means any individual, corporation, company (including any limited liability company), partnership, joint venture, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock" means any Capital Stock of a Person, however designated, which entitles the holder thereof to a preference with respect to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of any other class of Capital Stock issued by such Person. "principal" of any Debt (including the Securities) means the principal amount of such Debt plus the premium, if any, on such Debt. "pro forma" means, with respect to any calculation made or required to be made pursuant to the terms hereof, a calculation performed in accordance with Article 11 of Regulation S-X promulgated under the Securities Act, as interpreted in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, or otherwise a calculation made in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, as the case may be. 24 "Property" means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including Capital Stock in, and other securities of, any other Person. "Public Equity Offering" means an underwritten public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act. "Purchase Money Debt" means Debt (a) consisting of the deferred purchase price of property, conditional sale obligations, obligations under any title retention agreement, other purchase money obligations and obligations in respect of industrial revenue bonds, in each case where the maturity of such Debt does not exceed the anticipated useful life of the asset being financed, and (b) Incurred to finance the acquisition or construction by the Company or a Restricted Subsidiary of such asset, including remodeling thereof and additions and improvements thereto; provided, however, that such Debt is Incurred within -------- ------- 180 days after such acquisition of such asset by the Company or a Restricted Subsidiary or completion of such construction, remodeling, addition or improvement, as the case may be. "Recapitalization" means the recapitalization of the Company effected on the Issue Date, as described in the Offering Memorandum of Holding dated April 12, 1998, including the Merger. "Redeemable Stock" means, with respect to any Person, any Capital Stock that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable, in either case at the option of the holder thereof) or otherwise (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b) is or may become redeemable or repurchaseable at the option of the holder thereof, in whole or in part, or (c) is convertible or exchangeable, in either case at the option of the holder thereof, for Debt or Disqualified Stock. "Refinance" means, in respect of any Debt, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Debt, in exchange or replacement for, such Debt. "Refinanced" and "Refinancing" shall have correlative meanings. 25 "Related Business" means any business that is related, ancillary or complementary to the businesses of the Company and the Restricted Subsidiaries on the Issue Date. "Representative" means the trustee, agent or representative expressly authorized to act in such capacity, if any, for an issue of Senior Debt. "Restricted Payment" means (a) any dividend or distribution (whether made in cash, securities or other Property) declared or paid on or with respect to any shares of Capital Stock of the Company or any Restricted Subsidiary (including any payment in connection with any merger or consolidation with or into the Company or any Restricted Subsidiary), except for any dividend or distribution which is made solely to the Company or a Restricted Subsidiary (and, if such Restricted Subsidiary is not a Wholly Owned Subsidiary, to the other shareholders of such Restricted Subsidiary on a pro rata basis or on a basis that results in the receipt by the Company or a Restricted Subsidiary of dividends or distributions of greater value than it would receive on a pro rata basis) or any dividend or distribution payable solely in shares of Capital Stock (other than Disqualified Stock) of the Company; (b) the purchase, repurchase, redemption, acquisition or retirement for value of any Capital Stock of the Company or any Affiliate of the Company (other than from the Company or a Restricted Subsidiary) or any securities exchangeable for or convertible into any such Capital Stock, including the exercise of any option to exchange any Capital Stock (other than for or into Capital Stock of the Company that is not Disqualified Stock); (c) the purchase, repurchase, redemption, acquisition or retirement for value, prior to any scheduled maturity, scheduled sinking fund or mandatory redemption payment, any Subordinated Obligation (other than the purchase, repurchase or other acquisition of any Subordinated Obligation 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 (d) any Investment (other than Permitted Investments) in any Person. "Restricted Subsidiary" means (a) any Subsidiary of the Company unless such Subsidiary shall have been designated an Unrestricted Subsidiary as permitted or required pursuant to Section 4.13 and (b) an Unrestricted Subsidiary which is redesignated as a Restricted Subsidiary as permitted pursuant to Section 4.13. 26 "S&P" means Standard & Poor's Ratings Service or any successor to the rating agency business thereof. "Sale and Leaseback Transaction" means any arrangement relating to Property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such Property to another Person and the Company or a Restricted Subsidiary leases it from such Person. "Securities Act" means the Securities Act of 1933. "Senior Debt" of the Company means (a) all obligations consisting of the principal, premium, if any, and accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company to the extent post-filing interest is allowed in such proceeding) in respect of (i) Debt of the Company for borrowed money, including Debt under the New Credit Facility and the Notes, and (ii) Debt of the Company evidenced by notes, debentures, bonds or other similar instruments permitted under this Indenture for the payment of which the Company is responsible or liable; (b) all Capital Lease Obligations of the Company; (c) all obligations of the Company (i) for the reimbursement of any obligor on any letter of credit, bankers' acceptance or similar credit transaction, (ii) under Hedging Obligations or (iii) issued or assumed as the deferred purchase price of Property and all conditional sale obligations of the Company and all obligations under any title retention agreement permitted under this Indenture; and (d) all obligations of other Persons of the type referred to in clauses (a), (b) and (c) for the payment of which the Company is responsible or liable as Guarantor; provided, however, that Senior Debt shall not include (A) Debt of the Company - -------- ------- that is by its terms subordinate or pari passu in right of payment to the Securities, including any Subordinated Debt and Subordinated Obligations; (B) any Debt Incurred in violation of the provisions of this Indenture; (C) accounts payable or any other obligations of the Company to trade creditors created or assumed by the Company in the ordinary course of business in connection with the obtaining of materials or services (including Guarantees thereof or instruments evidencing such liabilities); (D) any liability for Federal, state, local or other taxes owed or owing by the Company; (E) any obligation of the Company to any Subsidiary; or (F) any obligations with respect to any Capital Stock. "Significant Subsidiary" means any Subsidiary that would be a "Significant Subsidiary" of the Company 27 within the meaning of Rule 1-02 under Regulation S-X promulgated by the Commission. "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). "Subordinated Debt" means the Securities and any other Debt of the Company that specifically provides that such Debt is to rank pari passu with the Securities in right of payment and is not subordinated by its terms to any Debt or other obligation of the Company which is not Senior Debt. "Subordinated Obligation" means any Debt of the Company (whether outstanding on the Issue Date or thereafter Incurred) that specifically provides that such Debt is to be subordinate or junior in right of payment to the Securities. "Subsidiary" means, in respect of any Person, any corporation, company, association, partnership, joint venture or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled directly or indirectly, by (a) such Person, (b) such Person and one or more Subsidiaries of such Person or (c) one or more Subsidiaries of such Person. "Subsidiary Guarantor" means each Subsidiary of the Company that becomes a Subsidiary Guarantor pursuant to the 9 1/8% Indenture. "Subsidiary Guaranty" means a Guarantee on the terms set forth in the 9 1/8% Indenture by a Subsidiary Guarantor of the Company's obligations with respect to the Notes. "Temporary Cash Investments" means any of the following: (a) Investments in U.S. Government Obligations; (b) Investments in time deposit accounts, certificates of deposit and money market deposits maturing within 90 days of the date of acquisition thereof issued by a bank or trust 28 company which is organized under the laws of the United States of America or any state thereof having capital, surplus and undivided profits aggregating in excess of $500 million and whose long-term debt is rate "A-3" or "A-" or higher according to Moody's or S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)); (c) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (a) entered into with a bank meeting the qualifications described in clause (b) above; (d) Investments in commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America with a rating at the time as of which any Investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)); (e) direct obligations (or certificates representing an ownership interest in such obligations) of any state of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of such state is pledged and which are not callable or redeemable at the issuer's option, provided, however, that (i) the long-term -------- ------- debt of such state is rated "A-3" or "A-1" or higher according to Moody's or S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)) and (ii) such obligations mature within 180 days of the date of acquisition thereof; and (f) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (a) through (e) above. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa- ------ 77bbbb) as in effect on the date of this Indenture except as required by Section 9.03 hereof; provided, however, that in the event the Trust Indenture Act of -------- ------- 1939 is amended after such date, "Trust Indenture Act" means, to the extent ------------------- required by any such amendment, the Trust Indenture Act of 1939, as so amended. "Trustee" means the party named as such in this Indenture until a successor replaces it and, thereafter, means the successor. 29 "Trust Officer" means the Chairman of the Board, the President or any other officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "Uniform Commercial Code" means the New York Uniform Commercial Code as in effect from time to time. "Unrestricted Subsidiary" means (a) any Subsidiary of the Company in existence on the Issue Date that is not a Restricted Subsidiary; (b) any Subsidiary of an Unrestricted Subsidiary; and (c) any Subsidiary of the Company that is designated after the Issue Date as an Unrestricted Subsidiary as permitted or required pursuant to Section 4.13 and not thereafter redesignated as a Restricted Subsidiary as permitted pursuant thereto. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "Voting Stock" of a corporation means all classes of Capital Stock of such corporation then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means, at any time, a Restricted Subsidiary all the Voting Stock of which (except directors' qualifying shares) is at such time owned, directly or indirectly, by the Company and its other Wholly Owned Subsidiaries. SECTION 1.02. Other Definitions. ------------------
Defined in Term Section ---- ------- "Bankruptcy Law".................................................. 6.01 "Change of Control Offer"......................................... 4.10 "Change of Control Purchase Price"................................ 4.10 "covenant defeasance option"...................................... 8.01(b) "Custodian"....................................................... 6.01 "Event of Default"................................................ 6.01
30 "Excess Proceeds"................................................. 4.06 "Global Security"................................................. Appendix A "legal defeasance option"......................................... 8.01(b) "Legal Holiday"................................................... 11.08 "Offer Amount".................................................... 4.06 "Offer Period".................................................... 4.06 "pay the Securities".............................................. 10.03 "Paying Agent".................................................... 2.04 "Payment Blockage Notice"......................................... 10.03 "Payment Blockage Period"......................................... 10.03 "Prepayment Offer"................................................ 4.06 "Prepayment Offer Notice"......................................... 4.06 "Purchase Date"................................................... 4.06 "Registrar"....................................................... 2.04 "Successor Company"............................................... 5.01
SECTION 1.03. Incorporation by Reference of Trust Indenture Act. -------------------------------------------------- This Indenture is subject to the mandatory provisions of the TIA which are incorporated by reference in and made a part of this Indenture. The following TIA terms have the following meanings: "Commission" means the SEC. "indenture securities" means the Securities. "indenture security holder" means a Securityholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company and any other obligor on the indenture securities. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings assigned to them by such definitions. 31 SECTION 1.04. Rules of Construction. Unless the context otherwise ---------------------- requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) "including" means including without limitation; (5) words in the singular include the plural and words in the plural include the singular; (6) unsecured Debt shall not be deemed to be subordinate or junior to secured Debt merely by virtue of its nature as unsecured Debt; (7) the principal amount of any noninterest bearing or other discount security at any date shall be the principal amount thereof that would be shown on a balance sheet of the issuer dated such date prepared in accordance with GAAP; and (8) the principal amount of any Preferred Stock shall be the greater of (i) the maximum liquidation value of such Preferred Stock or (ii) the maximum mandatory redemption or mandatory repurchase price with respect to such Preferred Stock. ARTICLE 2 The Securities -------------- SECTION 2.01. Amount of Securities. The aggregate principal amount --------------------- of Securities which may be authenticated and delivered under this Indenture shall equal the liquidation preference of the Holding Preferred Stock or Company Preferred Stock, as applicable, plus, without duplication, accumulated and unpaid dividends on the Exchange Date (the "Exchange Amount") plus any Additional Securities issued in lieu of cash interest. Subject to Section 2.03, the Trustee shall authenticate Initial Securities for original issue on the Exchange Date in the aggregate principal amount equal to the Exchange Amount and shall authenticate Additional Securities 32 sufficient to pay interest on outstanding Securities if the Company elects, as provided in paragraph 1 of the Securities, to pay such interest in the form of Additional Securities. SECTION 2.02. Form and Dating. (a) Provisions relating to the ---------------- Initial Securities and the Exchange Securities are set forth in Appendix A, which is hereby incorporated in and expressly made a part of this Indenture. The Initial Securities of each series and the Trustee's certificate of authentication shall be substantially in the form of Exhibit 1 to Appendix A which is hereby incorporated in and expressly made a part of this Indenture. The Exchange Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A, which is hereby incorporated in and expressly made a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject, if any, or usage, provided that any such notation, -------- legend or endorsement is in a form reasonably acceptable to the Company. Each Security shall be dated the date of its authentication. The terms of the Securities set forth in Exhibit 1 to Appendix A and Exhibit A are part of the terms of this Indenture. (b) Upon their original issuance, Rule 144A Securities shall be issued in the form of one or more Global Notes registered in the name of the Depository or its nominee and deposited with the Trustee, as custodian for the Depository, duly executed by the Company and authenticated by the Trustee, for credit by the Depository to the respective accounts of beneficial owners of the Securities represented thereby (or such other accounts as they may direct). Such Global Notes are collectively herein called the "Rule 144A Global Note". Upon their original issuance, Regulation S Securities shall, to the extent required pursuant to paragraph (C)(3)(ii)(B) of Rule 903 under Regulation S under the Securities Act, be issued in the form of one or more temporary Global Notes (the "Temporary Regulation S Global Notes") and, to the extent permitted pursuant to paragraph (C)(3)(ii)(B) of such Rule 903, shall be issued initially in the form of one or more permanent Global Notes (the "Permanent Regulation S Global Notes"), in each case registered in the name of the Depository or its nominee and deposited with the Trustee as custodian for the Depository, duly executed by the Company and authenticated by the Trustee, for credit to the Agent Member accounts at the Depository of Euroclear and/or Cedel for further credit by Euroclear and Cedel, as the case may be, to the 33 respective accounts of the beneficial owners of the Securities represented thereby (or such other accounts as they may direct). Interests in the Temporary Regulation S Global Notes may only be held by the Agent Members of the Depository for Euroclear and Cedel. SECTION 2.03. Execution and Authentication. Two Officers shall sign ----------------------------- the Securities for the Company by manual or facsimile signature. The Company's seal shall be impressed, affixed, imprinted or reproduced on the Securities and may be in facsimile form. If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together with a written order of the Company signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of the Company for the authentication and delivery of such Securities, and the Trustee in accordance with such written order of the Company shall authenticate and deliver such Securities. A Security shall not be valid until an authorized officer or signatory of the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate the Securities. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as any Registrar, Paying Agent or agent for service of notices and demands. SECTION 2.04. Registrar and Paying Agent. The Company shall maintain --------------------------- in the Borough of Manhattan, the City of New York, an office or agency where Securities may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Securities may be presented for payment (the "Paying Agent"). The Registrar 34 shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company may also from time to time designate one or more other offices or agencies (in or outside the Borough of Manhattan, the City of Mew York) where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, -------- ------- that no such designation or recision shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York, for such purposes. The Company will give written notice to the Trustee of any such designation or recision and of any change in the location of any such other office or agency. The Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent or co-registrar not a party to this Indenture, which shall incorporate the terms of the TIA. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of any such agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.07. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar, co-registrar or transfer agent. The Company may change any Paying Agent or Registrar upon notice to the Trustee but without notice to any Holder. The Company initially appoints the Trustee as Registrar and Paying Agent in connection with the Securities. SECTION 2.05. Paying Agent To Hold Money in Trust. No later than ------------------------------------ 11:00 a.m., New York City time, on or prior to each due date of the principal and interest on any Security, the Company shall deposit with the Paying Agent, on such due date, a sum sufficient to pay such principal and interest then so becoming due. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Securityholders or the Trustee all money held by the Paying Agent for the payment of principal of or interest on the Securities and shall notify the Trustee of any default by the Company in making any such payment. If the Company or a Wholly Owned Subsidiary acts as Paying Agent, 35 it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed by the Paying Agent. Upon complying with this Section, the Paying Agent shall have no further liability for the money delivered to the Trustee. SECTION 2.06. Securityholder Lists. The Trustee shall preserve in as --------------------- current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee, in writing at least five Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Securityholders. SECTION 2.07. Replacement Securities. If a mutilated Security is ----------------------- surrendered to the Registrar or if the Holder of a Security claims that such Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the requirements of Section 8-405 of the Uniform Commercial Code are met and the Holder satisfies any other reasonable requirements of the Trustee and the Company. If required by the Trustee or the Company, such Holder shall furnish an indemnity bond sufficient in the judgment of the Company and the Trustee to protect the Company, the Trustee, the Paying Agent, the Registrar and any co-registrar from any loss which any of them may suffer if a Security is replaced. The Company and the Trustee may charge the Holder for their expenses in replacing a Security. Every replacement Security is an additional obligation of the Company. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement of mutilated, lost, destroyed or wrongfully taken Securities. SECTION 2.08. Outstanding Securities. Securities outstanding at any ----------------------- time are all Securities authenticated by the Trustee except for those canceled by it, those delivered to it for cancelation and those described in this Section as not outstanding. A Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the Security. 36 If a Security is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee and the Company receive proof satisfactory to them that the replaced Security is held by a bona fide purchaser. If the Paying Agent segregates and holds in trust, in accordance with this Indenture, on a redemption date or maturity date money sufficient to pay all principal and interest payable on that date with respect to the Securities (or portions thereof) to be redeemed or maturing, as the case may be, and the Paying Agent is not prohibited from paying such money to the Securityholders on that date pursuant to the terms of this Indenture, then on and after that date such Securities (or portions thereof) cease to be outstanding and interest on them ceases to accrue. SECTION 2.09. Temporary Securities. Until definitive Securities are --------------------- ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Every such temporary Security shall be authenticated upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities and deliver them in exchange for temporary Securities. Such exchange shall be made by the Company at its own expense and without any charge therefor. Until so exchanged, the temporary Securities shall in all respects be entitled to the same rights, privileges and benefits under this Indenture as definitive Securities authenticated and delivered hereunder. SECTION 2.10. Cancelation. The Company at any time may deliver ------------ Securities to the Trustee for cancelation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel and destroy (subject to the record retention requirements of the Exchange Act) all Securities surrendered for registration of transfer, exchange, payment or cancelation and deliver a certificate of such destruction to the Company, unless the Company directs the Trustee to deliver canceled Securities to the Company. If the Company shall acquire any of the Securities, such acquisition shall not operate as a redemption or satisfaction of the Debt represented by such Securities unless and until the same are delivered to the Trustee for cancelation. The Company may 37 not issue new Securities to replace Securities it has redeemed, paid or delivered to the Trustee for cancelation. SECTION 2.11. Defaulted Interest. If the Company defaults on a ------------------- payment of interest on the Securities, the Company shall pay defaulted interest (plus interest on such defaulted interest to the extent lawful) in any lawful manner. The Company may pay the defaulted interest to the persons who are Securityholders on a subsequent special record date. The Company shall fix or cause to be fixed any such special record date and payment date to the reasonable satisfaction of the Trustee and shall promptly mail to each Securityholder a notice that states the special record date, the payment date and the amount of defaulted interest to be paid. Notwithstanding the foregoing, any interest which is paid prior to the expiration of the grace period provided for in Section 6.01(1) hereof shall be paid to the Holders of the Securities as of the regular record date for which interest has not been paid. SECTION 2.12. CUSIP Numbers. The Company in issuing the Securities -------------- may use "CUSIP" numbers (if then generally in use) and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided, however, that any such notice may state that no representation is made - -------- ------- as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. ARTICLE 3 Redemption ---------- SECTION 3.01. Notices to Trustee. If the Company redeems Securities ------------------- pursuant to paragraph 5 of the Securities, it shall notify the Trustee in writing of the redemption date, the principal amount of Securities to be redeemed and whether such redemption is being made pursuant to paragraph 5(a) or 5(b) of the Securities. In the event of a redemption pursuant to paragraph 5(a) of the Securities, the Company shall give each notice to the Trustee provided for in this Section at least 45 days before the redemption date unless the Trustee consents to a shorter period. In the event of a redemption 38 pursuant to paragraph 5(b) of the Securities, the Company shall give the notice to the Trustee provided for in this Section no later than 5:00 p.m., New York City time, on April 10, 1998. Any notice pursuant to this Section shall be transmitted by facsimile and confirmed with a Trust Officer by telephone. Such notice shall be accompanied by an Officers' Certificate and an Opinion of Counsel from the Company to the effect that such redemption will comply with the conditions herein. Such Officers' Certificate shall, in addition, specify the redemption price of the Securities. SECTION 3.02. Selection of Securities To Be Redeemed. If less than --------------------------------------- all the Securities are to be redeemed at any time, selection of Securities for redemption may be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Securities are listed, or, if the Securities are not so listed, on a pro rata basis, by lot or by such other method that the Trustee shall deem fair and appropriate (and in a manner that complies with applicable legal requirements, if any). The Trustee shall make the selection from outstanding Securities not previously called for redemption. The Trustee may select for redemption portions of the principal of Securities that have denominations larger than $1,000. Securities and portions of them the Trustee selects shall be in amounts of $1,000 or a whole multiple of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee shall notify the Company and, unless the Trustee is acting as such, the Registrar, promptly of the Securities or portions of Securities to be redeemed. SECTION 3.03. Notice of Redemption. The Company shall mail a notice --------------------- of redemption by first-class mail to each Holder of Securities to be redeemed (i) in the case of a redemption under paragraph 5(a) of the Securities at least 30 days but not more than 60 days before a date for redemption of Securities, and (ii) in the case of a redemption under paragraph 5(b) of the Securities on April 10, 1998. The notice shall identify the Securities to be redeemed and shall state: (1) the redemption date; (2) the redemption price, or the calculation thereof described in paragraph 5 of the Securities; (3) the name and address of the Paying Agent; 39 (4) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; (5) if fewer than all the outstanding Securities are to be redeemed, the identification and principal amounts of the particular Securities to be redeemed; (6) that, unless the Company defaults in making such redemption payment or the Paying Agent is prohibited from making such payment pursuant to the terms of this Indenture, interest on Securities (or portion thereof) called for redemption ceases to accrue on and after the redemption date; and (7) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Securities. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. In such event, the Company shall provide the Trustee with the information required by this Section. In the event of a redemption pursuant to paragraph 5(b) of the Securities, the Company will, on April 10, 1998, cause a notice of such redemption to be sent at least once to the Dow Jones News Service or similar business news service in the United States. SECTION 3.04. Effect of Notice of Redemption. Once notice of ------------------------------- redemption is mailed, Securities called for redemption become due and payable on the redemption date and at the redemption price stated in the notice, and from and after such redemption date (unless the Company shall default on the payment of the redemption price and accrued interest) such Securities shall cease to bear interest. Upon surrender to the Paying Agent, such Securities shall be paid at the redemption price stated in the notice, plus accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date that is on or prior to the date of redemption). Failure to give notice or any defect in the notice to any Holder shall not affect the validity of the notice to any other Holder. SECTION 3.05. Deposit of Redemption Price. No later than 11:00 a.m., ---------------------------- New York City time, on the redemption date, the Company shall deposit with the Paying Agent (or, if the Company or a Wholly Owned Subsidiary is the Paying 40 Agent, shall segregate and hold in trust) money sufficient to pay the redemption price of and accrued interest (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date that is on or prior to the date of redemption) on all Securities to be redeemed on that date other than Securities or portions of Securities called for redemption which have been delivered by the Company to the Trustee for cancelation. All money earned on funds held in trust by the Trustee or any Paying Agent and any excess or remaining funds shall be remitted to the Company. In the event of a redemption pursuant to paragraph 5(b) of the Securities, Holding will, on April 10, 1998, deposit with (and not withdraw) the Trustee (or a paying agent designated by the Trustee) money sufficient to pay the redemption price. The Trustee (or the paying agent) will invest such funds in cash or Temporary Cash Investments as directed in writing by the Company pending distribution to Holders on April 24, 1998. The Trustee (or the paying agent) shall not be accountable or liable for any losses from the sale or depreciation in value of such investments. Subject to any applicable abandoned property law, the Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of the redemption price of and accrued interest, if any, on the Securities that remains unclaimed for two years (or if then held by the Company or a Wholly Owned Subsidiary in trust for the payment thereof), shall be discharged from such trust, and, thereafter, Securityholders entitled to the money must look to the Company for payment as general creditors; provided, -------- however, that the Trustee or such Paying Agent before being required to make any - ------- such repayment shall at the expense of the Company cause to be mailed to each such Holder a notice that said moneys have not been so applied and that after a date named therein any unclaimed balance of said moneys then remaining will be returned to the Company. SECTION 3.06. Securities Redeemed in Part. Upon surrender of a ---------------------------- Security that is redeemed in part, the Company shall execute and the Trustee shall authenticate for the Holder (at the Company's expense) a new Security equal in principal amount to the unredeemed portion of the Security surrendered. 41 ARTICLE 4 Covenants --------- SECTION 4.01. Payment of Securities. The Company shall promptly pay ---------------------- the principal of and interest on the Securities on the dates and in the manner provided in the Securities and in this Indenture. Principal and interest shall be considered paid on the date due if on such date the Trustee or the Paying Agent holds in accordance with this Indenture money sufficient to pay all principal and interest then due and the Trustee or the Paying Agent, as the case may be, is not prohibited from paying such money to the Securityholders on that date pursuant to the terms of this Indenture. The Company shall pay interest on overdue principal at the rate specified therefor in the Securities, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. SECTION 4.02. SEC Reports. Notwithstanding that the Company may not ------------ be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the Commission and provide the Trustee, Holders of Securities and, upon request, security analysts of prospective holders of the Securities with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and reports to be so filed and provided at the times specified for the filing of such information, documents and reports under such Sections; provided, -------- however, that the Company shall not be so obligated to file such information, - ------- documents and reports with the Commission if the Commission does not permit such filings. The Company shall file with the Commission and provide the Trustee, Holders of Securities and, upon request, security analysts of prospective holders of the Securities with the information, documents and reports described herein whether or not the Exchange Offer Registration Statement has been filed or declared effective. SECTION 4.03. Limitation on Debt. The Company shall not, and shall ------------------- not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Debt unless, after giving pro forma effect to the application of the proceeds thereof, no Default or Event of Default would occur as a consequence of such Incurrence or be continuing following such Incurrence and either (a) after giving effect to the 42 Incurrence of such Debt and the application of the proceeds thereof, the Consolidated Interest Coverage Ratio would be greater than 1.75 to 1.00 if such Debt is Incurred from the Issue Date through April 15, 2000, and 2.00 to 1.00 if such Debt is Incurred thereafter or (b) such Debt is Permitted Debt. Notwithstanding paragraphs (j) and (k) of the definition of "Permitted Debt", (a) the Company shall not, and shall not permit any Restricted Subsidiary to, Incur any Debt pursuant to such paragraphs if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations unless such Debt shall be subordinated to the Securities to at least the same extent as such Subordinated Obligations and (b) the Company shall not permit any Restricted Subsidiary to Incur any Debt pursuant to such paragraphs if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations. SECTION 4.04. Limitation on Restricted Payments. (a) The Company --------------------------------- shall not make, and shall not permit any Restricted Subsidiary to make, directly or indirectly, any Restricted Payment if at the time of, and after giving pro forma effect to, such proposed Restricted Payment, (i) a Default or Event of Default shall have occurred and be continuing, (ii) the Company could not Incur at least $1.00 of additional Debt pursuant to clause (a) of the first paragraph of Section 4.03 or (iii) the aggregate amount of such Restricted Payment and all other Restricted Payments declared or made since the Issue Date (the amount of any Restricted Payment, if made other than in cash, to be based upon Fair Market Value) would exceed an amount equal to the sum of: (A) 50% of the aggregate amount of Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter during which the Issue Date occurs to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or if the aggregate amount of Consolidated Net Income for such period shall be a deficit, minus 100% of such deficit), 43 (B) Capital Stock Sale Proceeds, (C) the amount by which Debt of the Company Incurred after the Issue Date is reduced on the Company's balance sheet upon the conversion or exchange (other than by the Company or a Subsidiary of the Company) subsequent to the Issue Date of any Debt (other than Subordinated Obligations) of the Company for Capital Stock (other than Disqualified Stock) of the Company (less the amount of any cash or other Property distributed by the Company or any Restricted Subsidiary upon such conversion or exchange), and (D) an amount equal to the sum of (1) the net reduction in Investments in any Person other than the Company or a Restricted Subsidiary resulting from dividends, repayments of loans or advances or other transfers of Property, in each case to the Company or any Restricted Subsidiary from such Person, to the extent such dividends, repayments or transfers do not increase the amount of Permitted Investments permitted to be made pursuant to clause (i) of the definition thereof and (2) the portion (proportionate to the Company's equity interest in such Unrestricted Subsidiary) of the Fair Market Value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided, however, that the foregoing sum shall not exceed, in the -------- ------- case of any Person, the amount of Investments previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in such Person, and (E) $7.5 million. (b) Notwithstanding the foregoing limitation, the Company may: (i) pay dividends on its Capital Stock within 60 days of the declaration thereof if, on said declaration date, such dividends could have been paid in compliance with this Indenture; provided, however, that at the -------- ------- time of such payment of such dividend, no other Default or Event of Default shall have occurred and be continuing (or result therefrom); provided -------- further, however, that such dividend shall be included in the calculation ------- ------- of the amount of Restricted Payments; 44 (ii) purchase, repurchase, redeem, legally defease, acquire or retire for value Capital Stock of the Company or Subordinated Obligations in exchange for, or in an amount not in excess of the proceeds of the substantially concurrent sale of, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any of its Subsidiaries for the benefit of their employees); provided, however, that (1) such purchase, repurchase, -------- ------- redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments and (2) the Capital Stock Sale Proceeds from such exchange or sale shall be excluded from the calculation pursuant to clause (a)(iii)(B) above; (iii) purchase, repurchase, redeem, legally defease, acquire or retire for value any Subordinated Obligations in exchange for, or in an amount not in excess of the proceeds of the substantially concurrent sale of, Permitted Refinancing Debt; provided, however, that such purchase, -------- ------- repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments; (iv) 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 for value, shares of, or options to purchase shares of, common stock of the Company or Holding from employees or former employees of the Company, Holding or any of their Subsidiaries (or their estates or beneficiaries thereof) upon death, disability, retirement or termination pursuant to the terms of the agreements (including employment agreements) or plans (or amendments thereto) approved by the Board or Directors or the board of directors of 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 common stock; provided, however, that (1) the aggregate amount of such purchases, -------- ------- repurchases, redemptions, defeasances, acquisitions or retirements shall not exceed $1.0 million in any year or $5.0 million during the term of the Securities, except that (x) such amounts shall be increased by the aggregate 45 net amount of cash received by the Company after the Issue Date from the sale of such shares to, or the exercise of options to purchase such shares by, employees of the Company, Holding or any of their Subsidiaries and (y) the Company may forgive or return Employee Notes without regard to the limitation set forth in clause (iv)(1) above and such forgiveness or return shall not be treated as a Restricted Payment for purpose of determining compliance with such clause (iv)(1) and (2) such purchases, repurchases, defeasances, acquisitions or retirements (but not forgiveness or return of Employee Notes) shall be included in the calculation of the amount of Restricted Payments; (v) purchase or redeem Subordinated Obligations pursuant to asset sale or change of control provisions contained in the governing instrument relating thereto; provided, however, that (i) no offer or purchase -------- ------- obligation may be triggered in respect of any such Subordinated Obligation unless a corresponding obligation also arises with respect to the Securities and (ii) in any event, no repurchase or redemption of any such Subordinated Obligation may be consummated unless and until the Company shall have satisfied all repurchase obligations with respect to any required purchase offer made with respect to the Securities; provided, -------- however, that such purchases or redemptions shall be included in the ------- calculation of the amount of Restricted Payments; and (vi) make payments to Helen Hudson Lovaas pursuant to the Merger Agreement in an aggregate amount not to exceed $1.1 million in any fiscal year or $3.3 million during the term of the Securities (plus, in each case, interest due on the unpaid portion of such required payments in accordance with the Merger Agreement); provided, however, that such payments shall be -------- ------- excluded in the calculation of the amount of Restricted Payments. (c) In computing Consolidated Net Income of the Company under paragraph (a) above, (1) the Company shall use audited financial statements for the portions of the relevant period for which audited financial statements are available on the date of determination and unaudited financial statements and other current financial data based on the books and records of the Company for the remaining portion of such period and (2) the Company shall be permitted to rely in good faith on the financial statements 46 and other financial data derived from the books and records of the Company that are available on the date of determination. If the Company makes a Restricted Payment which, at the time of the making of such Restricted Payment, would in the good faith determination of the Company be permitted under the requirements of this Indenture, such Restricted Payment shall be deemed to have been made in compliance with this Indenture notwithstanding any subsequent adjustments made in good faith to the Company's financial statements affecting Consolidated Net Income of the Company for any period. SECTION 4.05. Limitation on Restrictions on Distributions from ------------------------------------------------ Restricted Subsidiaries. The Company shall not, and shall not permit any - ------------------------ Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist any consensual restriction on the right of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, or pay any Debt or other obligation owed, to the Company or any other Restricted Subsidiary (except, with respect to restrictions on dividends of non-cash Property, as permitted pursuant to clause (ii) of the next sentence), (b) make any loans or advances to the Company or any other Restricted Subsidiary or (c) transfer any of its Property to the Company or any other Restricted Subsidiary. The foregoing limitations will not apply (i) with respect to clauses (a), (b) and (c), to restrictions (A) in effect on the Issue Date, (B) pursuant to the Credit Facility, (C) relating to Debt of a Restricted Subsidiary and existing at the time it became a Restricted Subsidiary if such restriction was not created in connection with or in anticipation of the transaction or series of transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company or (D) which result from the Refinancing of Debt Incurred pursuant to an agreement referred to in clause (i)(A) or (B) above or in clause (ii)(A) or (B) below, provided such restriction is no less favorable to the holders of Securities than those under the agreement evidencing the Debt so Refinanced, and (ii) with respect to clause (c) only, to restrictions (A) relating to Debt that is permitted to be Incurred and secured without also securing the Securities equal and ratable treatment pursuant to Section 4.03 and Section 4.10 that limit the right of the debtor to dispose of the Property securing such Debt, (B) encumbering Property at the time such Property was acquired by the Company or any Restricted Subsidiary, so long as such restriction relates solely to the Property so acquired and was not created in connection with or in 47 anticipation of such acquisition, (C) resulting from customary provisions restricting subletting or assignment of leases or customary provisions in other agreements that restrict assignment of such agreements or rights thereunder or (D) customary restrictions contained in asset sale agreements limiting the transfer of such Property pending the closing of such sale. SECTION 4.06. Limitation on Asset Sales. (a) The Company shall not, -------------------------- and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale unless (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the Property subject to such Asset Sale; (ii) at least 75% of the consideration paid to the Company or such Restricted Subsidiary in connection with such Asset Sale is in the form of cash or cash equivalents or the assumption by the purchaser of liabilities of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Securities) as a result of which the Company and the Restricted Subsidiaries are no longer obligated with respect to such liabilities; and (iii) the Company delivers an Officers' Certificate to the Trustee certifying that such Asset Sale complies with the foregoing clauses (i) and (ii). (b) The Net Available Cash (or any portion thereof) from Asset Sales may be applied by the Company or a Restricted Subsidiary, to the extent the Company or such Restricted Subsidiary elects (or is required by the terms of any Debt): (i) to prepay, repay, legally defease or purchase Senior Debt of the Company or any Restricted Subsidiary (excluding, in any such case, Disqualified Stock and Debt owed to the Company or an Affiliate of the Company); or (ii) to reinvest in Additional Assets (including by means of an Investment in Additional Assets by a Restricted Subsidiary with Net Available Cash received by the Company or another Restricted Subsidiary); provided, however, that in connection with any -------- ------- prepayment, repayment, legal defeasance or purchase of Debt pursuant to clause (i) above, the Company or such Restricted Subsidiary shall retire such Debt and shall cause the related loan commitment (if any) to be permanently reduced by an amount equal to the principal amount so prepaid, repaid, legally defeased or purchased. (c) Any Net Available Cash from an Asset Sale not applied in accordance with the preceding paragraph within twelve months from the date of the receipt of such Net Available Cash shall constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million 48 (taking into account income earned on such Excess Proceeds, if any), the Company will be required to make an offer to purchase (the "Prepayment Offer") the Securities which offer shall be in the amount of the Excess Proceeds, on a pro rata basis according to principal amount, at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the purchase date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date) in accordance with the procedures (including prorating in the event of oversubscription) set forth in this Indenture. To the extent that any portion of the amount of Net Available Cash remains after compliance with the preceding sentence and provided that all holders of Securities have been given the opportunity to tender their Securities for purchase in accordance with this Indenture, the Company or such Restricted Subsidiary may use such remaining amount for any purpose permitted by this Indenture and the amount of Excess Proceeds will be reset to zero. (d)(1) Within five business days after the Company is obligated to make a Prepayment Offer as described in the preceding paragraph, the Company shall send a written notice, by first-class mail, to the Trustee and the Holders of Securities (the "Prepayment Offer Notice"), accompanied by such information regarding the Company and its Subsidiaries as the Company in good faith believes will enable such Holders to make an informed decision with respect to such Prepayment Offer. The Prepayment Offer Notice shall state (i) that the Company is offering to purchase Securities pursuant to the provisions of this Indenture, (ii) that any Security (or any portion thereof) accepted for payment (and duly paid on the Purchase Date) pursuant to the Prepayment Offer shall cease to accrue interest on the Purchase Date, (iii) that any Securities (or portions thereof) not properly tendered shall continue to accrue interest, (iv) the purchase price and purchase date, which shall be, subject to any contrary requirements of applicable law, a Business Day no earlier than 30 days nor later than 60 days after the date the Prepayment Offer Notice is mailed (the "Purchase Date"), (v) the aggregate principal amount of Securities to be purchased, (vi) a description of the procedures which Holders of Securities must follow in order to tender their Securities and the procedures that Holders of Securities must follow in order to withdraw an election to tender their Securities for payment and (vii) all other instructions and materials necessary to enable Holders to tender Securities pursuant to the Prepayment Offer. 49 (2) Not later than the date upon which written notice of a Prepayment Offer is delivered to the Trustee as provided above, the Company shall deliver to the Trustee an Officers' Certificate as to (i) the amount of the Prepayment Offer (the "Offer Amount"), (ii) the allocation of the Net Available Cash from the Asset Sales pursuant to which such Prepayment Offer is being made and (iii) the compliance of such allocation with the provisions of Section 4.06(a). On such date or prior to the Purchase Date, the Company shall also irrevocably deposit with the Trustee or with the Paying Agent (or, if the Company or a Wholly Owned Subsidiary is the Paying Agent, shall segregate and hold in trust) in cash or Temporary Cash Investments, maturing on the last day prior to the Purchase Date or on the Purchase Date if funds are immediately available by open of business, an amount equal to the Offer Amount to be held for payment in accordance with the provisions of this Section. Upon the expiration of the period for which the Prepayment Offer remains open (the "Offer Period"), the Company shall deliver to the Trustee for cancelation the Securities or portions thereof which have been properly tendered to and are to be accepted by the Company. The Trustee or the Paying Agent shall, on the Purchase Date, mail or deliver payment to each tendering Holder in the amount of the purchase price. In the event that the aggregate purchase price of the Securities delivered by the Company to the Trustee is less than the Offer Amount, the Trustee or the Paying Agent shall deliver the excess to the Company immediately after the expiration of the Offer Period for application in accordance with this Section. (3) Holders electing to have a Security purchased shall be required to surrender the Security, with an appropriate form duly completed, to the Company or its agent at the address specified in the notice at least three Business Days prior to the Purchase Date. Holders shall be entitled to withdraw their election if the Trustee or the Company receives not later than one Business Day prior to the Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security which was delivered for purchase by the Holder and a statement that such Holder is withdrawing his election to have such Security purchased. If at the expiration of the Offer Period the aggregate principal amount of Securities surrendered by Holders exceeds the Offer Amount, the Company shall select the Securities to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Securities in denominations of $1,000, or integral multiples thereof, shall be purchased). Holders whose Securities are purchased 50 only in part shall be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered. (4) At the time the Company delivers Securities to the Trustee which are to be accepted for purchase, the Company shall also deliver an Officers' Certificate stating that such Securities are to be accepted by the Company pursuant to and in accordance with the terms of this Section 4.06. A Security shall be deemed to have been accepted for purchase at the time the Trustee or the Paying Agent mails or delivers payment therefor to the surrendering Holder. (e) The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Securities as described above. To the extent that the provisions of any securities laws or regulations conflict with the provisions relating to the Prepayment Offer, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described above by virtue thereof. SECTION 4.07. Limitation on Transactions with Affiliates. (a) The ------------------------------------------- Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, conduct any business or enter into or suffer to exist any transaction or series of transactions (including the purchase, sale, transfer, assignment, lease, conveyance or exchange of any Property or the rendering of any service) with, or for the benefit of, any Affiliate of the Company (an "Affiliate Transaction"), unless (a) the terms of such Affiliate Transaction are (i) set forth in writing, (ii) in the interest of the Company or such Restricted Subsidiary, as the case may be, and (iii) no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could be obtained in a comparable arm's-length transaction with a Person that is not an Affiliate of the Company, (b) if such Affiliate Transaction involves aggregate payments or value in excess of $2.5 million, the Board of Directors (including a majority of the disinterested members of the Board of Directors, if any) approves such Affiliate Transaction and, in its good faith judgment, believes that such Affiliate Transaction complies with clauses (a) (ii) and (iii) of this paragraph as evidenced by a Board Resolution promptly delivered to the Trustee and (c) if such Affiliate Transaction involves aggregate payments or value in excess of $5.0 million, the 51 Company obtains a written opinion from an Independent Appraiser to the effect that the consideration to be paid or received in connection with such Affiliate Transaction is fair, from a financial point of view, to the Company or such Restricted Subsidiary, as the case may be and a copy of the written opinion is delivered to the Trustee. (b) Notwithstanding the foregoing limitation, the Company or any Restricted Subsidiary may enter into or suffer to exist the following: (i) any transaction or series of transactions between the Company and one or more Restricted Subsidiaries or between two or more Restricted Subsidiaries in the ordinary course of business; provided that no more than -------- 5% of the total voting power of the Voting Stock (on a fully diluted basis) of any such Restricted Subsidiary is owned by an Affiliate of the Company (other than a Restricted Subsidiary); (ii) any Restricted Payment permitted to be made pursuant to Section 4.04; (iii) the payment of compensation (including amounts paid pursuant to employee benefit plans) for the personal services of officers, directors and employees of the Company or any of the Restricted Subsidiaries, so long as the Board of Directors in good faith shall have approved the terms thereof and deemed the services theretofore or thereafter to be performed for such compensation to be fair consideration therefor; (iv) loans and advances to employees made in the ordinary course of business and consistent with the past practices of the Company or such Restricted Subsidiary, as the case may be; provided, that such loans and -------- advances do not exceed $1.0 million in the aggregate at any one time outstanding; (v) the payment of fees and expenses in connection with the Recapitalization pursuant to written agreements in effect on the Issue Date; (vi) the sale of common stock of the Company for cash; provided that -------- the Company may receive Employee Notes in an aggregate principal amount not in excess of $1.0 million at any one time outstanding; 52 (vii) the payment of dividends in kind in respect of (i) the Mirror Preferred Stock or (ii) any other Preferred Stock issued in compliance with this Section; and (viii) a proportionate split of, or a common stock dividend payable on, the common stock of the Company. SECTION 4.08. Limitation on Issuance or Sale of Capital Stock of -------------------------------------------------- Restricted Subsidiaries. The Company shall not (a) sell, pledge, hypothecate or - ------------------------ otherwise dispose of any shares of Capital Stock of a Restricted Subsidiary or (b) permit any Restricted Subsidiary to, directly or indirectly, issue or sell or otherwise dispose of any shares of its Capital Stock, other than (i) directors' qualifying shares, (ii) to the Company or a Wholly Owned Subsidiary or (iii) a disposition of 100% of the shares of Capital Stock of a Restricted Subsidiary that complies with Section 4.06. SECTION 4.09. Repurchase at the Option of Holders Upon a Change of ---------------------------------------------------- Control. (a) Upon the occurrence of a Change of Control, each holder of - -------- Securities shall have the right to require the Company to repurchase all or any part of such holder's Securities pursuant to the offer described below (the "Change of Control Offer") at a purchase price (the "Change of Control Purchase Price") equal to 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the purchase date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). (b) Within 30 days following any Change of Control, the Company shall (a) cause a notice of the Change of Control Offer to be sent at least once to the Dow Jones News Service or similar business news service in the United States and (b) send, by first-class mail, with a copy to the Trustee, to each holder of Securities, at such holder's address appearing in the Security Register, a notice stating: (i) that a Change of Control has occurred and a Change of Control Offer is being made pursuant to this Section and that all Securities timely tendered will be accepted for payment; (ii) the Change of Control Purchase Price and the purchase date, which shall be, subject to any contrary requirements of applicable law, a business day no earlier than 30 days nor later than 60 days from the date such notice is mailed; (iii) the circumstances and relevant facts regarding the Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to the Change of 53 Control); (iv) that any Security (or portion thereof) accepted for payment (and duly paid on the Change of Control Payment Date) pursuant to the Change of Control Offer shall cease to accrue interest on the Change of Control Payment Date; (v) that any Securities (or portions thereof) not properly tendered shall continue to accrue interest; (vi) the procedures that Holders of Securities must follow in order to tender their Securities (or portions thereof) for payment and the procedures that Holders of Securities must follow in order to withdraw an election to tender Securities (or portions thereof) for payment; and (vii) all other instructions and materials necessary to enable Holders to tender Securities pursuant to the Change of Control Offer. (c) Holders electing to have a Security purchased shall be required to surrender the Security, with an appropriate form duly completed, to the Company or its agent at the address specified in the notice at least three Business Days prior to the Change of Control Payment Date. Holders shall be entitled to withdraw their election if the Trustee or the Company receives not later than one Business Day prior to the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security which was delivered for purchase by the Holder and a statement that such Holder is withdrawing his election to have such Security purchased. Holders whose Securities are purchased only in part shall be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered. (d) On or prior to the Change of Control Payment Date, the Company shall irrevocably deposit with the Trustee or with the Paying Agent (or, if the Company or any of its Wholly Owned Subsidiaries is acting as the Paying Agent, segregate and hold in trust) in cash an amount equal to the Change of Control Payment payable to the Holders entitled thereto, to be held for payment in accordance with the provisions of this Section. (e) On the Change of Control Payment Date, the Company shall deliver to the Trustee the Securities or portions thereof which have been properly tendered to and are to be accepted by the Company for payment. The Trustee or the Paying Agent shall, on the Change of Control Payment Date, mail or deliver payment to each tendering Holder of the Change of Control Payment. In the event that the aggregate Change of Control Payment is less than the amount delivered by the Company to the Trustee or the Paying Agent, 54 the Trustee or the Paying Agent, as the case may be, shall deliver the excess to the Company immediately after the Change of Control Payment Date. (f) At the time the Company delivers Securities to the Trustee which are to be accepted for purchase, the Company shall also deliver an Officers' Certificate stating that such Securities are to be accepted by the Company pursuant to and in accordance with the terms of this Section. A Security shall be deemed to have been accepted for purchase at the time the Trustee or the Paying Agent mails or delivers payment therefor to the surrendering Holder. Unless the Company defaults in the payment of the Change of Control Payment, each Security accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest on and after the Change of Control Payment Date. (g) The Company shall comply, to the extent applicable, with the requirements of Rule 14(e) under the Exchange Act and any other securities laws or regulations thereunder in connection with the purchase of Securities pursuant to this Section. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section by virtue thereof. SECTION 4.10. Limitation on Liens. The Company shall not, and shall -------------------- not permit any Restricted Subsidiary to, directly or indirectly, Incur or suffer to exist, any Lien (other than Permitted Liens) upon any of its Property (including Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired, or any interest therein or any income or profits therefrom, unless (i) if such Lien secures Subordinated Debt, the Securities are secured on an equal and ratable basis with such Debt and (ii) if such Lien secures Subordinated Obligations, such Lien shall be subordinated to a Lien securing the Securities in the same Property as that securing such Lien to the same extent as such Subordinated Obligations are subordinated to the Securities. SECTION 4.11. Compliance Certificate. The Company shall deliver to ----------------------- the Trustee within 120 days after the end of each fiscal year of the Company an Officers' Certificate stating that in the course of the performance by the signers of their duties as Officers of the Company they would normally have knowledge of any Default and whether or 55 not the signers know of any Default that occurred during such period. If they do, the certificate shall describe the Default, its status and what action the Company is taking or proposes to take with respect thereto. The Company also shall comply with TIA (S) 314(a)(4). SECTION 4.12. Further Instruments and Acts. Upon request of the ----------------------------- Trustee, the Company shall execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. SECTION 4.13. Designation of Restricted and Unrestricted ------------------------------------------ Subsidiaries. The Board of Directors may designate any Subsidiary of the - ------------- Company which is not designated as a Restricted Subsidiary under the 9 1/8% Indenture to be an Unrestricted Subsidiary if (a) the Subsidiary to be so designated does not own any Capital Stock or Debt of, or own or hold any Lien on any Property of, the Company or any other Restricted Subsidiary, (b) the Subsidiary to be so designated is not obligated under any Debt, Lien or other obligation that, if in default, would result (with the passage of time or notice or otherwise) in a default on any Debt of the Company or of any Restricted Subsidiary and (c) either (i) the Subsidiary to be so designated has total assets of $1,000 or less or (ii) such designation is effective immediately upon such entity becoming a Subsidiary of the Company. Unless so designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company will be classified as a Restricted Subsidiary; provided, however, that such -------- ------- Subsidiary shall not be designated a Restricted Subsidiary and shall be automatically classified as an Unrestricted Subsidiary if either of the requirements set forth in clauses (x) and (y) of the immediately following paragraph will not be satisfied after giving pro forma effect to such classification. Except as provided in the first sentence of this paragraph, no Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary if, immediately after giving pro forma effect to such designation, (x) the Company could Incur at least $1.00 of additional Debt pursuant to clause (a) of the first paragraph of Section 4.03 and (y) no Default or Event of Default shall have occurred and be continuing or would result therefrom. Any such designation or redesignation by the Board of Directors will be evidenced to the Trustee by filing with 56 the Trustee a Board Resolution giving effect to such designation or redesignation and an Officers' Certificate (a) certifying that such designation or redesignation complies with the foregoing provisions and (b) giving the effective date of such designation or redesignation, such filing with the Trustee to occur within 45 days after the end of the fiscal quarter of the Company in which such designation or redesignation is made (or, in the case of a designation or redesignation made during the last fiscal quarter of the Company's fiscal year, within 90 days after the end of such fiscal year). SECTION 4.14. Limitation on Holding's Business. The Company shall use --------------------------------- its best efforts to cause Holding not to, directly or indirectly, engage in any business or activity other than the ownership of Capital Stock of the Company and business activities incidental thereto. ARTICLE 5 Successor Company ----------------- SECTION 5.01. When Company May Merge or Transfer Assets. (a) The ------------------------------------------ Company shall not merge, consolidate or amalgamate with or into any other Person (other than a merger of a Wholly Owned Subsidiary into the Company) or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all its Property in any one transaction or series of transactions unless: (i) the Company shall be the surviving Person (the "Surviving Person") or the Surviving Person (if other than the Company) formed by such merger, consolidation or amalgamation or to which such sale, transfer, assignment, lease, conveyance or disposition is made shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia; (ii) the Surviving Person (if other than the Company) expressly assumes, by supplemental indenture in form satisfactory to the Trustee, executed and delivered to the Trustee by such Surviving Person, the due and punctual payment of the principal of, and premium, if any, and interest on, all the Securities, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be performed by the Company; (iii) in the case of a sale, transfer, assignment, lease, conveyance or other disposition of all or substantially all the Property of the Company, such Property shall have been transferred as an entirety or virtually as an entirety to one Person; (iv) immediately before and after giving effect 57 to such transaction or series of transactions on a pro forma basis (and treating, for purposes of this clause (iv) and clauses (v) and (vi) below, any Debt which becomes, or is anticipated to become, an obligation of the Surviving Person or any Restricted Subsidiary as a result of such transaction or series of transactions as having been Incurred by the Surviving Person or such Restricted Subsidiary at the time of such transaction or series of transactions), no Default or Event of Default shall have occurred and be continuing; (v) immediately after giving effect to such transaction or series of transactions on a pro forma basis, the Company or the Surviving Person, as the case may be, would be able to Incur at least $1.00 of additional Debt under clause (a) of the first paragraph of Section 4.03; provided, however, that this clause (v) shall -------- ------- not apply to a merger between the Company and a Wholly Owned Subsidiary of the Company or Holding incorporated in another state of the United States solely for the purpose of reincorporating the Company as long as the total amount of Debt of the Company and its Restricted Subsidiaries is not increased as a result thereof; and (vi) the Company shall deliver, or cause to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that such transaction and the supplemental indenture, if any, in respect thereto comply with this Section and that all conditions precedent herein provided for relating to such transaction have been satisfied and that the supplemental indenture, if any, has been duly authorized, executed and delivered and is enforceable against the Surviving Person. (b) The Surviving Person shall succeed to, and be substituted for, and may exercise every right and power of the Company under this Indenture, but the predecessor Company in the case of a sale, transfer, assignment, lease, conveyance or other disposition shall not be released from the obligation to pay the principal of, and premium, if any, and interest on, the Securities. ARTICLE 6 Defaults and Remedies --------------------- SECTION 6.01. Events of Default. The following events shall be ------------------ "Events of Default": (1) the Company defaults in any payment of inter est on the Securities when the same becomes due and payable, whether or not such payment shall be 58 prohibited by Article 10, and such default continues for a period of 30 days; (2) the failure to make the payment of any principal of or premium, if any, on any of the Securities when the same become due and payable at its Stated Maturity, upon acceleration, redemption, optional redemption, upon required repurchase or otherwise, whether or not such payment shall be prohibited by Article 10; (3) the Company fails to comply with Article 5; (4) the Company fails to comply with any other covenant or agreement in the Securities or in this Indenture (other than a failure which is the subject of the foregoing clause (1), (2) or (3)), or Holding engages at any time, directly or indirectly, in any business or activity other than ownership of Capital Stock of the Company and business activities incidental thereto, and continuance of such failure, or occurrence, for a period of 30 days after the notice specified below; (5) default by the Company or any Restricted Subsidiary under any Debt of the Company or any Restricted Subsidiary which results in acceleration of the stated maturity of such Debt, or the failure to pay such Debt at final maturity, in an aggregate amount greater than $7.5 million or its foreign currency equivalent at the time; (6) any judgment or judgments for the payment of money in an aggregate amount in excess of $7.5 million (or its foreign currency equivalent at the time) shall be rendered against the Company or any Restricted Subsidiary and shall not be waived, satisfied or discharged for any period of 30 consecutive days during which a stay of enforcement shall not be in effect; (7) the Company or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case; (B) consents to the entry of an order for relief against it in an involuntary case; 59 (C) consents to the appointment of a Custodian of it or for any substantial part of its property; or (D) makes a general assignment for the benefit of its creditors; or takes any comparable action under any foreign laws relating to insolvency; (8) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any Significant Subsidiary in an involuntary case; (B) appoints a Custodian of the Company or any Significant Subsidiary or for any substantial part of its property; (C) orders the winding up or liquidation of the Company or any Significant Subsidiary; or (D) grants any similar relief under any foreign laws; and in each such case the order or decree remains unstayed and in effect for 60 days; or The foregoing shall constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body. The term "Bankruptcy Law" means Title 11, United States Code, or any ------------------ similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. A Default under clause (4) is not an Event of Default until the Trustee or the Holders of at least 25% in aggregate principal amount of the outstanding Securities notify the Company (and in the case of such notice by Holders, the Trustee) in writing of such Default and the Company does not cure such Default within the time specified after receipt of such notice. Such notice must specify the 60 Default, demand that it be remedied and state that such notice is a "Notice of Default." The Company shall deliver to the Trustee, within 30 days after the occurrence thereof, written notice in the form of an Officers' Certificate of any Event of Default and event which with the giving of notice or the lapse of time would become an Event of Default, its status and what action the Company is taking or proposes to take with respect thereto. SECTION 6.02. Acceleration. If an Event of Default (other than an ------------- Event of Default specified in Section 6.01(7) or (8)) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in aggregate principal amount of the Securities then outstanding by notice to the Company and the Trustee, may declare the principal amount of all the Securities then outstanding, plus accrued but unpaid interest to be due and payable. Upon such a declaration, such principal shall be due and payable immediately. If an Event of Default specified in Section 6.01(7) or (8) occurs, the principal of the Securities shall automatically and without any action by the Trustee or any Holder, become immediately due and payable. The Holders of a majority in aggregate principal amount of the outstanding Securities by notice to the Trustee and the Company may rescind and annul any declaration of acceleration if the rescission would not conflict with any judgment or decree, and if all existing Events of Default have been cured or waived except nonpayment of principal, premium or interest that has become due solely because of the acceleration. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 6.03. Other Remedies. If an Event of Default occurs and is --------------- continuing, the Trustee may pursue any available remedy to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. 61 SECTION 6.04. Waiver of Defaults. The Holders of a majority in ------------------- aggregate principal amount of the Securities by notice to the Trustee may waive, on behalf of the Holders of all outstanding Securities, a past or an existing Default and its consequences or compliance with any provision of this Indenture or the Securities except (i) a Default in the payment of the principal of or interest on a Security or (ii) a Default in respect of a provision that under Section 9.02 cannot be amended without the consent of each Securityholder affected. When a Default is waived, it is deemed cured and not to have occurred for every purpose of this Indenture and the Securities, but no such waiver shall extend to any subsequent or other Default or impair any consequent right. SECTION 6.05. Control by Majority. The Holders of a majority in -------------------- aggregate principal amount of the Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee with respect to the Securities. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture or, subject to Section 7.01, that the Trustee determines is unduly prejudicial to the rights of other Securityholders or would involve the Trustee in personal liability; provided, however, that the -------- ------- Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. Prior to taking any action hereunder, the Trustee shall be entitled to reasonable indemnity against all losses and expenses caused by taking or not taking such action. SECTION 6.06. Limitation on Suits. A Securityholder may not pursue -------------------- any remedy with respect to this Indenture or the Securities unless: (1) such Holder shall have previously given to the Trustee written notice of a continuing Event of Default; (2) the Holders of at least 25% in aggregate principal amount of the Securities then outstanding shall have made a written request, and such Holder of or Holders shall have offered reasonable indemnity, to the Trustee to pursue such proceeding as trustee; and (3) the Trustee has failed to institute such proceeding and has not received from the Holders of at least a majority in aggregate principal amount of the Securities outstanding a direction inconsistent with 62 such request, within 60 days after such notice, request and offer. The foregoing limitations on the pursuit of remedies by a Securityholder shall not apply to a suit instituted by a Holder of Securities for the enforcement of payment of the principal of or interest on such Security on or after the applicable due date specified in such Security. A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder. SECTION 6.07. Rights of Holders To Receive Payment. Notwithstanding ------------------------------------- any other provision of this Indenture, the right of any Holder to receive payment of principal of and interest on the Securities held by such Holder, on or after the respective due dates expressed in this Securities, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. Collection Suit by Trustee. If an Event of Default --------------------------- specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount then due and owing (together with interest on any unpaid interest to the extent lawful) and the amounts provided for in Section 7.07. SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file --------------------------------- such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Securityholders allowed in any judicial proceedings relative to the Company, its creditors or its property and, unless prohibited by law or applicable regulations, may vote on behalf of the Holders in any election of a trustee in bankruptcy or other Person performing similar functions, is empowered to participate as a member, voting or otherwise, of any official committee of creditors appointed in such matter, and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and its counsel, and any other amounts due the Trustee under Section 7.07. 63 Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10. Priorities. If the Trustee collects any money or ----------- property pursuant to this Article 6, it shall pay out the money or property in the following order: FIRST: to the Trustee for amounts due under Section 7.07; SECOND: to holders of Senior Debt of the Company to the extent required by Article 10; THIRD: to Securityholders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively; and FOURTH: to the Company. The Trustee may fix a record date and payment date for any payment to Securityholders pursuant to this Section. At least 15 days before such record date, the Company shall mail to each Securityholder and the Trustee a notice that states the record date, the payment date and amount to be paid. SECTION 6.11. Undertaking for Costs. In any suit for the enforcement ---------------------- of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, the Company, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of more than 10% in aggregate principal amount of the Securities. SECTION 6.12. Waiver of Stay or Extension Laws. The Company (to the --------------------------------- extent it may lawfully do so) shall not 64 at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE 7 Trustee ------- SECTION 7.01. Duties of Trustee. (a) If an Event of Default has ------------------ occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent Person would exercise or use under the circumstances in the conduct of such Person's own affairs. (b) Except during the continuance of an Event of Default: (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture, but shall not be obligated to verify the contents thereof. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that: (1) this paragraph does not limit the effect of paragraph (b) of this Section; 65 (2) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (3) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. (f) Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (g) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (h) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section and to the provisions of the TIA. SECTION 7.02. Rights of Trustee. (a) The Trustee may rely on any ------------------ document reasonably believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on the Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any 66 agent (other than an agent who is an employee of the Trustee) appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it reasonably believes to be authorized or within its rights or powers; provided, however, that the Trustee's conduct does not -------- ------- constitute wilful misconduct or negligence. (e) The Trustee may consult with counsel, and the written advice or written opinion of counsel with respect to legal matters relating to this Indenture and the Securities shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with such advice or opinion of such counsel. (f) Unless otherwise specifically provided herein, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. (g) The Company, the Paying Agent, the Registrar, the Trustee and any agent of the Company, the Paying Agent, the Registrar or the Trustee may deem and treat the Person in whose name any Security is registered as the absolute owner of such Security for the purpose of receiving payment of or on account of the principal of and, subject to the provisions of this Indenture, interest on such Security and for all other purposes; and neither the Company, the Paying Agent, the Registrar nor the Trustee nor any agent of the Company, the Paying Agent, the Registrar or the Trustee shall be affected by any notice to the contrary. SECTION 7.03. Individual Rights of Trustee. The Trustee in its ----------------------------- individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent, Registrar or co- registrar may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be --------------------- responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement of the Company in this Indenture or in any document issued in connection with the 67 sale of the Securities or in the Securities other than the Trustee's certificate of authentication. SECTION 7.05. Notice of Defaults. If a Default occurs and is ------------------- continuing and if it is known to the employees of the Trustee with responsibility for the Securities, the Trustee shall mail to each Securityholder notice of the Default within 90 days after it is known to such employees of the Trustee or written notice of it is received by the Trustee. Except in the case of a Default in payment of principal of or interest on any Security, the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Securityholders. SECTION 7.06. Reports by Trustee to Holders. As promptly as ------------------------------ practicable after each May 15 beginning with May 15, 1999, and in any event prior to July 15 in each year, the Trustee shall mail to each Securityholder a brief report dated as of May 15 each year that complies with TIA (S) 313(a), if and to the extent required by said subsection. The Trustee also shall comply with TIA (S) 313(b). A copy of each report at the time of its mailing to Securityholders shall be filed with the SEC and each stock exchange (if any) on which the Securities are listed. The Company agrees to notify promptly the Trustee whenever the Securities become listed on any stock exchange and of any delisting thereof. SECTION 7.07. Compensation and Indemnity. The Company shall pay to --------------------------- the Trustee from time to time reasonable compensation for its services. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred or made by it, including costs of collection, in addition to the compensation for its services. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Trustee's agents, counsel, accountants and experts. The Company shall indemnify the Trustee against any and all loss, liability or expense (including reasonable attorneys' fees, but excluding any franchise taxes imposed on the Trustee and any taxes based on the income of the Trustee) incurred by it in connection with the acceptance and administration of this trust, including the reasonable costs and expenses of enforcing this Indenture against the Company (including Section 7.07) and of defending itself against any claim (including any claim asserted by the Company) and the 68 performance of its duties hereunder. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder, except to the extent such failure shall have materially prejudiced the Company. The Company shall defend the claim and the Trustee shall cooperate in the defense. If the Trustee is advised by counsel in writing that it may have available to it defenses which are in conflict with the defenses available to the Company, then the Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not reimburse any expense or indemnify against any loss, liability or expense incurred by the Trustee or any of its agents, counsel, accountants or experts which is judicially determined to be the result of the Trustee's or any such agent's, counsel's, accountant's or expert's own wilful misconduct, negligence or bad faith. The Company need not pay for any settlement made by the Trustee without the Company's consent, such consent not to be unreasonably withheld or delayed. The Trustee's right to receive payment of any amounts due under this Section 7.07 shall not be subordinated to any other liability or indebtedness of the Company (even though the Securities may be so subordinated). To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee other than money or property held in trust to pay principal of and interest on particular Securities. The Company's payment obligations pursuant to this Section shall survive the discharge of this Indenture. When the Trustee incurs expenses after the occurrence of a Default specified in Section 6.01(7) or (8), the expenses are intended to constitute expenses of administration under the Bankruptcy Law. SECTION 7.08. Replacement of Trustee. The Trustee may resign at any ----------------------- time by so notifying the Company. The Holders of a majority in aggregate principal amount of the Securities may remove the Trustee by so notifying the Trustee and may appoint a successor Trustee. The Company shall remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged bankrupt or insolvent; 69 (3) a receiver or other public officer takes charge of the Trustee or its property; or (4) the Trustee otherwise becomes incapable of acting. If the Trustee resigns, is removed by the Company or by the Holders of a majority in aggregate principal amount of the Securities and such Holders do not reasonably promptly appoint a successor Trustee, or if a vacancy exists in the office of Trustee for any reason (the Trustee in such event being referred to herein as the retiring Trustee), the Company shall promptly appoint a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Securityholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.07. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of 10% in aggregate principal amount of the Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Securityholder who has been a bona fide Holder of a Security for at least six months may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding the replacement of the Trustee pursuant to this Section, the Company's obligations under Section 7.07 shall continue for the benefit of the retiring Trustee. SECTION 7.09. Successor Trustee by Merger. If the Trustee ---------------------------- consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation or banking association without any further act shall be the successor Trustee. 70 In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any such successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have. SECTION 7.10. Eligibility; Disqualification. The Trustee shall at ------------------------------ all times satisfy the requirements of TIA (S) 310(a). The Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA (S) 310(b), subject to the penultimate paragraph thereof; provided, however, -------- ------- that there shall be excluded from the operation of TIA (S) 310(b)(1) any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company are outstanding if the requirements for such exclusion set forth in TIA (S) 310(b)(1) are met. SECTION 7.11. Preferential Collection of Claims Against Company. The -------------------------------------------------- Trustee shall comply with TIA (S) 311(a), excluding any creditor relationship listed in TIA (S) 311(b). A Trustee who has resigned or been removed shall be subject to TIA (S) 311(a) to the extent indicated. ARTICLE 8 Discharge of Indenture; Defeasance ---------------------------------- SECTION 8.01. Discharge of Liability on Securities; Defeasance. (a) ------------------------------------------------- When (i) the Company delivers to the Trustee all outstanding Securities (other than Securities replaced pursuant to Section 2.07) for cancelation or (ii) all outstanding Securities have become due and payable, whether at maturity or as a result of the mailing of a notice of redemption pursuant to Article 3 and the Company irrevocably deposits with the Trustee funds sufficient to pay at maturity or upon redemption all outstanding Securities, including interest thereon to maturity or such redemption date (other than Securities replaced pursuant to 71 Section 2.07), and if in either case the Company pays all other sums payable hereunder by the Company, then this Indenture shall, subject to Sections 8.01(c), cease to be of further effect. The Trustee shall acknowledge satisfaction and discharge of this Indenture on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Company. (b) Subject to Sections 8.01(c) and 8.02, the Company at any time may terminate (i) all its obligations under the Securities and this Indenture ("legal defeasance option") or (ii) its obligations under Sections 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.13 and 4.14 the operation of Sections 6.01(4) (to the extent relating to such other Sections), 6.01(5), 6.01(6), 6.01(7) and 6.01(8) (but, in the case of Sections 6.01(6) and (7), with respect only to Significant Subsidiaries), its obligations under Sections 5.01(a)(iv), 5.01(a)(v) and the related operation of Section 6.01(3) ("covenant defeasance option"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Securities may not be accelerated because of an Event of Default with respect thereto. If the Company exercises its covenant defeasance option, payment of the Securities may not be accelerated because of an Event of Default specified in Sections 6.01(3) and 6.01(4) (with respect to the provisions of Articles 4 and 5 referred to in the immediately preceding paragraph) and Sections 6.01(5), 6.01(6), 6.01(7) and 6.01(8) (but, in the case of Sections 6.01(6) and (7), with respect only to Significant Subsidiaries). Upon satisfaction of the conditions set forth herein and upon request of the Company, the Trustee shall acknowledge in writing the discharge of those obligations that the Company terminates. (c) Notwithstanding clauses (a) and (b) above, the Company's obligations in Sections 2.04, 2.05, 2.06, 2.07, 7.07, 7.08, 8.05 and 8.06 and Appendix A shall survive until the Securities have been paid in full. Thereafter, the Company's obligations in Sections 7.07 and 8.05 shall survive. 72 SECTION 8.02. Conditions to Defeasance. The Company may exercise its ------------------------- legal defeasance option or its covenant defeasance option only if: (1) the Company irrevocably deposits in trust with the Trustee money or U.S. Government Obligations for the payment of principal of and interest on the Securities to maturity or redemption, as the case may be; (2) the Company delivers to the Trustee a certificate from a nationally recognized firm of independent accountants expressing their opinion that the payments of principal and interest when due and without reinvestment on the deposited U.S. Government Obligations plus any deposited money without investment will provide cash at such times and in such amounts as will be sufficient to pay principal and interest when due on all the Securities to maturity or redemption, as the case may be; (3) 123 days pass after the deposit is made and during the 123-day period no Default specified in Section 6.01(6) or (7) with respect to the Company occurs which is continuing at the end of the period; (4) the deposit does not constitute a default under any other material agreement binding on the Company and is not prohibited by Article 10; (5) the Company delivers to the Trustee an Opinion of Counsel to the effect that the trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940; (6) in the case of the legal defeasance option, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (ii) since the date of this Indenture there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Securityholders will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; 73 (7) in the case of the covenant defeasance option, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Securityholders will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and (8) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance and discharge of the Securities as contemplated by this Article 8 have been complied with. Opinions of Counsel required to be delivered to the Trustee may have assumptions customary for opinions of the type required and counsel delivering such Opinions of Counsel may rely on certificates of the Company or government or other officials customary for opinions of the type required, including certificates certifying as to matters of fact, including that various financial covenants have been complied with. Before or after a deposit, the Company may make arrangements satisfactory to the Trustee for the redemption of Securities at a future date in accordance with Article 3. SECTION 8.03. Application of Trust Money. The Trustee shall hold in --------------------------- trust money or U.S. Government Obligations deposited with it pursuant to this Article 8. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal of and interest on the Securities. Money and securities so held in trust are not subject to Article 10. SECTION 8.04. Repayment to Company. The Trustee and the Paying Agent --------------------- shall promptly turn over to the Company upon request any excess money or securities held by them at any time. Subject to any applicable abandoned property law, the Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal or interest that remains unclaimed for two years (or if then held by the Company or a Wholly Owned Subsidiary in trust for the payment thereof), shall be discharged from such trust, and, thereafter, Securityholders entitled to the 74 money must look to the Company for payment as general creditors; provided, -------- however, that the Trustee or such Paying Agent before being required to make - ------- any such repayment, may at the expense of the Company cause to be mailed to each such Holder a notice that said moneys have not been so applied and that after a date named therein any unclaimed balance of said moneys then remaining will be returned to the Company. SECTION 8.05. Indemnity for Government Obligations. The Company ------------------------------------- shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against deposited U.S. Government Obligations or the principal and interest received on such U.S. Government Obligations. SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is -------------- unable to apply any money or U.S. Government Obligations in accordance with this Article 8 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article 8 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article 8; provided, however, that, if the --------- ------- Company has made any payment of interest on or principal of any Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE 9 Amendments ---------- SECTION 9.01. Without Consent of Holders. The Company and the --------------------------- Trustee may amend this Indenture or the Securities without notice to or consent of any Securityholder: (1) to cure any ambiguity, omission, defect or inconsistency; (2) to comply with Article 5; 75 (3) to provide for uncertificated Securities in addition to or in place of certificated Securities (provided that the uncertificated Securities are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Securities are described in Section 163(f)(2)(B) of the Code); (4) to make any change in Article 10 that would limit or terminate the benefits available to any holder of Senior Debt of the Company (or Representatives therefor) under Article 10; (5) to secure the Securities; (6) to add to the covenants of the Company for the benefit of the Holders or to surrender any right or power herein conferred upon the Company; (7) to comply with any requirements of the SEC in connection with qualifying, or maintaining the qualification of, this Indenture under the TIA; or (8) to make any change that does not adversely affect the rights of any Securityholder in any material respect. An amendment under this Section may not make any change that adversely affects the rights under Article 10 of any holder of Senior Debt then outstanding unless the holders of such Senior Debt (or their Representative) consent in writing to such change, it being understood that any amendment the purpose of which is to permit the Incurrence of additional Debt shall not be construed as impairing the rights of the holders of Senior Debt pursuant to such subordination provisions. After an amendment under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment. The failure to give such notice to all Securityholders, or any defect therein, shall not impair or affect the validity of an amendment under this Section. SECTION 9.02. With Consent of Holders. The Company and the Trustee ------------------------ may amend this Indenture or the Securities without notice to any Securityholder but with the written consent of the Holders of at least a majority in aggregate principal amount of the Securities. However, 76 without the consent of each Holder of an outstanding Security affected thereby an amendment or waiver may not: (1) reduce the amount of Securities whose holders must consent to an amendment or waiver, (2) reduce the rate of or extend the time for payment of interest on any Security, (3) reduce the principal of or extend the Stated Maturity of any Security, (4) make any Security payable in money other than that stated in the Security, (5) impair the right of any holder of the Securities to receive payment of principal of and interest on such holder's Securities on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such holder's Securities, (6) release any security interest that may have been granted in favor of the holders of the Securities, (7) reduce the premium payable upon the redemption or repurchase of any Security, or change the time at which any Security may be redeemed, as described under Article 3, (8) reduce the premium payable upon a Change of Control or, at any time after a Change of Control or Asset Sale has occurred, change the time at which the Change of Control Offer or Prepayment Offer relating thereto must be made or at which the Securities must be repurchased pursuant to such Change of Control Offer, or (9) make any change to the subordination provisions of this Indenture that would adversely affect the holders of the Securities. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. An amendment under this Section may not make any change that adversely affects the rights under Article 10 of any holder of Senior Debt then outstanding unless the 77 holders of such Senior Debt (or their Representative) consent in writing to such change, it being understood that any amendment the purpose of which is to permit the Incurrence of additional Debt shall not be construed as impairing the rights of the holders of Senior Debt pursuant to such subordination provisions. After an amendment under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment. The failure to give such notice to all Securityholders, or any defect therein, shall not impair or affect the validity of an amendment under this Section. SECTION 9.03. Compliance with Trust Indenture Act. Every amendment ------------------------------------ to this Indenture or the Securities shall comply with the TIA as then in effect. SECTION 9.04. Revocation and Effect of Consents and Waivers. A ---------------------------------------------- consent to an amendment or a waiver by a Holder of a Security shall bind the Holder and every subsequent Holder of that Security or portion of the Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent or waiver is not made on the Security. However, any such Holder or subsequent Holder may revoke the consent or waiver as to such Holder's Security or portion of the Security if the Trustee receives the notice of revocation before the date the amendment or waiver becomes effective. After an amendment or waiver becomes effective, it shall form a part of this Indenture for all purposes and shall bind every Securityholder. An amendment or waiver becomes effective upon the execution of such amendment or waiver by the Trustee. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Securityholders entitled to give their consent or take any other action described above or required or permitted to be taken pursuant to this Indenture. If a record date is fixed, then notwithstanding the immediately preceding paragraph, those Persons who were Securityholders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to give such consent or to revoke any consent previously given or to take any such action, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 120 days after such record date. SECTION 9.05. Notation on or Exchange of Securities. If an amendment -------------------------------------- changes the terms of a Security, the 78 Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security regarding the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate notation or to issue a new Security shall not affect the validity of such amendment. SECTION 9.06. Trustee To Sign Amendments. The Trustee shall sign any --------------------------- amendment authorized pursuant to this Article 9 if such amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may but need not sign it. In signing such amendment the Trustee shall be entitled to receive indemnity reasonably satisfactory to it and to receive, and (subject to Section 7.01) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that such amendment is authorized or permitted by this Indenture. SECTION 9.07. Payment for Consent. Neither the Company nor any -------------------- Affiliate of the Company shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Securities unless such consideration is offered to be paid to all Holders that so consent, waive or agree to amend in the time frame set forth in solicitation documents relating to such consent, waiver or agreement. ARTICLE 10 Subordination ------------- SECTION 10.01. Agreement To Subordinate. The Company agrees, and ------------------------- each Securityholder by accepting a Security agrees, that the Securities are subordinated obligations of the Company and that the Debt evidenced by the Securities is subordinated in right of payment, to the extent and in the manner provided in this Article 10, to the payment when due of all Senior Debt of the Company and that the subordination is for the benefit of and enforceable by the holders of such Senior Debt. The Securities shall in all respects rank pari ---- passu in right of payment with any future Subordinated Debt of the Company, and - ----- only Senior Debt of the Company shall be senior to the Securities in 79 accordance with the provisions set forth herein. All provisions of this Article 10 shall be subject to Section 10.12. SECTION 10.02. Liquidation, Dissolution, Bankruptcy. Upon any ------------------------------------- payment or distribution of the assets of the Company upon a total or partial liquidation, dissolution or winding up of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property: (1) holders of Senior Debt of the Company shall be entitled to receive payment in full in cash of such Senior Debt before Securityholders shall be entitled to receive any payment of principal of or interest on the Securities, except that Holders of Securities may receive and retain shares of stock and any debt securities that are subordinated to Senior Debt to at least the same extent as the Securities; and (2) until such Senior Debt is paid in full in cash, any distribution to which Securityholders would be entitled but for this Article 10 shall be made to holders of such Senior Debt as their interests may appear. SECTION 10.03. Default on Senior Debt. The Company may not pay the ----------------------- principal of or interest on the Securities or make any deposit pursuant to Section 8.01 and may not repurchase, redeem or otherwise retire any Securities (collectively, "pay the Securities") if (a) any principal, premium or interest in respect of any Senior Debt is not paid within any applicable grace period (including at maturity) or (b) any other default on Senior Debt occurs and the maturity of such Senior Debt is accelerated in accordance with its terms unless, in either case, (i) the default has been cured or waived and any such acceleration has been rescinded or (ii) such Senior Debt has been paid in full in cash; provided, however, that the Company may pay the Securities without -------- ------- regard to the foregoing if the Company and the Trustee receive written notice approving such payment from the Representative of each issue of Designated Senior Debt. During the continuance of any default (other than a default described in clause (a) or (b) of the preceding sentence) with respect to any Designated Senior Debt pursuant to which the maturity thereof may be accelerated immediately without further notice (except notice required to effect the acceleration) or the expiration of any applicable grace period, the Company may not pay the Securities for a period (a "Payment Blockage 80 Period") commencing upon the receipt by the Company and the Trustee of written notice of such default from the Representative of the holders of such Designated Senior Debt specifying an election to effect a Payment Blockage Period (a "Payment Blockage Notice") and ending 179 days thereafter (unless such Payment Blockage Period is earlier terminated (a) by written notice to the Trustee and the Company from the Representative which gave such Payment Blockage Notice, (b) because such default is no longer continuing or (c) because such Designated Senior Debt has been repaid in full in cash). Unless the holders of such Designated Senior Debt or the Representative of such holders have accelerated the maturity of such Designated Senior Debt and not rescinded such acceleration, the Company may (unless otherwise prohibited as described in the first sentence of this paragraph) resume payments on the Securities after the end of such Payment Blockage Period. Not more than one Payment Blockage Notice with respect to all issues of Designated Senior Debt may be given in any consecutive 360-day period, irrespective of the number of defaults with respect to one or more issues of Designated Senior Debt during such period. SECTION 10.04. Acceleration of Payment of Securities. If payment of -------------------------------------- the Securities is accelerated because of an Event of Default, the Company or the Trustee shall promptly notify the holders of the Designated Senior Debt (or their Representatives) of the acceleration. If payment of the Securities is accelerated when any Designated Senior Debt is outstanding, the Company may not pay the Securities until three Business Days after the Representatives of all issues of Designated Senior Debt receive notice of such acceleration and, thereafter, may pay the Securities only if this Indenture otherwise permits payment at that time. SECTION 10.05. When Distribution Must Be Paid Over. If a ------------------------------------ distribution is made to Securityholders that because of this Article 10 should not have been made to them, the Securityholders who receive the distribution shall hold it in trust for holders of Senior Debt of the Company and pay it over to them as their interests may appear. SECTION 10.06. Subrogation. After all Senior Debt of the Company is ------------ paid in full in cash and until the Securities are paid in full, Securityholders shall be subrogated to the rights of holders of such Senior Debt to receive distributions applicable to such Senior Debt. A distribution made under this Article 10 to holders of such Senior Debt which otherwise would have been made to 81 Securityholders is not, as between the Company and Securityholders, a payment by the Company on such Senior Debt. SECTION 10.07. Relative Rights. This Article 10 defines the relative ---------------- rights of Securityholders and holders of Senior Debt of the Company. Nothing in this Indenture shall: (1) impair, as between the Company and Securityholders, the obligation of the Company, which is absolute and unconditional, to pay principal of and interest on the Securities in accordance with their terms; or (2) prevent the Trustee or any Securityholder from exercising its available remedies upon a Default or an Event of Default, subject to the rights of holders of Senior Debt of the Company to receive distributions otherwise payable to Securityholders. SECTION 10.08. Subordination May Not Be Impaired by Company. No --------------------------------------------- right of any holder of Senior Debt of the Company to enforce the subordination of the Debt evidenced by the Securities shall be impaired by any act or failure to act by the Company or by its failure to comply with this Indenture. SECTION 10.09. Rights of Trustee and Paying Agent. Notwithstanding ----------------------------------- Section 10.03, the Trustee or Paying Agent may continue to make payments on the Securities and shall not be charged with knowledge of the existence of facts that would prohibit the making of any such payments unless, not less than two Business Days prior to the date of such payment, a Trust Officer receives notice satisfactory to it that payments may not be made under this Article 10. The Company, the Registrar or co-registrar, the Paying Agent, a Representative or a holder of Senior Debt may give the notice; provided, however, that, if an issue -------- ------- of Senior Debt of the Company has a Representative, only the Representative may give the notice. The Trustee in its individual or any other capacity may hold Senior Debt of the Company with the same rights it would have if it were not Trustee. The Registrar and co-registrar and the Paying Agent may do the same with like rights. The Trustee shall be entitled to all the rights set forth in this Article 10 with respect to any Senior Debt of the Company which may at any time be held by it, to the same extent as any other holder of such Senior 82 Debt; and nothing in Article 7 shall deprive the Trustee of any of its rights as such holder. Nothing in this Article 10 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 7.07. SECTION 10.10. Distribution or Notice to Representative. Whenever a ----------------------------------------- distribution is to be made or a notice given to holders of Senior Debt of the Company, the distribution may be made and the notice given to their Representative (if any). SECTION 10.11. Article 10 Not To Prevent Events of Default or Limit ---------------------------------------------------- Right To Accelerate. The failure to make a payment pursuant to the Securities - -------------------- by reason of any provision in this Article 10 shall not be construed as preventing the occurrence of a Default. Nothing in this Article 10 shall have any effect on the right of the Securityholders or the Trustee to accelerate the maturity of the Securities. SECTION 10.12. Trust Moneys Not Subordinated. Notwithstanding ------------------------------ anything contained herein to the contrary, payments from money or the proceeds of U.S. Government Obligations held in trust under Article 8 by the Trustee for the payment of principal of and interest on the Securities shall not be subordinated to the prior payment of any Senior Debt or subject to the restrictions set forth in this Article 10, and none of the Securityholders shall be obligated to pay over any such amount to the Company or any holder of Senior Debt of the Company or any other creditor of the Company. SECTION 10.13. Trustee Entitled To Rely. Upon any payment or ------------------------- distribution pursuant to this Article 10, the Trustee and the Securityholders shall be entitled to rely (i) upon any order or decree of a court of competent jurisdiction in which any proceedings of the nature referred to in Section 10.02 are pending, (ii) upon a certificate of the liquidating trustee or agent or other Person making such payment or distribution to the Trustee or to the Securityholders or (iii) upon the Representatives for the holders of Senior Debt of the Company for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of such Senior Debt and other Debt of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 10. In the event that the Trustee determines, in good faith, that evidence is required with respect to the right of any Person as a holder of Senior Debt of the Company to participate in any payment 83 or distribution pursuant to this Article 10, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Debt held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and other facts pertinent to the rights of such Person under this Article 10, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. The provisions of Sections 7.01 and 7.02 shall be applicable to all actions or omissions of actions by the Trustee pursuant to this Article 10. SECTION 10.14. Trustee To Effectuate Subordination. Each ------------------------------------ Securityholder by accepting a Security authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination between the Securityholders and the holders of Senior Debt of the Company as provided in this Article 10 and appoints the Trustee as attorney-in-fact for any and all such purposes. SECTION 10.15. Trustee Not Fiduciary for Holders of Senior Debt. The ------------------------------------------------- Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt and shall not be liable to any such holders if it shall mistakenly pay over or distribute to Securityholders or the Company or any other Person, money or assets to which any holders of Senior Debt of the Company shall be entitled by virtue of this Article 10 or otherwise. SECTION 10.16. Reliance by Holders of Senior Debt on Subordination --------------------------------------------------- Provisions. Each Securityholder by accepting a Security acknowledges and agrees - ----------- that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to each holder of any Senior Debt of the Company, whether such Senior Debt was created or acquired before or after the issuance of the Securities, to acquire and continue to hold, or to continue to hold, such Senior Debt and such holder of such Senior Debt shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Debt. 84 ARTICLE 11 Miscellaneous ------------- SECTION 11.01. Trust Indenture Act Controls. If any provision of ----------------------------- this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. If any provision of this Indenture modifies or excludes any provision of the TIA that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. SECTION 11.02. Notices. Any notice or communication shall be in -------- writing and delivered in person or mailed by first-class mail or recognized overnight courier or sent by facsimile (with a hard copy delivered in person or by mail promptly thereafter) and addressed as follows: if to the Company: Hudson Respiratory Care Inc. 27711 Diaz Road Temecula, California 92589 Attention: Jay R. Ogram if to the Trustee: (1) for payment, registration, transfer, exchange and tender of the Securities: By Hand: ------- United States Trust Company of New York 111 Broadway New York, NY 10006 Attention: Corporate Trust Window Lower Level By Mail: ------- United States Trust Company of New York 770 Broadway, 13th Floor New York, NY 10003 Attention: Corporate Trust Services Telephone No.: (800)548-6565 85 (2) for all other communications relating to the Securities: United States Trust Company of New York Attention: Corporate Trust Administration - Hudson RCI 114 West 47th Street, 25th Floor New York, NY 10036 Telephone No.: (212) 852-1663 Telecopy No.: (212) 852-1626 The Company, on the one hand, or the Trustee, on the other hand, by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Securityholder shall be mailed to the Securityholder at the Securityholder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. All such notices and communications shall be deemed to have been duly received: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail with first-class postage prepaid, if mailed; when receipt acknowledged, if sent by facsimile; and the next Business Day after timely delivery to the courier, if sent by recognized overnight courier guaranteeing next-day delivery. Notices to the Trustee will be deemed effective only upon actual receipt. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. Notices to the Trustee shall be effective only upon receipt. SECTION 11.03. Communication by Holders with Other Holders. -------------------------------------------- Securityholders may communicate pursuant to TIA (S) 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA (S) 312(c). SECTION 11.04. Certificate and Opinion as to Conditions Precedent. --------------------------------------------------- Upon any request or application by 86 the Company to the Trustee to take or refrain from taking any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 11.05. Statements Required in Certificate or Opinion. Each ---------------------------------------------- certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture shall include: (1) a statement that the individual making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such individual, such covenant or condition has been complied with. Any certificate or opinion of an Officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such Officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous, and provided that any such certificate or opinion names the Trustee as an addressee and is furnished to the Trustee at the time of delivery of such certificate or opinion. Any such certificate or Opinion of Counsel may 87 be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Opinions of Counsel required to be delivered to the Trustee may have qualifications customary for opinions of the type required and counsel delivering such Opinions of Counsel may rely on certificates of the Company or government or other officials customary for opinions of the type required, including certificates certifying as to matters of fact, including that various financial covenants have been complied with. SECTION 11.06. When Securities Disregarded; Acts of Holder. In -------------------------------------------- determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which the Trustee knows are so owned shall be so disregarded. Also, subject to the foregoing, only Securities outstanding at the time shall be considered in any such determination. SECTION 11.07. Rules by Trustee, Paying Agent and Registrar. The --------------------------------------------- Trustee may make reasonable rules for action by or a meeting of Securityholders. The Registrar, the Paying Agent and any co-registrar may make reasonable rules for their functions. SECTION 11.08. Legal Holidays. A "Legal Holiday" is a Saturday, a --------------- Sunday or a day on which banking institutions are not required to be open in New York City and Los Angeles. If a payment date is a Legal Holiday, payment shall be made on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. If a regular record date is a Legal Holiday, the record date shall not be affected. SECTION 11.09. Governing Law. THIS INDENTURE AND THE SECURITIES -------------- SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW. 88 SECTION 11.10. No Recourse Against Others. A director, officer, --------------------------- employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Securities. SECTION 11.11. Successors. All agreements of the Company in this ----------- Indenture and the Securities shall bind their successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 11.12. Multiple Originals. The parties may sign any number ------------------- of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. SECTION 11.13. Table of Contents; Headings. The table of contents, ---------------------------- cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. SECTION 11.14. Separability Clause. In case any provision of this -------------------- Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 11.15. Benefits of Indenture. Nothing in this Indenture or ---------------------- in the Securities, express or implied, shall give to any Person, other than the parties hereto, the holders of Senior Debt (subject to Article 10 hereof) and 89 the Holders of the Securities and their successors, any benefit or any legal or equitable right, remedy or claim under this Indenture or the Securities. IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. HUDSON RESPIRATORY CARE INC., by /s/ Richard W. Johansen _____________________________ Name: Richard W. Johansen Title: President and Chief Executive Officer by /s/ Jay R. Ogram _____________________________ Name: Jay R. Ogram Title: Chief Financial Officer UNITED STATES TRUST COMPANY OF NEW YORK by /s/ James E. Logan _____________________________ Name: James E. Logan Title: Vice President EX-4.3 8 REGISTRATION AGREEMENT DATED 4-7-98 EXHIBIT 4.3 EXECUTION COPY HUDSON RESPIRATORY CARE INC. $115,000,000 9 1/8% Senior Subordinated Notes due 2008 RIVER HOLDING CORP. 300,000 Shares of 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010 REGISTRATION AGREEMENT New York, New York April 7, 1998 Salomon Smith Barney Salomon Brothers Inc BT Alex. Brown Incorporated c/o Salomon Brothers Inc 388 Greenwich Street New York, New York 10013 Ladies and Gentlemen: Hudson Respiratory Care Inc., a California corporation (the "Company") proposes to issue and sell to the several initial purchasers named in Schedule A hereto (the "Purchasers"), upon the terms set forth in a purchase agreement dated the date hereof (the "Purchase Agreement"), $115,000,000 aggregate principal amount of the Company's 9 1/8% Senior Subordinated Notes due 2008 (the "Notes"). In addition, River Holding Corp. ("Holding") proposes to issue and sell to the Purchasers, upon the terms set forth in the Purchase Agreement, 300,000 shares of Holding's 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010, $.01 par value per share (the "Holding Preferred Stock"). The Holding Preferred Stock is exchangeable at Holding's option, subject to certain conditions, in whole but not in part, for either (a) the Company's 11 1/2% Subordinated Exchange Debentures due 2010 (the "Company Exchange Debentures") or (b) the Company's 11 1/2% Senior Exchangeable PIK Preferred Stock due 2010 (the "Company Preferred Stock" and, together with the Notes, the Holding Preferred Stock and the Company Exchange Debentures, the "Securities"). As an inducement to the Purchasers to enter into the Purchase Agreement and in satisfaction of a condition to your obligations thereunder, the Company and Holding jointly and severally agree with you, (i) for your benefit and (ii) for the benefit of the 2 holders from time to time of the Securities (including the Purchasers) (each of the foregoing a "Holder" and together the "Holders"), as follows: 1. Definitions. Capitalized terms used herein without definition ------------ shall have their respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Act" means the Securities Act of 1933, as amended, and the rules and --- regulations of the Commission promulgated thereunder. "Affiliate" of any specified person means any other person which, --------- directly or indirectly, is in control of, is controlled by, or is under common control with, such specified person. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Commission" means the Securities and Exchange Commission. ---------- "Exchange Act" means the Securities Exchange Act of 1934, as amended, ------------ and the rules and regulations of the Commission promulgated thereunder. "Exchange Indenture" means the indenture governing the Company ------------------ Exchange Debentures. "Exchange Offer Registration Period" means the 180-day period ---------------------------------- following the consummation of the Registered Exchange Offer, exclusive of any period during which any stop order shall be in effect suspending the effectiveness of the Exchange Offer Registration Statement. "Exchange Offer Registration Statement" means one or more registration ------------------------------------- statements of the Company and Holding on an appropriate form under the Act with respect to the Registered Exchange Offer, all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchanging Dealer" means any Holder (which may include the ----------------- Purchasers) which is a broker-dealer electing to 3 exchange Securities acquired for its own account as a result of market-making activities or other trading activities for New Securities. "Holder" has the meaning set forth in the preamble hereto. ------ "Indenture" means the Indenture relating to the Notes and the New --------- Notes dated as of April 7, 1998, between Holding, the Company and United States Trust Company of New York, as trustee, as the same may be amended from time to time in accordance with the terms thereof. "Initial Placement" means the issuance and sale of the Notes and the ----------------- Holding Preferred Stock. "Majority Holders" means the Holders of a majority of the aggregate ---------------- principal amount or liquidation preference, as applicable, of any securities registered under a Registration Statement. "Managing Underwriters" means the investment banker or investment --------------------- bankers and manager or managers that shall administer an underwritten offering. "New Company Preferred Stock" means preferred stock of the Company --------------------------- identical in all material respects to the Company Preferred Stock (except that the dividend rate step-up provisions and the transfer restrictions will be modified or eliminated, as appropriate), to be issued pursuant to the Certificate of Designation for the Company Preferred Stock. "New Company Exchange Debentures" means exchange debentures of the ------------------------------- Company identical in all material respects to the Company Exchange Debentures (except that the interest rate step-up provisions and the transfer restrictions will be modified or eliminated, as appropriate), to be issued pursuant to the Exchange Indenture. "New Holding Preferred Stock" means preferred stock of Holding --------------------------- identical in all material respects to the Holding Preferred Stock (except that the dividend rate step-up provisions and the transfer restrictions will be modified or eliminated, as appropriate), to be issued pursuant to the Certificate of Designation for the Holding Preferred Stock. "New Notes" means notes of the Company identical in all material --------- respects to the Notes (except that the interest rate step-up provisions and the transfer 4 restrictions will be modified or eliminated, as appropriate), to be issued pursuant to the Indenture. "New Securities" means collectively, the New Notes, New Holding -------------- Preferred Stock and, if applicable, New Company Exchange Debentures and New Company Preferred Stock "Prospectus" means the prospectus included in any Registration ---------- Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A under the Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Securities or the New Securities, covered by such Registration Statement, and all amendments and supplements to the Prospectus, including post-effective amendments. "Registered Exchange Offer" means the proposed offer or offers to the ------------------------- Holders to issue and deliver to such Holders, in exchange for the Notes or the Holding Preferred Stock (or, if the Holding Preferred Stock has been exchanged therefor, Company Exchange Debentures or Company Preferred Stock), as applicable, a like principal amount or liquidation preference, as applicable, of applicable New Securities. "Registration Securities" has the meaning set forth in Section 3(a) ----------------------- hereof. "Registration Statement" means any Exchange Offer Registration ---------------------- Statement or Shelf Registration Statement that covers any of the Securities or the New Securities pursuant to the provisions of this Agreement, all amendments and supplements to such registration statement, including, without limitation, post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Securities" has the meaning set forth in the preamble hereto. ---------- "Shelf Registration" means a registration effected pursuant to Section ------------------ 3 hereof. "Shelf Registration Period" has the meaning set forth in Section 3(b) ------------------------- hereof. "Shelf Registration Statement" means a "shelf" registration statement ---------------------------- of the Company and Holding pursuant to the provisions of Section 3 or Section 5 hereof which 5 covers some of or all the Securities or New Securities, as applicable, on an appropriate form under Rule 415 under the Act, or any similar rule that may be adopted by the Commission, all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Transfer Agent" means Holding's transfer agent for the Holding -------------- Preferred Stock and the New Holding Preferred Stock or, if the Holding Preferred Stock has been exchanged therefor, the Company Preferred Stock and New Company Preferred Stock. "Trustee" means the trustee with respect to the Notes and the New ------- Notes under the Indenture or, if the Holding Preferred Stock has been exchanged therefor, the Company Exchange Debentures and New Company Exchange Debentures. "underwriter" means any underwriter of securities in connection with ----------- an offering thereof under a Shelf Registration Statement. 2. Registered Exchange Offer; Resales of New Securities by Exchanging ------------------------------------------------------------------ Dealers; Private Exchange. (a) The Company and Holding shall prepare and, not - -------------------------- later than 60 days after the date of the original issuance of the Notes and the Holding Preferred Stock, shall file with the Commission the Exchange Offer Registration Statement with respect to the Registered Exchange Offer. The Company and Holding shall use their best efforts to cause the Exchange Offer Registration Statement to become effective under the Act within 150 days after the date of the original issuance of the Notes and the Holding Preferred Stock. (b) Upon the effectiveness of the Exchange Offer Registration Statement, the Company and Holding shall promptly commence the Registered Exchange Offer, it being the objective of such Registered Exchange Offer to enable each Holder electing to exchange Securities for New Securities (assuming that such Holder is not an affiliate of the Company or Holding within the meaning of the Act, acquires the New Securities in the ordinary course of such Holder's business and has no arrangements with any person to participate in the distribution of the New Securities and is not prohibited by any law or policy of the Commission from participating in the Registered Exchange Offer) to trade such New Securities from and after their receipt without any limitations or restrictions under the Act and without 6 material restrictions under the securities laws of the several states of the United States. (c) In connection with the Registered Exchange Offer, the Company and Holding shall: (i) mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (ii) keep the Registered Exchange Offer open for not less than 30 days after the date notice thereof is mailed to the Holders (or longer if required by applicable law); (iii) utilize the services of a depositary for the Registered Exchange Offer with an address in the Borough of Manhattan, The City of New York; (iv) permit Holders to withdraw tendered Securities at any time prior to the close of business, New York time, on the last business day on which the Registered Exchange Offer shall remain open; and (v) comply in all respects with all applicable laws. (d) As soon as practicable after the close of the Registered Exchange Offer, the Company and Holding shall: (i) accept for exchange all Securities tendered and not validly withdrawn pursuant to the Registered Exchange Offer; (ii) deliver to the Trustee or the Transfer Agent, as the case may be, for cancelation all Securities so accepted for exchange; and (iii) cause the Trustee or the Transfer Agent, as the case may be, promptly to authenticate and deliver to each Holder of Securities, New Securities equal in principal amount or liquidation preference to the Securities of such Holder so accepted for exchange. (e) The Purchasers, the Company and Holding acknowledge that, pursuant to current interpretations by the Commission's staff of Section 5 of the Act, and in the absence of an applicable exemption therefrom, each Exchanging Dealer is required to deliver a Prospectus in connection with a sale of any New Securities received by 7 such Exchanging Dealer pursuant to the Registered Exchange Offer in exchange for Securities acquired for its own account as a result of market-making activities or other trading activities. Accordingly, the Company and Holding shall: (i) include the information set forth in Annex A hereto on the cover of the Exchange Offer Registration Statement, in Annex B hereto in the forepart of the Exchange Offer Registration Statement in a section setting forth details of the Exchange Offer, in Annex C hereto in the underwriting or plan of distribution section of the Prospectus forming a part of the Exchange Offer Registration Statement, and in Annex D hereto in the Letter of Transmittal delivered pursuant to the Registered Exchange Offer; and (ii) use their best efforts to keep the Exchange Offer Registration Statement continuously effective under the Act during the Exchange Offer Registration Period for delivery by Exchanging Dealers in connection with sales of New Securities received pursuant to the Registered Exchange Offer, as contemplated by Section 4(h) below. (f) In the event that any Purchaser determines that it is not eligible to participate in the Registered Exchange Offer with respect to the exchange of Securities constituting any portion of an unsold allotment, at the request of such Purchaser, the Company and Holding shall issue and deliver to such Purchaser, in exchange for such Securities, a like principal amount or liquidation preference of New Securities (which shall be subject to restrictions on transfer under the Act and the securities laws of the several states of the United States). The Company and Holding shall seek to cause the CUSIP Service Bureau to issue the same CUSIP numbers for such New Securities as for New Securities issued pursuant to the Registered Exchange Offer. The Company shall cause such principal amount or liquidation preference of New Securities (which shall not be subject to such restrictions on transfer) to be delivered to a party purchasing such New Securities from such Purchaser registered under a Shelf Registration Statement as contemplated by Section 3 hereof. 3. Shelf Registration. If, (i) because of any change in law or ------------------- applicable interpretations thereof by the Commission's staff, the Company and Holding are not permitted to effect the Registered Exchange Offer as contemplated by Section 2 hereof, (ii) for any other reason the Exchange Offer Registration Statement is not declared 8 effective within 150 days after the Closing Date or the Registered Exchange Offer is not consummated within 180 days after the Closing Date, (iii) any Purchaser so requests with respect to Securities (or any New Securities received pursuant to Section 2(f)) not eligible to be exchanged for New Securities in a Registered Exchange Offer or, in the case of any Purchaser that participates in any Registered Exchange Offer, such Purchaser does not receive freely tradable New Securities, (iv) any Holder (other than a Purchaser) is not eligible to participate in the Registered Exchange Offer or (v) in the case of any such Holder that participates in the Registered Exchange Offer, such Holder does not receive freely tradable New Securities in exchange for tendered securities, other than by reason of such Holder being an affiliate of the Company or Holding within the meaning of the Act (it being understood that, for purposes of this Section 3, (x) the requirement that a Purchaser deliver a Prospectus containing the information required by Items 507 and/or 508 of Regulation S-K under the Act in connection with sales of New Securities acquired in exchange for such Securities shall result in such New Securities being not "freely tradeable" and (y) the requirement that an Exchanging Dealer deliver a Prospectus in connection with sales of New Securities acquired in the Registered Exchange Offer in exchange for Securities acquired as a result of market-making activities or other trading activities shall not result in such New Securities being not "freely tradeable"), the following provisions shall apply: (a) The Company and Holding shall as promptly as practicable (but in no event more than 30 days after so required or requested pursuant to this Section 3), file with the Commission and thereafter shall use their best efforts to cause to be declared effective under the Act a Shelf Registration Statement relating to the offer and sale of the Securities or the New Securities, as applicable, by the Holders from time to time in accordance with the methods of distribution elected by such Holders and set forth in such Shelf Registration Statement (such Securities or New Securities, as applicable, to be sold by such Holders under such Shelf Registration Statement being referred to herein as "Registration Securities"); provided, however, that, with respect to New -------- ------- Securities received by a Purchaser in exchange for Securities constituting any portion of an unsold allotment, the Company and Holding may, if permitted by current interpretations by the Commission's staff, file a post-effective amendment to the Exchange Offer Registration Statement containing the information required by Regulation S-K Items 507 and/or 508, as applicable, in satisfaction of its obligations under this paragraph (a) with respect thereto, and any such Exchange Offer Registration Statement, 9 as so amended, shall be referred to herein as, and governed by the provisions herein applicable to, a Shelf Registration Statement. (b) The Company and Holding shall use their best efforts to keep the Shelf Registration Statement continuously effective in order to permit the Prospectus forming part thereof to be usable by Holders for a period of two years after the later of (x) the date of the original issuance of the Notes and the Holding Preferred Stock (or until one year after such date if such Shelf Registration Statement is filed at the request of a Purchaser) and (y) the last date on which any Affiliate of Holding or the Company, as applicable, was a beneficial owner of the Securities or such shorter period that will terminate when all the Securities or New Securities, as applicable, covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement (in any such case, such period being called the "Shelf Registration Period"). The Company and Holding shall be deemed not to have used their best efforts to keep the Shelf Registration Statement effective during the Shelf Registration Period if either of them voluntarily takes any action that would result in Holders of securities covered thereby not being able to offer and sell such securities during that period, unless (i) such action is required by applicable law or (ii) such action is taken by the Company or Holding in good faith and for valid business reasons (not including avoidance of the Company's or Holding's obligations hereunder), including the acquisition or divestiture of assets, so long as the Company or Holding promptly thereafter complies with the requirements of Section 4(k) hereof, if applicable. 4. Registration Procedures. In connection with any Shelf ------------------------ Registration Statement and, to the extent applicable, any Exchange Offer Registration Statement, the following provisions shall apply: (a) The Company and Holding shall furnish to the Purchasers, prior to the filing thereof with the Commission, a copy of any Shelf Registration Statement and any Exchange Offer Registration Statement, each amendment thereof and each amendment or supplement, if any, to the Prospectus included therein and shall use their best efforts to reflect in each such document, when so filed with the Commission, such comments as the Purchasers or any Holder reasonably may propose. (b) The Company and Holding shall ensure that (i) any Registration Statement and any amendment thereto and any Prospectus forming part thereof and any 10 amendment or supplement thereto complies in all material respects with the Act and the rules and regulations thereunder, (ii) any Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Registration Statement, and any amendment or supplement to such Prospectus, does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (c) (1) The Company and Holding shall advise the Purchasers and, in the case of a Shelf Registration Statement, the Holders of securities covered thereby, and, if requested by you or any such Holder, confirm such advice in writing: (i) when a Registration Statement and any amendment thereto has been filed with the Commission and when the Registration Statement or any post-effective amendment thereto has become effective; and (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus included therein or for additional information. (2) The Company and Holding shall advise the Purchasers and, in the case of a Shelf Registration Statement, the Holders of securities covered thereby, and, in the case of an Exchange Offer Registration Statement, any Exchanging Dealer which has provided in writing to the Company and Holding a telephone or facsimile number and address for notices, and, if requested by the Purchasers or any such Holder or Exchanging Dealer, confirm such advice in writing: (i) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (ii) of the receipt by the Company or Holding of any notification with respect to the suspension of the qualification of the securities included therein for sale in any jurisdiction or the 11 initiation or threatening of any proceeding for such purpose; and (iii) of the happening of any event that requires the making of any changes in the Registration Statement or the Prospectus so that, as of such date, the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in the light of the circumstances under which they were made) not misleading (which advice shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made). (d) The Company and Holding shall use their best efforts to obtain the withdrawal of any order suspending the effectiveness of any Registration Statement at the earliest possible time. (e) The Company and Holding shall furnish to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, any documents incorporated by reference therein and all exhibits thereto (including those incorporated by reference therein). (f) The Company and Holding shall, during the Shelf Registration Period, deliver to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, as many copies of the Prospectus (including each preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company and Holding consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of securities in connection with the offering and sale of the securities covered by the Prospectus or any amendment or supplement thereto. (g) The Company and Holding shall furnish to each Exchanging Dealer which so requests, without charge, at least one copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules and, if the Exchanging Dealer so requests in writing, any 12 documents incorporated by reference therein and all exhibits thereto (including those incorporated by reference therein). (h) The Company and Holding shall, during the Exchange Offer Registration Period, promptly deliver to each Exchanging Dealer, without charge, as many copies of the Prospectus included in such Exchange Offer Registration Statement and any amendment or supplement thereto as such Exchanging Dealer may reasonably request for delivery by such Exchanging Dealer in connection with a sale of New Securities received by it pursuant to the Registered Exchange Offer; and the Company and Holding consent to the use of the Prospectus or any amendment or supplement thereto by any such Exchanging Dealer, as aforesaid. (i) Prior to the Registered Exchange Offer or any other offering of securities pursuant to any Registration Statement, the Company and Holding shall register or qualify or cooperate with the Holders of securities included therein and their respective counsel in connection with the registration or qualification of such securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holder reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the securities covered by such Registration Statement; provided, -------- however, that the Company and Holding will not be required to qualify ------- generally to do business in any jurisdiction where they are not then so qualified or to take any action which would subject them to general service of process or to taxation in any such jurisdiction where they are not then so subject. (j) The Company and Holding shall cooperate with the Holders of Securities to facilitate the timely preparation and delivery of certificates representing securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as Holders may request prior to sales of securities pursuant to such Registration Statement. (k) Upon the occurrence of any event contemplated by paragraph (c)(2)(iii) above, the Company and Holding shall promptly prepare a post- effective amendment to any Registration Statement or an amendment or supplement to the related Prospectus or file any other 13 required document so that, as thereafter delivered to purchasers of the securities included therein, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (l) Not later than the effective date of any such Registration Statement hereunder, the Company and Holding shall provide CUSIP numbers for the Securities or New Securities, as the case may be, registered under such Registration Statement, and provide the Transfer Agent or the Trustee (or the transfer agent for the Company Preferred Stock or the trustee under the Exchange Indenture), as applicable, with printed certificates for such Securities or New Securities, in a form, if requested by the applicable Holder or Holder's Counsel, eligible for deposit with The Depository Trust Company or any successor thereto under the Certificate of Designation for the Holding Preferred Stock or the Indenture (or the certificate of designation for the Company Preferred Stock or the Exchange Indenture), as applicable. (m) The Company and Holding shall use their best efforts to comply with all applicable rules and regulations of the Commission to the extent and so long as they are applicable to the Registered Exchange Offer or the Shelf Registration and will make generally available to their security holders a consolidated earnings statement (which need not be audited) covering a twelve-month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which consolidated earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. (n) The Company and Holding shall cause the Indenture and the Exchange Indenture, as applicable, to be qualified under the Trust Indenture Act of 1939, as amended, on or prior to the effective date of any Shelf Registration Statement or Exchange Offer Registration Statement. (o) The Company and Holding may require each Holder of securities to be sold pursuant to any Shelf Registration Statement to furnish to the Company and Holding such information regarding the Holder and the distribution of such securities as the Company and 14 Holding may from time to time reasonably require for inclusion in such Registration Statement. (p) The Company and Holding shall, if requested, promptly incorporate in a Prospectus supplement or post-effective amendment to a Shelf Registration Statement, such information as the Managing Underwriters and Majority Holders reasonably agree should be included therein and shall make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment. (q) In the case of any Shelf Registration Statement, the Company and Holding shall enter into such agreements (including underwriting agreements) and take all other appropriate actions in order to expedite or facilitate the registration or the disposition of the Securities, and in connection therewith, if an underwriting agreement is entered into, cause the same to contain indemnification provisions and procedures no less favorable than those set forth in Section 7 hereof (or such other provisions and procedures acceptable to the Majority Holders and the Managing Underwriters, if any), with respect to all parties to be indemnified pursuant to Section 7 hereof from Holders of Securities to the Company and Holding. (r) In the case of any Shelf Registration Statement, the Company and Holding shall (i) make reasonably available for inspection by the Holders of securities to be registered thereunder, any underwriter participating in any disposition pursuant to such Registration Statement, and any attorney, accountant or other agent retained by the Holders or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company, Holding and their subsidiaries; (ii) cause the Company's and Holding's officers, directors and employees to supply all relevant information reasonably requested by the Holders or any such underwriter, attorney, accountant or agent in connection with any such Registration Statement as is customary for similar due diligence examinations; provided, however, that any information that is designated in -------- ------- writing by the Company and Holding, in good faith, as confidential at the time of delivery of such information shall be kept confidential by the Holders or any such underwriter, attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or 15 required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality; (iii) make such representations and warranties to the Holders of securities registered thereunder and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings; (iv) obtain opinions of counsel to the Company and Holding (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Managing Underwriters, if any) addressed to each selling Holder and the underwriters, if any, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Holders and underwriters; (v) obtain "cold comfort" letters (or, in the case of any person that does not satisfy the conditions for receipt of a "cold comfort" letter specified in Statement on Auditing Standards No. 72, an "agreed-upon procedures" letter) and updates thereof from the independent certified public accountants of the Company and Holding (and, if necessary, any other independent certified public accountants of any subsidiary of the Company and Holding or of any business acquired by the Company and Holding for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each selling Holder of securities registered thereunder and the underwriters, if any, in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with primary underwritten offerings; and (vi) deliver such documents and certificates as may be reasonably requested by the Majority Holders and the Managing Underwriters, if any, including those to evidence compliance with Section 4(k) and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company and Holding. The foregoing actions set forth in clauses (iii), (iv), (v) and (vi) of this Section 4(r) shall be performed (A) on the effective date of such Registration Statement and each post-effective amendment thereto and (B) at each closing under any underwriting or similar agreement as and to the extent required thereunder. (s) In the case of any Exchange Offer Registration Statement, the Company and Holding shall, if requested of a Purchaser by an Exchanging Dealer, (i) obtain opinions of counsel to the Company and Holding (which counsel and opinions (in form, scope and 16 substance) shall be reasonably satisfactory to such Purchaser and its counsel), addressed to such Purchaser, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Purchaser or its counsel and (ii) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company and Holding (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or Holding or of any business acquired by the Company and Holding for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to such Purchaser, in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with primary underwritten offerings, or if requested by such Purchaser or its counsel in lieu of a "cold comfort" letter, an agreed-upon procedures letter under Statement on Auditing Standards No. 35, covering matters requested by such Purchaser or its counsel. The foregoing actions, if requested as set forth above, shall be performed (A) at the close of the Registered Exchange Offer and (B) on the effective date of any post-effective amendment to the Exchange Offer Registration Statement. 5. Additional Exchange Offer. In the event that for any reason the -------------------------- shares of Company Preferred Stock or Company Exchange Debentures received by Holders in exchange for Holding Preferred Stock or Company Preferred Stock following the filing of the Exchange Offer Registration Statement or Shelf Registration Statement are not freely tradeable, the Company will (i) prepare and, not later than 30 days following such exchange, file a registration statement with the Commission with respect to a registered offer to exchange such Company Preferred Stock or Company Exchange Debentures, as the case may be, for New Company Preferred Stock or New Company Exchange Debentures and (ii) use its best efforts to cause such registration statement to become effective under the Act as soon as practicable, but in any event within 90 days after the date of such filing. Upon the effectiveness of such registration statement, the Company shall promptly commence such exchange offer on the terms set forth in Section 2. If, (i) because of any change in law or applicable interpretations thereof by the Commission's staff, the Company is not permitted to effect such registered exchange offer as contemplated by this Section 5, (ii) for any other reason such exchange offer registration statement is not declared effective within 120 days after such exchange or such registered 17 exchange offer is not consummated within 150 days after such exchange, (iii) any Purchaser so requests with respect to Company Preferred Stock or Company Exchange Debentures not eligible to be exchanged for New Company Preferred Stock or New Company Exchanged Debentures in such Registered Exchange Offer or, in the case of any Purchaser that participates in such registered exchange offer, such Purchaser does not receive freely tradable New Securities, (iv) any Holder (other than a Purchaser) is not eligible to participate in such registered exchange offer or (v) in the case of any such Holder that participates in such registered exchange offer, such Holder does not receive freely tradable New Securities in exchange for tendered securities, other than by reason of such Holder being an Affiliate of the Company within the meaning of the Act, the Company shall as promptly as practicable (but in no event more than 30 days after so required or requested pursuant to this Section 5) file with the Commission and thereafter shall use its best efforts to cause to be declared effective under the Act a Shelf Registration Statement relating to the offer and sale of the Company Preferred Stock or Company Exchange Debentures, in accordance with the provisions of Section 3. The Company shall use its best efforts to keep such Shelf Registration Statement continuously effective in order to permit the Prospectus forming part thereof to be usable by Holders for a period of two years after the later of (x) the date of the original issuance of the Company Preferred Stock or Company Exchange Debentures, as applicable (or until one year after such date if such Shelf Registration Statement is filed at the request of a Purchaser and (y) the last date on which any Affiliate of the Company was a beneficial owner of such Securities or such shorter period that will terminate when all Securities covered thereby have been sold thereunder. The Company shall be deemed not to have used its best efforts to keep such Shelf Registration Statement effective during such period if it voluntarily takes any action that would result in Holders of Securities covered thereby not being able to offer and sell such Securities during that period, unless (i) such action is required by applicable law or (ii) such action is taken by the Company in good faith and for valid business reasons (not including avoidance of the Company's obligations hereunder), including the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of Section 4(k) hereof, if applicable. 6. Registration Expenses. The Company and Holding shall bear all ---------------------- expenses incurred in connection with the performance of their obligations under Sections 2, 3, 4 and 5 hereof and, (a) in the event of any Shelf Registration Statement, will reimburse the Holders for the reasonable 18 fees and disbursements of one firm or counsel (in addition to one local counsel in each relevant jurisdiction) designated by the Majority Holders to act as counsel for the Holders in connection therewith ("Holders' Counsel"), and (b) in the case of any Exchange Offer Registration Statement, will reimburse the Purchasers for the reasonable fees and disbursements of counsel acting in connection therewith; provided, that the Company and Holding shall not be -------- obligated to reimburse the Purchasers in excess of $10,000 in the aggregate pursuant to this clause (b). 7. Indemnification and Contribution. (a) In connection with any --------------------------------- Registration Statement, the Company and Holding agree, jointly and severally, to indemnify and hold harmless each Holder of securities covered thereby (including each Purchaser and, with respect to any Prospectus delivery as contemplated in Section 4(h) hereof, each Exchanging Dealer), the directors, officers, employees and agents of each such Holder and each other person, if any, who controls any such Holder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement as originally filed or in any amendment thereof, or in any preliminary Prospectus or Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company and Holding will not be -------- ------- liable in any case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company and Holding by or on behalf of any such Holder specifically for inclusion therein; provided -------- further, however, that the indemnity agreement contained in this Section 7(a) - ------- ------- shall not inure to the benefit of any indemnified party to the extent that it is determined by a final, non-appealable judgment that (i) any Registration Statement or Prospectus, or any 19 amendment thereof or supplement thereto, contained an untrue statement of a material fact or omitted to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the sale to the person asserting any such losses, claims, damages or liabilities was an initial resale of New Securities by any Exchanging Dealer, (iii) any such loss, claim, damage or liability of such indemnified party results from the fact that there was not sent or given to such person, at or prior to the written confirmation of the sale of such New Securities to such person, a copy of any amended or supplemented Registration Statement or Prospectus and the Company or Holding had previously furnished copies thereof to such Exchanging Dealer and (iv) the amended or supplemented Registration Statement or Prospectus as amended or supplemented corrected such untrue statement or omission. This indemnity agreement will be in addition to any liability which the Company and Holding may otherwise have. The Company and Holding also agree to indemnify or contribute to Losses (as defined below) of, as provided in Section 7(d), any underwriters of Securities registered under a Shelf Registration Statement, their officers, directors, employees and agents and each person who controls such underwriters on substantially the same basis as that of the indemnification of the Purchasers and the selling Holders provided in this Section 7(a) and shall, if requested by any Holder, enter into an underwriting agreement reflecting such agreement, as provided in Section 4(q) hereof. (b) Each Holder of securities covered by a Registration Statement (including each Purchaser and, with respect to any Prospectus delivery as contemplated in Section 4(h) hereof, each Exchanging Dealer) severally and not jointly agrees to indemnify and hold harmless the Company and Holding, each of their directors and officers and each other person, if any, who controls the Company or Holding within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company and Holding to each such Holder, but only with reference to written information relating to such Holder furnished to the Company and Holding by or on behalf of such Holder specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which any such Holder may otherwise have. 20 (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 7, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to participate therein and, to the extent it may wish, to assume the defense thereof with counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be -------- ------- satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party; provided that the indemnifying party shall not be responsible for the expenses of more than one separate counsel (in addition to one local counsel in each relevant jurisdiction) in any one action. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, 21 action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. An indemnified party will not, without the prior written consent of the indemnifying party, which consent will not be unreasonably withheld, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 7 is unavailable to or insufficient to hold harmless an indemnified party for any reason (other than as provided in paragraph (a)), then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall have a joint and several obligation to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which such indemnified party may be subject in such proportion as is appropriate to reflect the relative benefits received by such indemnifying party, on the one hand, and such indemnified party, on the other hand, from the Initial Placement and the Registration Statement which resulted in such Losses; provided, however, that in no case shall any Purchaser or any -------- ------- subsequent Holder of any Security or New Security be responsible, in the aggregate, for any amount in excess of the purchase discount or commission applicable to such Security, or in the case of a New Security, applicable to the Security which was exchangeable into such New Security, as set forth on the cover page of the Final Memorandum, nor shall any underwriter be responsible for any amount in excess of the underwriting discount or commission applicable to the securities purchased by such underwriter under the Registration Statement which resulted in such Losses. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the indemnifying party and the indemnified party shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of such indemnifying party, on the one hand, and such indemnified party, on the other hand, in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company and Holding shall be deemed to be equal to 22 the sum of (x) the total net proceeds from the Initial Placement (before deducting expenses) as set forth on the cover page of the Final Memorandum and (y) the total amount of additional interest or dividend which the Company and Holding were not required to pay as a result of registering the securities covered by the Registration Statement which resulted in such Losses. Benefits received by the Purchasers shall be deemed to be equal to the total purchase discounts and commissions as set forth on the cover page of the Final Memorandum, and benefits received by any other Holders shall be deemed to be equal to the value of receiving Securities or New Securities, as applicable, registered under the Act. Benefits received by any underwriter shall be deemed to be equal to the total underwriting discounts and commissions, as set forth on the cover page of the Prospectus forming a part of the Registration Statement which resulted in such Losses. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the indemnifying party, on the one hand, or by the indemnified party, on the other hand. The parties agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person who controls a Holder within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of such Holder shall have the same rights to contribution as such Holder, and each person who controls the Company or Holding within the meaning of either the Act or the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company or Holding shall have the same rights to contribution as the Company or Holding, subject in each case to the applicable terms and conditions of this paragraph (d). (e) The provisions of this Section 7 will remain in full force and effect, regardless of any investigation made by or on behalf of any Holder, the Company, Holding or any underwriter or any of the officers, directors or controlling persons referred to in this Section 7, and will survive the sale by a Holder of securities covered by a Registration Statement. 23 8. Miscellaneous. -------------- (a) No Inconsistent Agreements. The Company and Holding have not, as --------------------------- of the date hereof, entered into, nor shall they, on or after the date hereof, enter into, any agreement with respect to their securities that is inconsistent with the rights granted to the Holders herein or otherwise conflicts with the provisions hereof. (b) Amendments and Waivers. The provisions of this Agreement, ----------------------- including the provisions of this sentence, may not be amended, qualified, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company and Holding have obtained the written consent of the Holders of at least a majority of the then outstanding aggregate principal amount or Liquidation preference, as the case may be, of Securities (or, after the consummation of any Exchange Offer in accordance with Section 2 hereof, of New Securities); provided that, with -------- respect to any matter that directly or indirectly affects the rights of any Purchaser hereunder, the Company and Holding shall obtain the written consent of each such Purchaser against which such amendment, qualification, supplement, waiver or consent is to be effective. Notwithstanding the foregoing (except the foregoing proviso), a waiver or consent to departure from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by the Majority Holders, determined on the basis of securities being sold rather than registered under such Registration Statement. (c) Notices. All notices and other communications provided for or -------- permitted hereunder shall be made in writing by hand-delivery, first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (1) if to a Holder, at the most current address given by such Holder to the Company and Holding in accordance with the provisions of this Section 8(c), which address initially is, with respect to each Holder, the address of such Holder maintained by the registrar under the Indenture, Exchange Indenture, the Certificate of Designation of the Holding Preferred Stock and the Certification of Designation for the Company Preferred Stock, with a copy in like manner to Salomon Brothers Inc by fax (212-783-2823) and 24 confirmed by mail to it at Seven World Trade Center, New York, New York 10048; (2) if to you, initially at the address set forth in the Purchase Agreement; and (3) if to the Company or Holding, initially at their addresses set forth in the Purchase Agreement. All such notices and communications shall be deemed to have been duly given when received. The Purchasers, the Company or Holding notice to the other may designate additional or different addresses for subsequent notices or communications. (d) Successors and Assigns. This Agreement shall inure to the ----------------------- benefit of and be binding upon the successors and assigns of each of the parties, including, without the need for an express assignment or any consent by the Company, Holding or subsequent Holders of Securities and/or New Securities. The Company and Holding hereby agree to extend the benefits of this Agreement to any Holder of Securities and/or New Securities and any such Holder may specifically enforce the provisions of this Agreement as if an original party hereto. (e) Counterparts. This Agreement may be executed in any number of ------------- counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Headings. The headings in this Agreement are for convenience of --------- reference only and shall not limit or otherwise affect the meaning hereof. (g) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED -------------- IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO THE CONFLICT OF LAW PROVISIONS THEREOF). (h) Severability. In the event that any one of more of the ------------- provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected thereby, it being intended that all the rights and privileges of the parties shall be enforceable to the fullest extent permitted by law. 25 (i) Securities Held by the Company, Holding, etc. Whenever the --------------------------------------------- consent or approval of Holders of a specified percentage of principal amount of Securities or New Securities is required hereunder, Securities or New Securities, as applicable, held by the Company, Holding or their Affiliates (other than subsequent Holders of Securities or New Securities if such subsequent Holders are deemed to be Affiliates solely by reason of their holdings of such Securities or New Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. 26 Please confirm that the foregoing correctly sets forth the agreement between the Company, Holding and you. Very truly yours, HUDSON RESPIRATORY CARE, INC. By: /s/ Richard W. Johansen __________________________ Name: Richard W. Johansen Title: President and Chief Executive Officer By: /s/ Jay R. Ogram __________________________ Name: Jay R. Ogram Title: Chief Financial Officer RIVER HOLDING CORP. By: /s/ Charles P. Rullman __________________________ Name: Charles P. Rullman Title: President The foregoing Agreement is hereby confirmed and accepted as of the date first above written SALOMON BROTHERS INC BT ALEX. BROWN INCORPORATED By: SALOMON BROTHERS INC By: /s/ H. Allen Bouch _______________________ Name: H. Allen Bouch Title: Director EX-5.1 9 OPINION OF RIORDAN & MCKINZIE EXHIBIT 5.1 RIORDAN & McKINZIE 300 South Grand Avenue, Suite 2900 Los Angeles, California 90071 June 5, 1998 6-849-003 Hudson Respiratory Care Inc. 27711 Diaz Road Post Office Box 9020 Temecula, California 92589-9020 Re: Hudson Respiratory Care Inc. -- Senior Subordinated Notes due 2008 -- Registration Statement on Form S-4 ----------------------------------------------- Ladies and Gentlemen: We have acted as counsel to Hudson Respiratory Care Inc., a California corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended (the "Securities Act") of, and the offer to exchange, the Company's 9 1/8% Senior Subordinated Notes due 2008 to be registered with the Securities and Exchange Commission (the "Commission") (the "Exchange Notes"), for its outstanding 9 1/8% Senior Subordinated Notes due 2008. This opinion is delivered to you in connection with the Registration Statement on Form S-4 (the "Registration Statement") for the aforementioned Exchange Notes and exchange offer, filed as of the date hereof with the Commission under the Securities Act. Capitalized terms used herein without definition shall have the meanings given to them in the Registration Statement. In rendering this opinion, we have examined copies identified to our satisfaction as being copies of the Indenture, attached as an exhibit to the Registration Statement, and originals, counterparts or copies identified to our satisfaction as being true copies of such other documents as we have deemed necessary or appropriate to render the opinions given below. We have assumed the authenticity of all documents submitted to us as originals and the conformity to authentic original documents of all documents submitted to us as certified, conformed or photostatic copies. We have investigated such questions of law for the purpose of rendering this opinion as we have deemed necessary. We express no opinion with respect to compliance with state securities laws or with respect to any state or federal fraudulent conveyance statutes. Hudson Respiratory Care Inc. June 5, 1998 Page 2 Based upon the foregoing and subject to the qualifications, exceptions and limitations set forth herein, we are of the opinion that, when the Indenture shall become qualified under the Trust Indenture Act of 1939, as amended, and when the Exchange Notes shall have been duly executed, authenticated and delivered in accordance with the Indenture and the exchange offer contemplated by the Registration Statement, the Exchange Notes will be legally issued and fully paid and constitute the legally valid and binding obligations of the Company, except as may be limited by (i) bankruptcy, reorganization, insolvency or other similar laws of general application affecting the rights and remedies of creditors and secured parties and (ii) the discretion of the courts in applying equitable principles. To the extent that the obligations of the Company under the Indenture may be dependent upon such matters, we assume for purposes of this opinion that the Trustee is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization; that the Trustee is duly qualified to engage in the activities contemplated by the Indenture; that the Indenture has been duly authorized, executed and delivered by the Trustee and constitutes the valid, binding and enforceable obligation of the Trustee; that the Trustee is in compliance, generally and with respect to acting as a trustee under the Indenture, with all applicable laws and regulations; and that the Trustee has the requisite corporate and legal power and authority to perform its obligations under the Indenture. We advise you that certain members of this firm own interests, directly or indirectly, in a partnership which owns a majority of the stock of the Company. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the caption "Legal Matters" in the Prospectus which is a part of the Registration Statement. Very truly yours, Riordan & McKinzie EX-10.1 10 CREDIT AGREEMENT DATED AS OF 4-7-98 EXHIBIT 10.1 EXECUTION COPY CREDIT AGREEMENT dated as of April 7, 1998 among HUDSON RESPIRATORY CARE INC., RIVER HOLDING CORP., The Lenders Party Hereto, SALOMON BROTHERS INC, as Arranger, Advisor and Syndication Agent, and BANKERS TRUST COMPANY, as Administrative Agent and Collateral Agent TABLE OF CONTENTS
Page ---- ARTICLE I Definitions SECTION 1.01. Defined Terms.......................................... 1 SECTION 1.02. Terms Generally........................................ 27 ARTICLE II The Credits SECTION 2.01. Commitments............................................ 27 SECTION 2.02. Loans.................................................. 28 SECTION 2.03. Borrowing Procedure.................................... 29 SECTION 2.04. Notes and Records...................................... 29 SECTION 2.05. Fees................................................... 30 SECTION 2.06. Interest on Loans...................................... 31 SECTION 2.07. Default Interest....................................... 31 SECTION 2.08. Alternate Rate of Interest............................. 32 SECTION 2.09. Termination and Reduction of Commitments............... 32 SECTION 2.10. Conversion and Continuation of Borrowings.............. 33 SECTION 2.11. Repayment of Term Borrowings........................... 34 SECTION 2.12. Prepayment............................................. 34 SECTION 2.13. Mandatory Prepayments.................................. 35 SECTION 2.14. Reserve Requirements................................... 37 SECTION 2.15. Change in Legality..................................... 38 SECTION 2.16 Indemnity.............................................. 39 SECTION 2.17. Pro Rata Treatment..................................... 39 SECTION 2.18. Sharing of Setoffs..................................... 39 SECTION 2.19. Payment................................................ 40 SECTION 2.20. Taxes.................................................. 40 SECTION 2.21. Assignment of Commitments Under Certain Circumstances; Duty to Mitigate........................ 42 SECTION 2.22. Swingline Loans........................................ 43 SECTION 2.23. Letters of Credit...................................... 45 ARTICLE III Representations and Warranties SECTION 3.01. Organization; Powers................................... 48 SECTION 3.02. Authorization.......................................... 48 SECTION 3.03. Enforceability......................................... 49
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Page ---- SECTION 3.04. Governmental Approvals and Licenses.................... 49 SECTION 3.05. Financial Statements................................... 49 SECTION 3.06. No Material Adverse Change............................. 50 SECTION 3.07. Title to Properties; Possession Under Leases........... 50 SECTION 3.08. Subsidiaries........................................... 50 SECTION 3.09. Litigation; Compliance with Laws....................... 50 SECTION 3.10. Default in Material Agreements......................... 51 SECTION 3.11. Federal Reserve Regulations............................ 51 SECTION 3.12. Investment Company Act; Public Utility Holding Company Act............................................ 51 SECTION 3.13. Use of Proceeds........................................ 51 SECTION 3.14. Tax Returns............................................ 51 SECTION 3.15. No Material Misstatements.............................. 52 SECTION 3.16. Employee Benefit Plans................................. 52 SECTION 3.17. Environmental Matters.................................. 52 SECTION 3.18. Insurance.............................................. 53 SECTION 3.19. Security Documents..................................... 53 SECTION 3.20. Location of Real Property and Leased Premises.......... 54 SECTION 3.21. Labor Matters.......................................... 54 SECTION 3.22. Solvency............................................... 54 SECTION 3.23. Year 2000.............................................. 54 ARTICLE IV Conditions of Lending SECTION 4.01. All Credit Events...................................... 54 SECTION 4.02. First Credit Event..................................... 55 ARTICLE V Affirmative Covenants SECTION 5.01. Existence; Businesses and Properties................... 58 SECTION 5.02. Insurance.............................................. 59 SECTION 5.03. Payment of Taxes....................................... 60 SECTION 5.04. Financial Statements, Reports, etc..................... 61 SECTION 5.05. Litigation and Other Notices........................... 62 SECTION 5.06. Employee Benefits...................................... 62 SECTION 5.07. Maintaining Records; Access to Properties and Inspections............................................ 62 SECTION 5.08. Use of Proceeds........................................ 63 SECTION 5.09. Compliance with Environmental Laws..................... 63 SECTION 5.10. Preparation of Environmental Reports................... 63 SECTION 5.11. Further Assurances..................................... 63 SECTION 5.12. Mortgaged Property Casualty and Condemnation........... 64
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Page ---- ARTICLE VI Negative Covenants SECTION 6.01. Indebtedness........................................... 67 SECTION 6.02. Liens.................................................. 68 SECTION 6.03. Investments, Loans and Advances........................ 69 SECTION 6.04. Mergers, Consolidations, Sales of Assets and Acquisitions........................................... 70 SECTION 6.05. Dividends and Distributions; Restrictions on Ability of Subsidiaries to Pay Dividends....................... 70 SECTION 6.06. Transactions with Affiliates........................... 72 SECTION 6.07. Business of Holding, Borrower and Subsidiaries......... 72 SECTION 6.08. Capital Expenditures................................... 72 SECTION 6.09. Debt/Adjusted EBITDA Ratio............................. 73 SECTION 6.10. Minimum EBITDA......................................... 73 SECTION 6.11. Interest Coverage Ratio................................ 73 SECTION 6.12. Fixed Charge Coverage Ratio............................ 74 SECTION 6.13. Modification of Certain Agreements..................... 74 ARTICLE VII Defaults and Remedies SECTION 7.01. Events of Default...................................... 75 ARTICLE VIII The Agents SECTION 8.01. Appointment of Administrative and Collateral Agent..... 77 SECTION 8.02. Limitations on Liabilities............................. 77 SECTION 8.03. Acting at the Direction of the Required Lenders........ 78 SECTION 8.04. Resignation of the Administrative Agent or the Collateral Agent....................................... 78 SECTION 8.05. Other Transactions..................................... 78 SECTION 8.06. Reimbursement and Indemnity............................ 78 SECTION 8.07. No Reliance............................................ 79 ARTICLE IX Miscellaneous SECTION 9.01. Notices................................................ 79 SECTION 9.02. Survival of Agreement.................................. 80 SECTION 9.03. Effectiveness; Termination............................. 80 SECTION 9.04. Successors and Assigns................................. 80 SECTION 9.05. Expenses; Indemnity.................................... 83 SECTION 9.06. Right of Setoff........................................ 84
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Page ---- SECTION 9.07. Applicable Law......................................... 84 SECTION 9.08. Waivers; Amendment..................................... 84 SECTION 9.09. Interest Rate Limitation............................... 86 SECTION 9.10. Entire Agreement....................................... 86 SECTION 9.11. WAIVER OF JURY TRIAL................................... 86 SECTION 9.13. Counterparts........................................... 87 SECTION 9.14. Headings............................................... 87 SECTION 9.15. Jurisdiction; Consent to Service of Process............ 87 SECTION 9.16. Confidentiality........................................ 87 Annexes - ------- Annex 1 - Initial Loan Commitments and Term Loan Commitments Annex 2 - Administrative Information Annex 3 - Description of the Recapitalization 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 3.17 - 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 4.02(b) - Local Counsel Schedule 6.01(a) - Indebtedness to be Paid Schedule 6.02(a) - Existing Liens 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 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
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Page ---- 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
-v- EXHIBIT 10.1 CREDIT AGREEMENT dated as of April 7, 1998, among HUDSON RESPIRATORY CARE INC., a California corporation (the "Borrower"), RIVER HOLDING CORP., a Delaware corporation ("Holding"), the Lenders (as defined in Article I), SALOMON BROTHERS INC, as Arranger, Advisor and Syndication Agent (in such capacity, the "Syndication Agent"), and BANKERS TRUST COMPANY, 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 extend credit in the form of (a) Term Loans (such term and each other capitalized term used but not defined herein having the meaning given it in Article I) on the Closing Date, in an aggregate principal amount not in excess of $40,000,000, and (b) Revolving Loans at any time and from time to time prior to the Revolving Credit Maturity Date, in an aggregate principal amount at any time outstanding not in excess of $60,000,000. The Borrower has requested the Swingline Lender to extend credit, at any time and from time to time prior to the Revolving Credit Maturity Date, in the form of Swingline Loans. The Borrower has requested the Issuing Bank to issue letters of credit, in an aggregate face amount at any time outstanding not in excess of $7,500,000, to support obligations incurred in the ordinary course of business by the Borrower and its Subsidiaries. The proceeds of the Loans are to be used solely as set forth in Section 3.13. The Lenders and the Swingline Lender are willing to extend such credit to the Borrower and the Issuing Bank is willing to issue letters of credit for the account of the Borrower on the terms and subject to the conditions 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. "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 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. "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 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 2 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 Subsidiary, (ii) any disposition effected in compliance with Section 6.04). "Asset Disposition" shall not include any Sale/Leaseback Transaction. "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 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. 3 "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. "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. "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 4 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 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; (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. 5 "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, 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 discount and debt issuance cost, including commitment fees, (c) capitalized interest, (d) non-cash interest expenses, (e) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (f) net costs associated with Hedging Obligations (including amortization of fees), (g) 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), (i) interest Incurred in connection with Investments in discontinued operations, (j) interest accruing on any Indebtedness of any other person to the extent such Indebtedness is Guaranteed by the Borrower or any Restricted Subsidiary and (k) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any person (other than the Borrower) in connection with Indebtedness Incurred by such plan or trust. "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 6 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 calculated such Consolidated Net Income, (e) any extraordinary gain or loss; provided, that any tax benefit or tax liability resulting therefrom shall be excluded in calculated 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, and (i) Contingent Acquisition-Related Payments. "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 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 and the Indemnity, Subrogation and Contribution 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 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. 7 "Default" means any event or condition which upon notice, lapse of time or both would constitute an Event of Default. "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 Term 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 Term 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, (a) the sum of Consolidated Net Income for such period, plus the following to the extent reducing Consolidated Net Income for such period: (i) the provision for taxes based on income or profits or utilized in computing net loss, (ii) Consolidated Interest Expense, (iii) depreciation, (iv) amortization and (v) any other non-cash items (other than any such non-cash item to the extent that it represents an accrual of or reserve for cash expenditures in any future period), minus (b) all non-cash items increasing Consolidated Net Income for such period (other than any such non-cash item to the extent that it will result in the receipt of cash payments in any future period). Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the 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. "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. "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 8 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 the issuance by Holding or the Borrower of any equity interests therein, or the issuance or sale by Holding or the Borrower of any instrument or obligation convertible into or exchangeable for, or giving any person any right, option or warrant to acquire from Holding or the Borrower any equity interests therein or any such convertible or exchangeable instrument or obligation, but excluding the Excluded Shares. "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 9 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. "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. "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, (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 10 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 (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). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Excluded Shares" means Capital Stock of Holding or the Borrower issued to a Subsidiary of the Borrower or to an employee stock ownership plan or trust established by the Borrower or any of its Subsidiaries for the benefit of their employees. "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. "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, 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. "GAAP" means generally accepted accounting principles applied on a consistent basis. 11 "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. "Holding Guarantee Agreement" means Holding Guarantee Agreement, substantially in the form of Exhibit , made by Holding in favor of the Collateral Agent for the benefit of the Secured Parties. "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 12 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 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 , among the Borrower, the Subsidiary Guarantors and the Collateral Agent. "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, 3 or 6 months (or, if Interest Periods of such duration shall be available from each Lender, 9 or 12 months) thereafter, as the Borrower may elect and (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 Term 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 13 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 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. "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 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. "Loans" means the Revolving Loans, the Term Loans and the Swingline Loans. "Margin Stock" has the meaning assigned thereto in Regulation U. "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 14 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 pursuant to clause (i) of Section 4.02(k) or pursuant to Section 5.11, each substantially in the form of Exhibit K. "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, (A) the amount of any expense or reasonable reserve established in accordance with GAAP against any liabilities associated with the assets sold or disposed of and retained by the Borrower or any Restricted Subsidiary (including (1) liabilities under any indemnification obligations to the acquiror, (2) liabilities with respect to representations and warranties, (3) liabilities retained by the Borrower or such Restricted Subsidiary, and (4) employee termination and similar costs relating to such disposition), provided that the amount of any subsequent reduction of such reserve (other than in connection with a payment in respect of any such liability) shall be deemed to be Net Cash Proceeds of a Prepayment Event occurring on the date of such reduction, and (B) the amount applied to 15 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 of fixed or capital assets, no Casualty Proceeds and no Condemnation Proceeds shall constitute Net Cash Proceeds, to the extent that 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; 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 any one time, 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. "New Lending Office" has the meaning assigned thereto in Section 2.20(e). "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: 16 (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, 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 to exceed $40,000,000 at any one time outstanding; and (B) unsecured subordinated Debt, in form and substance satisfactory to the Syndication 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 17 (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 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 18 financial data of a recent date, taking into account such Permitted Acquisition prepared in a manner consistent 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; 19 (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 , 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 Subsidiary, any Equity Issuance, 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:
CATEGORY 2 CATEGORY 1 DEBT/ADJUSTED EBITDA CATEGORY 3 DEBT/ADJUSTED EBITDA RATIO DEBT/ADJUSTED RATIO LESS THAN 4.0:1.0 AND EBITDA RATIO GREATER THAN OR EQUAL TO GREATER THAN OR EQUAL TO LESS THAN 3.5:1.0 4.0:1.0 3.5:1.0 ------------------------ ------------------------ ----------------- Commitment Fees 0% .0625% .125% ABR Loans 0% .250% .500% Eurodollar Loans 0% .250% .500%
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 20 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; and (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. "Pricing Adjustment Certificate" means an pricing adjustment certificate delivered by the Borrower to the Administrative Agent, in the form of Exhibit 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 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 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 (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. 21 "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 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. 22 "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" has the meaning given such term in Section 2.11. "Required Lenders" means, at any time, 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. "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 23 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 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 March 31, 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. "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 and each of the security agreements, mortgages and other instruments and documents executed and delivered pursuant to any of the foregoing or pursuant to Section 5.11. "Sellers" means Helen Hudson Lovaas and the other shareholders of the Borrower immediately before the Recapitalization. "Senior Subordinated Notes" means the Borrower's 9 1/8% 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 24 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. "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 , made by the Subsidiary Guarantors in favor of the Collateral Agent for the benefit of the Secured Parties. "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. "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. 25 "Swingline Note" means a promissory note evidencing Swingline Loans, executed and delivered as provided in Section 2.22 in substantially the form of Exhibit . "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 Loan Maturity Date" means March 31, 2004. "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 , 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) 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). 26 "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 (A) such Subsidiary and none of its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any Lien on any property of, the Borrower or any other Subsidiary of the Borrower that is not a Subsidiary of the Subsidiary to be so designated, and (B) the Subsidiary to be so designated has total consolidated assets of $1,000 or less. "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). 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 27 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). 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. Amounts paid or prepaid in respect of Term Loans may not be reborrowed. 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 12:00 (noon), New York City time, credit the amounts so received to an account in the name of 28 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. 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 29 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. (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 30 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 date hereof 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 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. 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 31 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 1.25% less the applicable Pricing Adjustment. (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 2.25% less the applicable Pricing Adjustment. (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. If the Borrower shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder, by acceleration or otherwise, or under any other Credit Document, the Borrower shall on demand from time to time pay interest, to the extent permitted by law, on such defaulted amount to but excluding the date of actual payment (after as well as before judgment) (a) in the case of overdue principal, at the rate otherwise applicable to such Loan pursuant to Section 2.06(a) plus 2.00% per annum and (b) in all other cases, at a rate per annum (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 determined by reference to the Prime Rate and over a year of 360 days at all other times) equal to the sum of the Alternate Base Rate plus 2.00%. 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. 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 32 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 Termination 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 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 pursuant to Section 2.13(g). (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) 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) not later than 11:00 a.m., New York City time, three Business Days prior to conversion, to convert the Interest Period with 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 33 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 Term Borrowing that would end later than a Repayment Date occurring on or after the first day of such Interest Period if, after giving effect to such selection, the aggregate outstanding amount of (A) the Eurodollar Term Borrowings with Interest Periods ending on or prior to such Repayment Date and (B) the ABR Term Borrowings would not be at least equal to the principal amount of Term 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 Term Loan Maturity Date; and (ix) upon notice to the Borrower from the Administrative Agent given at the request of the Required Lenders, 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 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 dates (each such date being called a "Repayment Date") in the following amounts: 34
- --------------------------------------------------------------------------------------------- DATE AMOUNT OF REPAYMENT - --------------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 2004 - --------------------------------------------------------------------------------------------- March 31 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 - --------------------------------------------------------------------------------------------- June 30 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 - --------------------------------------------------------------------------------------------- September 30 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 - --------------------------------------------------------------------------------------------- December 31 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 - ---------------------------------------------------------------------------------------------
(b) Each payment of Term Borrowings pursuant to this Section shall be accompanied by accrued interest on the principal amount paid to but excluding the date of payment. 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 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. (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. (b) With respect to any Restricted Asset Disposition, 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, as set forth in the definition of Net Cash Proceeds, (ii) promptly after the date on which the Borrower determines not to reinvest the Net Cash Proceeds thereof 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 reduce the Revolving Credit Commitment in accordance with Section 2.13(g). 35 (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, 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) to prepay outstanding Term 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 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, 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 reduce the Revolving Credit Commitment in accordance with Section 2.13(g). (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 Section 5.04(a), the Borrower shall prepay outstanding Term 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 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 Term 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 reduce the Revolving Credit Commitment in accordance with Section 2.13(g). (g) Mandatory prepayments under this Agreement shall be applied pro rata against the remaining scheduled installments of principal due in respect of the Term Loans under Section 2.11. If no Term 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. 36 (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 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 37 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 (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 date hereof of any law, rule, regulation, agreement or guideline regarding capital adequacy, or any change after the date hereof 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. 38 SECTION 2.15. Change in Legality. (a) Notwithstanding any other provision of this Agreement, if, after the date hereof, 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 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 receive pursuant to this Section with calculations in reasonable detail shall be delivered to the Borrower and shall be conclusive absent manifest error. 39 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 shall, through the exercise of a right of banker's lien, setoff or counterclaim against the Borrower or any other 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 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 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 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 40 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 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 41 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 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. 42 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 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 2.21. Swingline Loans. (a) Swingline Commitment. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, the 43 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 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 44 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 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, 45 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 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; 46 (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 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 such L/C Disbursement. The Administrative Agent shall promptly give each Revolving Credit Lender notice thereof. 47 (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 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 48 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 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 party thereto will constitute, a legal, valid and binding obligation of such Credit Party enforceable against such Credit Party in accordance with its terms. 49 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 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 date hereof and 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. 50 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, 1997. 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 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 the 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. SECTION 3.08. Subsidiaries. Schedule 3.08 sets forth as of the Closing 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. 51 SECTION 3.10. Default in Material Agreements. 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 G, 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. 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. 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 52 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 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. 53 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 Subsidiaries as of the date hereof and the Closing 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 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 Security Agreement) and, when financing statements in appropriate form are filed in the offices specified on Schedule 6 to the Perfection Certificate, the Security Agreement 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 date hereof). (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. SECTION 3.20. Location of Real Property and Leased Premises. (a) Schedule 3.20(a) lists completely and correctly as of the Closing Date all real property owned by the Borrower and the Subsidiaries and the addresses thereof. The Borrower and the 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 Closing Date all real property leased by the Borrower and the Subsidiaries and the addresses thereof. The Borrower and the Subsidiaries have valid leases in all the real property set forth on Schedule 3.20(b). 54 SECTION 3.21. Labor Matters. As of the date hereof and the Closing 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. (a) Immediately after the consummation of the Transactions to occur on the Closing Date and immediately following the making of each Loan made on the Closing Date and after giving effect to the application of the proceeds of such Loans, (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 Closing Date. SECTION 3.23. Year 2000. The Borrower does not expect that its information system capabilities will encounter any material "Year 2000" problems. 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): 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). 55 (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. 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) and (c) of this Section. SECTION 4.02. First Credit Event. On the Closing Date: (a) Notes. Each Lender shall have received its duly executed Notes complying with the provisions of Section 2.04. (b) Opinions. The Syndication Agent shall have received, on behalf of itself, the Lenders and the Issuing Bank, a favorable written opinion of (i) Riordan & McKinzie, special California counsel for Holding and the Borrower, substantially to the effect set forth in Exhibit , (ii) Richards & O'Neil, special New York counsel for Holding and the Borrower, substantially to the effect set forth in Exhibit , and (iii) each local counsel listed on Schedule 4.02(b), substantially to the effect set forth in Exhibit , in each case (A) dated the Closing Date, (B) addressed to the Syndication Agent, the Issuing Bank, the Administrative Agent and the Lenders, and (C) covering such other matters relating to the Credit Documents and the Transactions as the Syndication Agent shall reasonably request, and each of Holding and the Borrower hereby requests such counsel to deliver such opinions. (c) 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 Cravath, Swaine & Moore, counsel for the Syndication Agent. (d) Organizational Documents. The Syndication 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 Closing 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 Closing 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 56 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 Cravath, Swaine & Moore, counsel for the Administrative Agent, may reasonably request. (e) Officer's Certificate. The Syndication Agent shall have received a certificate, dated the Closing Date and signed by a Responsible Officer of the Borrower, confirming compliance with the conditions precedent set forth in clauses (b) and (c) of Section 4.01. (f) Payment of Fees, Etc. The Administrative Agent shall have received all Fees and other amounts due and payable on or prior to the Closing 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 and fees under Section 9.05(a). (g) Pledge Agreement. The 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 outstanding capital stock of the Borrower and the Subsidiaries shall have been duly and validly pledged thereunder to the Collateral Agent for the ratable benefit of the Secured Parties and certificates representing such shares, accompanied by instruments of transfer and stock powers endorsed in blank, shall be in the actual possession of the Collateral Agent; provided that to the extent to do so would cause adverse tax consequences to the Borrower, (i) neither the Borrower nor any Domestic Subsidiary shall be required to pledge more than 65% of the capital stock of any Foreign Subsidiary and (ii) no Foreign Subsidiary shall be required to pledge the capital stock of any of its Foreign Subsidiaries. (h) Security Agreement. The Security Agreement shall have been duly executed by the Credit Parties party thereto and 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. (i) Lien Search. The Collateral Agent shall have received the results of a search of the Uniform Commercial Code (or equivalent filings) filings made with respect to the Credit Parties in the states (or other jurisdictions) in which the chief executive office of each such person is located, any offices of such persons in which records have been kept relating to Accounts and the other jurisdictions in which Uniform Commercial Code filings (or equivalent filings) are to be made pursuant to the preceding clause, together with copies of the financing statements (or similar documents) disclosed by such search, and accompanied by evidence satisfactory to the Collateral Agent that the Liens indicated in any such financing statement (or similar document) would be permitted under Section 6.02 or have been released. 57 (j) Perfection Certificate. The Collateral Agent shall have received a Perfection Certificate with respect to the Credit Parties dated the Closing Date and duly executed by a Responsible Officer of the Borrower. (k) Mortgages. (i) Each of the Security Documents, in form and substance satisfactory to the Lenders, relating to each of the Mortgaged Properties shall have been duly executed by the parties thereto and delivered to the Collateral Agent and shall be in full force and effect, (ii) each of such Mortgaged Properties shall not be subject to any Lien other than those permitted under Section 6.02, (iii) each of such Security Documents shall be in proper form for filing and recordation in the recording office as specified on Schedule 3.19(d), and (iv) the Collateral Agent shall have received such other documents, including a commitment, policy or policies of title insurance issued by a nationally recognized title insurance company, together with such endorsements, coinsurance and reinsurance as may be requested by the Collateral Agent and the Lenders, insuring the Mortgages as valid first liens on the Mortgaged Properties, free of Liens other than those permitted under Section 6.02, together with such surveys, abstracts, appraisals and legal opinions required to be furnished pursuant to the terms of the Mortgages or as reasonably requested by the Collateral Agent or the Lenders. (l) Guarantee Agreements. Each of Holding Guarantee Agreement and the Subsidiary Guarantee Agreement shall have been duly executed by the parties thereto, shall have been delivered to the Collateral Agent and shall be in full force and effect. (m) Indemnity, Subrogation and Contribution Agreement. The Indemnity, Subrogation and Contribution Agreement shall have been duly executed by the parties thereto, shall have been delivered to the Collateral Agent and shall be in full force and effect. (n) Insurance Policies. The Syndication Agent shall have received a copy of, or a certificate as to coverage under, the insurance policies required by Section 5.02 and the applicable provisions of the Security Documents, each of which shall be endorsed or otherwise amended to include a "standard" or "New York" lender's loss payable endorsement and to name the Collateral Agent as additional insured, in form and substance satisfactory to the Administrative Agent. (o) Environmental and Employment Matters. The Lenders shall be satisfied as to the amount and nature of any environmental and employee health and safety exposures to which the Borrower and the Subsidiaries may be subject and the plans of the Borrower with respect thereto. (p) Environmental Reports. The Syndication Agent shall have received a Phase I environmental assessment report in form, scope and substance reasonably satisfactory to the Lenders, from Dames & Moore as to any environmental hazards, liabilities or Remedial Action to which the Borrower or any of the Subsidiaries may be subject and the Lenders shall be reasonably satisfied with the nature and cost of any such hazards, liabilities or Remedial Action and with the Borrower's plans with respect thereto. (q) Recapitalization Documents. The Syndication Agent shall have received, with a copy for each Lender, a copy of the Acquisition Agreement and any of the other Recapitalization Documents reasonably requested by the Syndication Agent, certified by a Responsible Officer of the Borrower. 58 (r) Recapitalization. The Recapitalization shall be concurrently consummated as set forth in Annex 3, and the capital structure of the Borrower shall be as set forth in Annex 3. The terms and conditions, and documentation, of any material Indebtedness and all equity securities of the Borrower or any of its Subsidiaries to be outstanding at or after the Closing Date, the certificate of incorporation, by-laws, other governing documents and the corporate and capital structure of the Borrower and its Subsidiaries, in each case after giving effect to the consummation of the Recapitalization, shall be in form and substance satisfactory to the Administrative Agent. The Recapitalization shall have been consummated for an aggregate Redemption Amount in cash equal to $225,000,000 (the "Redemption Amount"), pursuant to the Acquisition Agreement. All of the conditions precedent set forth in the Acquisition Agreement shall have been satisfied or waived, and no material provision of the Acquisition Agreement shall have been amended, supplemented, waived or otherwise modified without the prior written consent of the Required Lenders, which consent shall not be unreasonably withheld. The Administrative Agent shall be satisfied with the Acquisition Agreement in all respects. The Borrower and its Subsidiaries shall have outstanding no indebtedness other than the term loans or revolving credit loans (including letters of credit) under this Agreement, the Notes or Loans hereunder, as applicable, and other indebtedness as set forth on Schedule 6.01(a) hereto. (s) Transaction Costs. The Transaction Costs shall have been paid (or made provision reasonably satisfactory to the Syndication Agent for the payment thereof) in an amount not in excess of $15,000,000. (t) Senior Subordinated Notes. The Senior Subordinated Notes shall have been executed, authenticated and issued in form and substance satisfactory to the Lenders; and the Borrower shall have received proceeds (before deductions for underwriting and placement fees) pursuant thereto of approximately $115,000,000. (u) Exchangeable Preferred Stock. The Exchangeable Preferred Stock shall have been duly authorized and issued in form and substance satisfactory to the Lenders; and the Borrower shall have received proceeds (before deductions for underwriting and placement fees) pursuant thereto of approximately $30,000,000. (v) Solvency Certificate. The Administrative Agent shall have received a certificate of the Borrower's chief financial officer, in form and substance satisfactory to the Administrative Agent, to the effect of the representations set forth in Section 3.22. (w) EBITDA Certificate. The Administrative Agent shall have received a written certification of the Borrower's accountants that the EBITDA of the Borrower and its Subsidiaries on a consolidated basis for the immediately preceding fiscal year was at least $26,200,000, on a pro forma basis computed, in accordance with Regulation S-X. 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. 59 (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 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 60 by the Federal Emergency Management Agency (or any successor agency), obtain flood insurance in such total amount as the Syndication Agent, 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 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, 61 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 Subsidiaries as of the close of such fiscal year and the results of its operations and the operations of such Subsidiaries during such year, all audited by Arthur Andersen 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 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; (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 Subsidiaries as of the close of such fiscal quarter and the results of its operations and the operations of such 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 Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to the absence of footnotes and normal year-end audit adjustments; (c) 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 Subsidiaries as of the close of such month and the results of its operations and the operations of such 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 Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to the absence of footnotes and normal year-end audit adjustments; (d) concurrently with any delivery of financial statements under clause (a), (b) or (c), 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 6.09 through Section 6.12; 62 (d) concurrently with any delivery of financial statements under clause (a) or (b), a Pricing Adjustment Certificate; (e) not later than January 31 of each year, (i) copies of the Borrower's annual consolidated budget 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 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; (f) 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; and (g) 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 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. 63 (b) Each Credit Party will, and will cause each of its Subsidiaries to, permit any representatives designated by the Syndication 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 Syndication 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 Syndication Agent and the Lenders shall be limited to visits on four occasions per year, and the Syndication Agent shall use it best efforts to coordinate such visits, and (ii) the Syndication 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. 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. 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 64 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. 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 65 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 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: 66 (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; (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 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; 67 (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. 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: (a) Indebtedness for borrowed money existing on the date hereof 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; 68 (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; (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; and (h) 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)) does not exceed $5,000,000 at any one time outstanding. 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 date hereof and set forth in Schedule 6.02(a); provided that such Liens shall secure only those obligations which they secure on the date hereof; 69 (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; (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 date hereof in the capital stock of the Subsidiaries; (b) Permitted Investments; (c) Investments in Unrestricted Subsidiaries not to exceed $20,000 in the aggregate; and (d) Investments in Restricted Subsidiaries; (e) Investments made in connection with Permitted Investments; 70 (f) Investments which would be permitted as Indebtedness pursuant to Section 6.01; (g) loans and advances to employees of the Borrowers 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 in the ordinary course of the Borrower's business, except for 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 71 Section 2.13(b), 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). 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), or make any Investment (other than pursuant to Section 6.03) in any person (any such dividend, distribution, purchase, redemption, repurchase, defeasance, other acquisition, retirement or Investment 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 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, the Borrower may pay cash dividends on the Borrower's Exchangeable Preferred Stock, and Holding may pay cash dividends on Holding's Exchangeable Preferred Stock, but only in 72 accordance with the terms of the Exchangeable Preferred Stock in amounts not greater than 11 1/2% per annum of the original aggregate liquidation preference of the Borrower's Exchangeable Preferred Stock plus accreted PIK liquidation preference; (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; and (iv) the Borrower and/or Holding may make Contingent Acquisition- Related Payments; or (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. 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. 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 or Section 6.05; (b) the issuance of Capital Stock for cash; (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; or (d) the payment of the Transaction Costs. 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. 73 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 the following limits in the following fiscal years; provided, that the unused portion of the scheduled limit for any fiscal year (not to exceed $4,000,000) may be carried forward to be used in the following fiscal year.
FISCAL YEAR LIMIT -------------- ------------- 1998 $6,000,000 1999 $8,000,000 2000 $8,000,000 2001 $8,000,000 2002 $8,000,000 2003 $8,000,000 2004 $8,000,000
SECTION 6.09. Debt/Adjusted EBITDA Ratio. The Debt/Adjusted EBITDA Ratio shall not exceed the following amounts as of the ends of fiscal quarters of the Borrower ending nearest to the following dates:
- --------------------------------------------------------------------------------------------------- FISCAL DEBT/ADJUSTED EBITDA RATIO QUARTER ENDING NEAREST TO - --------------------------------------------------------------------------------------------------- 1998 1999 2000 2001 2002 2003 2004 - --------------------------------------------------------------------------------------------------- March 31 6.00:1.00 5.25:1.00 4.50:1.00 3.75:1.00 3.50:1.00 3.50:1.00 - --------------------------------------------------------------------------------------------------- June 30 6.25:1:00 6.00:1.00 5.00:1.00 4.25:1.00 3.75:1.00 3.50:1.00 - --------------------------------------------------------------------------------------------------- September 30 6.25:1:00 6.00:1.00 5.00:1.00 4.25:1.00 3.75:1.00 3.50:1.00 - --------------------------------------------------------------------------------------------------- December 31 6.00:1.00 5.25:1.00 4.50:1.00 3.75:1.00 3.50:1.00 3.50:1.00 - ---------------------------------------------------------------------------------------------------
and thereafter, 3.50:1.00. SECTION 6.10. Minimum EBITDA. The EBITDA for the fiscal year of the Borrower shall not be less than the following amounts as of the end of the following fiscal years:
FISCAL YEAR ENDING NEAREST TO DECEMBER 31, MINIMUM EBITDA --------------------- ------------------- 1998 $27,000,000 1999 $29,000,000 2000 $32,000,000 2001 $34,000,000 2002 $37,000,000
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FISCAL YEAR ENDING NEAREST TO DECEMBER 31, MINIMUM EBITDA ------------------- ------------------ 2003 $39,000,000 and thereafter
SECTION 6.11. Interest Coverage Ratio. (a) The ratio of (i) the EBITDA for the period of four fiscal quarters ending nearest to June 30, 1998 to (ii) the product of 4 times the Consolidated Interest Expense for the fiscal quarter ending nearest to June 30, 1998, shall not be less than 1.5:1.0. (b) The ratio of (i) the EBITDA for the period of four fiscal quarters ending nearest to September 30, 1998 to (ii) the product of 2 times the Consolidated Interest Expense for the period of two fiscal quarters ending nearest to September 30, 1998, shall not be less than 1.5:1.0. (c) The ratio of (i) the EBITDA for the period of four fiscal quarters ending nearest to December 31, 1998 to (ii) the product of 1.33 times the Consolidated Interest Expense for the period of three fiscal quarters ending nearest to December 31, 1998, shall not be less than 1.75:1.0. (d) The ratio of EBITDA to Consolidated Interest Expense for the period of four fiscal quarters ending nearest to each of the following dates, shall not be less than the following ratios:
- ------------------------------------------------------------------------------------------------ FISCAL QUARTER ENDING NEAREST TO CONSOLIDATED INTEREST COVERAGE RATIO - ------------------------------------------------------------------------------------------------ 1999 2000 2001 2002 2003 2004 - ------------------------------------------------------------------------------------------------ March 31 1.75:1.00 2.00:1.00 2.30:1.00 2.75:1.00 3.00:1:00 3.00:1:00 - ------------------------------------------------------------------------------------------------ June 30 1.75:1.00 2.00:1.00 2.30:1.00 2.75:1.00 3.00:1:00 - ------------------------------------------------------------------------------------------------ September 30 1.75:1.00 2.00:1.00 2.30:1.00 2.75:1.00 3.00:1:00 - ------------------------------------------------------------------------------------------------
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- ------------------------------------------------------------------------------------------------ FISCAL QUARTER ENDING NEAREST TO CONSOLIDATED INTEREST COVERAGE RATIO - ------------------------------------------------------------------------------------------------ 1999 2000 2001 2002 2003 2004 - ------------------------------------------------------------------------------------------------ December 31 2.00:1.00 2.30:1.00 2.75:1.00 3.00:1.00 3.00:1:00 - ------------------------------------------------------------------------------------------------
and thereafter, 3.00:1.00. SECTION 6.12. Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio as of the end of any period of four fiscal quarters shall not be less than 1.2:1.0, beginning with the fiscal quarter ending nearest to March 31, 1999. SECTION 6.13. Modification of Certain Agreements. Neither Holding, the Borrower nor any Restricted Subsidiary shall 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, 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. 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 of any covenant, condition or agreement contained in any Credit Document (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; 76 (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 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 77 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; or (m) there shall have occurred a Change in Control; 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 Required Lenders 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 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 VII The Agents SECTION 8.01. Appointment of Administrative and Collateral Agent. In order to expedite the transactions contemplated by this Agreement, Bankers Trust Company 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 78 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 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 79 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 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: 80 (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 Bankers Trust Company, 130 Liberty St., 14th Floor, New York, NY 10006, Attention of Stuart Levy, Deal Administrator (telephone: 212-250-4869), (telecopy: 212-250-6029; (c) if to the Administrative Agent with respect to other matters, to Bankers Trust Company, 300 South Grand Ave., Floor 41, Los Angeles, CA 90071, Attention of Keith Bernstein, Principal (telephone: 213-620-8148), (telecopy: 213-620-8484); (d) if to the Syndication Agent, to Salomon Smith Barney, 7 World Trade Center, New York, NY 10048, Attention of Nick Erni, (telecopy: 212- 783-2316); and (e) 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 81 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 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 Swingling 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), and (y) 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) 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). (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 82 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 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. 83 (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 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 84 Loans made or the Notes or Letters of Credit issued hereunder, including the fees, charges and disbursements of Cravath, Swaine & Moore, 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 wilful misconduct of such Indemnitee. (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 is hereby authorized at any time and from time to time, except to the extent prohibited by law, 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 to or for the credit or the account of the Borrower or Holding against any of and all the obligations of the Borrower or Holding now or hereafter existing under this Agreement and other Credit Documents held by such Lender, irrespective of whether or not 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 under this Section are in addition to other rights and remedies (including other rights of setoff) which 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), 85 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 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 86 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 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, and (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 (ii) 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. 87 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 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 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 88 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 date hereof, 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. 89 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/ Richard W. Johansen _____________________ Name: Richard W. Johansen Title: President and Chief Financial Officer by /s/ Jay R. Ogram --------------------- Name: Jay R. Ogram Title: Chief Financial Officer RIVER HOLDING CORP., by /s/ Charles P. Rullman ______________________ Name: Charles P. Rullman Title: President BANKERS TRUST COMPANY, as Administrative Agent, Collateral Agent, Swingline Lender and Issuing Bank, by /s/ Robert R. Telesca ______________________ Name: Robert R. Telesca Title: Assistant Vice President SALOMON BROTHERS INC, as Arranger, Advisor and Syndication Agent, by /s/ Chad A. Leat ______________________ Name: Chad A. Leat Title: Managing Director LENDERS ------- BANKERS TRUST COMPANY, by /s/ Robert R. Telesca _________________________ Name: Robert R. Telesca Title: Assistant Vice President 90 SALOMON BROTHERS HOLDING COMPANY INC, by /s/ Chad A. Leat _________________________ Name: Chad A. Leat Title: Managing Director BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, by /s/ Helen Wilson _________________________ Name: Helen Wilson Title: Vice President /s/ James O. Heil _________________________ Name: James O. Heil Title: Vice President BANK OF TOKYO-MITSUBISHI TRUST COMPANY, by /s/ Nicholas J. Campbell _________________________ Name: Nicholas J. Campbell Title: Vice President BHF-BANK AKTIENGESELLSCHAFT, by /s/ Dan Dobrjanskyj _________________________ Name: Dan Dobrjanskyj Title: Assistant Vice President /s/ Anthony Heyman _________________________ Name: Anthony Heyman Title: Assistant Vice President CREDITANSTALT CORPORATE FINANCE, INC, by /s/ Greg Roux _________________________ Name: Greg Roux Title: Vice President /s/ Jack R. Bertges _________________________ Name: Jack R. Bertges Title: Senior Vice President 91 WELLS FARGO BANK, N.A., by /s/ Delia B. Fance _________________________ Name: Delia B. Fance Title: Vice President ROYAL BANK OF CANADA, by /s/ Athar Khan ________________________ Name: Athar Khan Title: Senior Manager 92 NATIONSBANK OF TEXAS, N.A., by /s/ Keith Fern _________________________ Name: Keith Fern Title: Vice President SOCIETE GENERALE, by /s/ Maureen E. Kelly _________________________ Name: Maureen E. Kelly Title: Vice President 93 EX-10.2 11 SECURITY AGREEMENT DATED AS OF 4-7-98 EXHIBIT 10.2 SECURITY AGREEMENT dated as of April 7, 1998, among HUDSON RESPIRATORY CARE INC., a California corporation (the "Borrower"), 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 and the Borrower are referred to collectively herein as the "Grantors") 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 herein). Reference is made to 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 (in such capacity, the "Administrative Agent") and Collateral Agent and as issuing bank (in such capacity, the "Issuing Bank"). 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 Credit Agreement. Each of Holding and the Subsidiary Guarantors has agreed to guarantee, among other things, all the obligations of the Borrower under the 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 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 Secured Parties under the 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 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 Protection Agreement entered into with any counterparty that was a Lender at the time such Interest Rate Protection Agreement was entered into (all the monetary and other obligations described in the preceding clauses (a) through (d) being collectively called the "Obligations"). 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: 2 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 Credit Agreement. 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. "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 right evidenced by chattel paper, whether due or to become due, whether or not it has 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. "Collateral" shall mean all (a) Accounts Receivable, (b) Documents, (c) Equipment, (d) General Intangibles, (e) Inventory, (f) cash and cash accounts, (g) Proceeds and (h) Investment Property. "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 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 3 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. "Credit Agreement" shall have the meaning assigned to such term in the preliminary statement of this Agreement. "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. "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. "General Intangibles" shall mean all choses in action and causes of action and all other assignable 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 Protection Agreements and other agreements), Intellectual Property, goodwill, 4 registrations, franchises, tax refund claims 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. "Intellectual Property" shall mean 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 (other than those license agreements in existence on the date hereof and listed on Schedule III and those license agreements entered into after the date hereof, which by their terms prohibit assignment or a grant of a security interest by such Grantor as licensee thereunder). "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 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. 5 "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 Protection Agreement entered into with the Borrower if such counterparty was a Lender at the time the Interest Rate Protection 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 any obligations of an issuer or any shares, participations or other interests in an issuer or in property or an enterprise of an issuer which (a) are represented by a certificate representing a security in bearer or registered form, or the transfer of which may be registered upon books maintained for that purpose by or on behalf of the issuer, (b) are one of a class or series or by its terms is divisible into a class or series of shares, participations, interests or obligations and (c)(i) are, or are of a type, dealt with or trade on securities exchanges or securities markets or (ii) are a medium for investment and by their terms expressly provide that they are a security governed by Article 8 of the Uniform Commercial Code. "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. 6 "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 Credit Agreement shall be applicable to this Agreement. 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 state ments, 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 7 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, 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. 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, within the three month period (commencing as of the date hereof) pursuant to 35 U.S.C. (S) 261 or 15 U.S.C. (S) 1060 or the one month period (commencing as of the date hereof) pursuant to 17 U.S.C. (S) 205 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 8 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 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 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 Credit Agreement. ARTICLE IV Covenants SECTION 4.01 Change of Name; Location of Collateral; Records; Place of Business. (a) Each Grantor agrees promptly to notify the Collateral Agent in writing of any change (i) in its corporate name or in any trade name used to identify it in the conduct of its business or in the ownership of its properties, (ii) in the location of its chief executive office, its principal place of business, 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. 9 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 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 thereof against any Lien not expressly permitted pursuant to Section 6.02 of the 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. 10 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 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 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, security interests or other encumbrances at any time levied or placed on the Collateral and not permitted pursuant to Section 6.02 of the 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 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 11 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 Credit Agreement. 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) 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 Legend. Each Grantor shall legend, in form and manner satisfactory to the Collateral Agent, its Accounts Receivable and its books, records and documents evidencing or pertaining thereto with an appropriate reference to the fact that such Accounts Receivable have been assigned to the Collateral Agent for the benefit of the Secured Parties and that the Collateral Agent has a security interest therein. SECTION 4.13 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) 12 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 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 13 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 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 14 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 exer cise 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. 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 non-exclusive 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 15 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 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, notwith standing 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. 16 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. 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, non-exclusive 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. 17 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 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 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 amend ment or waiver of or any consent to any departure from the 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. 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 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 18 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 Indemnities 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 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 19 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 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 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 20 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. (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 affected 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 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 rea sonably 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 Credit Agreement; provided that the Required Lenders shall have consented to such sale, transfer or other disposition (to the extent required by the 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 Credit Agreement or is to be subject to a Lien permitted by Section 6.02(i) of the 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 21 6.02(i) of the 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 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 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 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 22 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 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. 23 (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. 24 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 /s/ Richard W. Johansen ------------------------------------ Name: Richard W. Johansen Title: President and Chief Executive Officer by /s/ Jay R. Ogram ------------------------------------ Name: Jay R. Ogram Title: Chief Financial Officer BANKERS TRUST COMPANY, as Collateral Agent, by /s/ Robert R. Telesca ------------------------------------ Name: Robert R. Telesca Title: Assistant Vice President EX-10.3 12 PLEDGE AGREEMENT DATED AS OF 4-7-98 EXHIBIT 10.3 PLEDGE AGREEMENT dated as of April 7, 1998, 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 Pledgor" and collectively, the "Subsidiary Pledgors"; the Borrower, Holding and the 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). 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. 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 Credit Agreement. Holding and the Subsidiary Guarantors have agreed to guarantee, among other things, all the obligations of the Borrower under the 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 Pledgors of a 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 Secured Parties 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 Protection Agreement entered into with any counterparty that was a Lender at the time such Interest Rate Protection 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. Accordingly, 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: 2 SECTION 1. Pledge. 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 the Pledgor's right, title and interest in, to and under (a) the shares of capital stock owned by it and listed on Schedule II hereto and any shares of capital stock of the Borrower or any Subsidiary obtained in the future by the Pledgor and the certificates representing all such shares (the "Pledged Stock"); provided that the Pledged Stock shall not include (i) more than 65% of the issued and outstanding shares of stock of any Foreign Subsidiary or (ii) to the extent that applicable law requires that a Subsidiary of the Pledgor issue directors' qualifying shares, such qualifying shares; (b)(i) the debt securities listed opposite the name of the Pledgor on Schedule II hereto, (ii) any debt securities or instruments in the future held the Pledgor and (iii) the promissory notes and any other instruments evidencing such debt securities (the "Pledged Debt Securities"); (c) all other property that may be delivered to and held by the Collateral Agent pursuant to the terms hereof; (d) subject to Section 5, all payments of principal or interest, dividends, cash, instruments and other property from time to time received, receivable or otherwise distrib uted, in respect of, in exchange for or upon the conversion of the securities referred to in clauses (a) and (b); (e) subject to Section 5, all rights and privileges of the Pledgor with respect to the securities and other property referred to in clauses (a), (b), (c) and (d); and (f) all proceeds of any of the foregoing (the items referred to in clauses (a) through (f) being collectively referred to as the "Collateral"). Upon delivery to the Collateral Agent, (a) any stock certificates, notes or other securities now or hereafter included in the Collateral (the "Pledged Securities") shall be accompanied by stock powers duly executed in blank or other instruments of transfer satisfactory to the Collateral Agent and by such other instruments and documents as the Collateral Agent may reasonably request and (b) 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 II and made a part hereof. Each schedule so delivered shall supersede any prior schedules so delivered. SECTION 2. Delivery of the Collateral. (a) 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. (b) Each Pledgor will cause any Indebtedness for borrowed money owed to the Pledgor by any person (except for Indebtedness representing advances made to persons other than customers in the ordinary cause of business) to be evidenced by a duly executed promissory note that is pledged and delivered to the Collateral Agent pursuant to the terms thereof. 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) the Pledged Stock represents that percentage as set forth on Schedule II of the issued and outstanding shares of each class of the capital stock of the issuer with respect thereto; (b) 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 II, (ii) holds the same free and clear of all 3 Liens (other than Liens permitted under Section 6.02 of the Credit Agreement), (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) subject to Section 5, 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; (c) 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; (d) no consent of any other person (including stockholders or creditors of any 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; (e) by virtue of the execution and delivery by the Pledgors of this Agreement, when the Pledged Securities, certificates 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; (f) 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; (g) all of the Pledged Stock has been duly authorized and validly issued and is fully paid and nonassessable and none of the Pledged Stock is subject to preemptive rights; (h) all information set forth herein relating to the Pledged Stock is accurate and complete in all material respects as of the date hereof; and (i) the pledge of the Pledged Stock pursuant to this Agreement does not violate Regulation G, T, U or X of the Federal Reserve Board or any successor thereto as of the date hereof. 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 Pledgors, 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 Pledged Securities registered in the name of such Pledgor. 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 shall have occurred and be continuing: (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 4 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. (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) and to receive the cash dividends it is entitled to receive pursuant to subclause (iii). (iii) Each Pledgor shall be entitled to receive and retain any and all cash dividends, interest and principal paid on the Pledged Securities to the extent and only to the extent that such cash dividends, interest and principal are permitted by, and otherwise paid in accordance with, the terms and conditions of the Credit Agreement, the other Credit Documents. All noncash dividends, interest and principal, and all dividends, interest and principal paid or payable in cash or otherwise in connection with a partial or total liquidation or dissolution, return of capital, capital surplus or paid-in surplus, and all other distributions (other than distributions referred to in the preceding sentence) made on or in respect of the Pledged Securities, whether paid or payable in cash or otherwise, whether resulting from a subdivision, combination or reclassification of the outstanding capital stock of the issuer of any Pledged Securities or received in exchange for Pledged Securities or any part thereof, or in redemption thereof, or as a result of any merger, consolidation, acquisition or other exchange of assets to which such issuer may be a party or otherwise, shall be and become part of the Collateral, and, if received by any Pledgor, shall not be commingled by such Pledgor with any of its other funds or property but shall be held separate and apart therefrom, shall be held in trust for the benefit of the Collateral Agent and shall be forthwith delivered to the Collateral Agent in the same form as so received (with any necessary endorsement). (b) Upon the occurrence and during the continuance of an Event of Default, all rights of any Pledgor to dividends, interest or principal that such Pledgor is authorized to receive pursuant to clause (a)(iii) 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 receive and retain such dividends, interest or principal. All dividends, interest or principal received by the 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 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 shall be applied in accordance with the provisions of Section 7. After all Events of Default have been cured or waived, the Collateral Agent shall, within five Business Days after all such Events of Default have been cured or waived, repay to each Pledgor all cash dividends, interest or principal (without interest), that such Pledgor would otherwise be permitted to retain pursuant to the terms of clause (a)(iii) and which remain in such account. (c) Upon the occurrence and during the continuance of an Event of Default, all rights of any Pledgor to exercise the voting and consensual rights and powers it is entitled to 5 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 the Pledgors to exercise such rights. After all Events of Default have been cured or waived, such Pledgor will have the right to exercise the voting and consensual rights and 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, 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, 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 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 a Pledgor 10 days' prior written notice (which each Pledgor 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 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 6 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 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 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 9-504(3) 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 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 any Pledgor 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, collec tion from, or other realization upon, any of 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. 7 (b) Without limitation of its indemnification obligations under the other Credit Documents, 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 wilful 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, 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 the 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 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 wilful 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 8 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 Laws") 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 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 provi sions 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 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 9 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 securi ties 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 each Pledgor 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 Obligations or (d) any other circumstance that might otherwise constitute a defense available to, or a discharge of, any Pledgor 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) Upon any sale or other transfer by any Pledgor of any Collateral that is permitted under the Credit Agreement to any person that is not a Pledgor, or, upon the effectiveness of any written consent to the release of the security interest granted hereby in any Collateral pursuant to Section 9.08(b) of the Credit Agreement, the security interest in such Collateral shall be automatically released. (c) In connection with any termination or release pursuant to clause (a) or (b), the Collateral Agent shall execute and deliver to any Pledgor, at such Pledgor's expense, all 10 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 any Subsidiary Pledgor shall be given to it in care of the Borrower. SECTION 16. Further Assurances. Each Pledgor agrees to do such further acts and things, and to execute and deliver such additional conveyances, assignments, agreements and instruments, as the Collateral Agent may at any time reasonably request in connection with the administration and enforcement of this Agreement or with respect to the Collateral or any part thereof or in order better to assure and confirm unto the Collateral Agent its rights and remedies hereunder. 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 any Pledgor that are contained in this Agreement shall bind and inure to the benefit of its successors and assigns. This Agreement shall become effective as to any Pledgor when a counterpart hereof executed on behalf of such Pledgor 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 Pledgor and the Collateral Agent and their respective successors and assigns, and shall inure to the benefit of such Pledgor, the Collateral Agent and the other Secured Parties, and their respective successors and assigns, except that no Pledgor shall have the right to assign its rights hereunder or any interest herein or in the Collateral (and any such attempted assignment shall be void), except as expressly contemplated by this Agreement or the other Credit Documents. If all of the capital stock of a Pledgor is sold, transferred or otherwise disposed of to a person that is not an Affiliate of the Borrower pursuant to a transaction permitted by Section 6.05 of the Credit Agreement, such Pledgor shall be released from its obligations under this Agreement without further action. This Agreement shall be construed as a separate agreement with respect to each Pledgor and may be amended, modified, supplemented, waived or released with respect to any Pledgor without the approval of any other Pledgor and without affecting the obligations of any other Pledgor hereunder SECTION 18. Survival of Agreement; Severability. (a) All covenants, agreements, representations and warranties made by each Pledgor 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. (b) 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 11 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 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 12 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. Pursuant to Section 5.11 of the Credit Agreement, each Restricted Subsidiary of the Borrower that was not in existence or not a Subsidiary on the date of the Credit Agreement is required to enter in this Agreement as a Subsidiary Pledgor upon becoming a Restricted Subsidiary 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 Subsidiary of an instrument in the form of Annex 1, such Subsidiary shall become a Subsidiary Pledgor hereunder with the same force and effect as if originally named as a Subsidiary 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 Subsidiary Pledgor as a party to this Agreement. SECTION 25. Certain Other Rights. (a) The Pledgors 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 Pledgors 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 Pledgors 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 Pledgors' 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 Pledgors' liability hereunder, the Pledgors 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 Pledgors 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 Pledgors 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 Pledgors 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 Pledgors may have to seek reimbursement, contribution, or indemnification from the Borrower or others based on any right the Pledgors may have of subrogation, reimbursement, contribution, or indemnification for any amounts paid by the Pledgors under this Agreement. 13 The Pledgors further understand and acknowledge that in the absence of this paragraph, such potential impairment or destruction of the Pledgors' rights, if any, may entitle the Pledgors 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 - --------------- Pledgors freely, irrevocably, and unconditionally: (A) waive and relinquish that defense and agree that the Pledgors 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 Pledgors 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 Pledgors in this Agreement include any right or defense that the Pledgors 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 Pledgors waive any rights and defenses that are or may become available to the Pledgors by reason of Sections 2787 to 2855, inclusive, of the California Civil Code. (iii) The Pledgors waive all rights and defenses that the Pledgors 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 Pledgors 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 Pledgors even if the Collateral Agent, by foreclosing on the real property collateral, has destroyed any right the Pledgors may have to collect from the Borrower. This is an unconditional and irrevocable waiver of any rights and defenses the Pledgors 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 Pledgors 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 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 Pledgors any information relating to the business operations or financial conditions of the Borrower. 14 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. RIVER HOLDING CORP, by /s/ Charles P. Rullman --------------------------------- Name: Charles P. Rullman Title: President HUDSON RESPIRATORY CARE INC., by /s/ Richard W. Johansen --------------------------------- Name: Richard W. Johansen Title: President and Chief Executive Officer by /s/ Jay R. Ogram --------------------------------- Name: Jay R. Ogram Title: Chief Financial Officer BANKERS TRUST COMPANY, as Collateral Agent, by /s/ Robert R. Telesca --------------------------------- Name: Robert R. Telesca Title: Assistant Vice President EX-10.4 13 DEED OF TRUST, SECURITY AGREEMENT, ETC. EXHIBIT 10.4 Recording Requested by: Bankers Trust Company, as Agent When Recorded Return to: Robert Harvey, Esq. Cravath, Swaine & Moore 825 Eighth Avenue New York, NY 10019 DEED OF TRUST, SECURITY AGREEMENT, FIXTURE FILING AND ASSIGNMENT OF LEASES AND RENTS THIS DEED OF TRUST SECURES AN OBLIGATION WHICH PROVIDES FOR A REVOLVING LINE OF CREDIT AND VARIABLE INTEREST RATE THIS DEED OF TRUST, SECURITY AGREEMENT, FIXTURE FILING AND ASSIGNMENT OF LEASES AND RENTS dated as of April 7, 1998 (this "Deed of Trust"), by HUDSON RESPIRATORY CARE INC., a California corporation ("Hudson RCI"), having an office at 27711 Diaz Road, Temecula, CA 92580-9020 (the "Grantor"), to CHICAGO TITLE INSURANCE COMPANY (the "Trustee") for the benefit of BANKERS TRUST COMPANY, a New York banking corporation ("BTCo."), having an office at 300 South Grand Avenue, Floor 41, Los Angeles, CA 90071, as collateral agent (in such capacity, the "Collateral Agent") for the benefit of the Secured Parties (as defined below) (the "Beneficiary"); WITNESSETH THAT: A. Reference is made to the Senior Secured Credit Agreement dated as of April 7, 1998 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Grantor as Borrower, River Holding Corp., a Delaware corporation, the financial institutions party thereto as lenders (the "Lenders") and BTCo. as Administrative Agent, Collateral Agent and Issuing Bank for the Lenders. As used herein, the term "Secured Parties" shall mean (i) the Lenders, (ii) the Administrative 2 Agent, (iii) the Collateral Agent, (iv) the Issuing Bank, (v) each counterparty to a Rate Protection Agreement entered into with the Grantor if such counterparty was a Lender at the time the Rate Protection Agreement was entered into, (vi) the beneficiaries of each indemnification obligation undertaken by the Grantor under any Credit Document and (vii) the successors and permitted assigns of each of the foregoing. Pursuant to the Credit Agreement, (a) the Lenders have lent or agreed to lend to the Grantor (i) on a term basis, Term Loans (such term and each other capitalized term used herein but not defined herein shall have the meaning assigned to such term in the Credit Agreement) in an aggregate principal amount not in excess of $40,000,000, and (ii) on a revolving basis, Revolving Loans, at any time and from time to time prior to the Revolving Credit Maturity Date, in an aggregate principal amount at any time outstanding not in excess of $50,000,000 in each case on the terms and subject to the conditions of the Credit Agreement and (b) the Issuing Bank has agreed to issue Letters of Credit for the account of the Grantor in an aggregate face amount at any time outstanding not in excess of $7,500,000 upon terms and subject to the conditions of the Credit Agreement. B. The obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit under the Credit Agreement are conditioned upon, among other things, the execution and delivery by the Grantor of this Deed of Trust in the form hereof, to secure (a) the due and punctual payment 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 Grantor 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 deficiency judgments and 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 Grantor to the Secured Parties under the Credit Agreement, this Deed of Trust and the other Credit Documents to which the Grantor is or is to be a party, (b) the due and punctual performance of all covenants, agreements, obligations and liabilities of the Grantor under or pursuant to the Credit Agreement, this Deed of Trust and the other Credit Documents to which the Grantor is or is to be a party and (c) the due and punctual payment and performance of all obligations of the Grantor under each Rate Protection Agreement entered into with a counterparty that was a Lender at the time such Rate Protection Agreement was entered into (all the obligations referred to in the preceding clauses (a) through (c) being referred to collectively, as the "Obligations"). Pursuant to the requirements of the Credit Agreement, the Grantor is entering into this Deed of Trust to create a security interest in the Trust Property (as defined herein) to secure the performance and payment by the Grantor of the Obligations. The Credit Agreement also requires the granting by the Grantor and the Subsidiaries (the "Other Mortgages") that create security interests in certain Mortgaged Properties other than the Trust Property to secure the performance of the Obligations. Granting Clauses 3 NOW THEREFORE, IN CONSIDERATION OF the foregoing and in order to secure (A) the due and punctual payment and performance of the Obligations, (B) the due and punctual payment by the Grantor of all taxes and insurance premiums relating to the Trust Property and (C) all disbursements made by Beneficiary for the payment of taxes, common area charges or insurance premiums, all fees, expenses or advances in connection with or relating to the Trust Property, and interest on such disbursements and other amounts not timely paid in accordance with the terms of the Credit Agreement, this Deed of Trust and the other Credit Documents, Grantor hereby grants, conveys, mortgages, assigns and pledges, with mortgage covenants, to the Trustee, IN TRUST FOREVER, with power of sale, for the benefit of the Beneficiary (for the ratable benefit of the Secured Parties), a security interest in, all the following described property (the "Trust Property") whether now owned or held or hereafter acquired: (1) all Grantor's right, title and interest in all the fee estate in the land more particularly described on Exhibit A hereto (the "Land"), together with all rights appurtenant thereto, including the easements over certain other adjoining land granted by any easement agreements, covenant or restrictive agreements and all air rights, mineral rights, water rights, oil and gas rights and development rights, if any, relating thereto, and also together with all of the other easements, rights, privileges, interests, hereditaments and appurtenances thereunto belonging or in anyway appertaining and all of the estate, right, title, interest, claim or demand whatsoever of Grantor therein and in the streets and ways adjacent thereto, either in law or in equity, in possession or expectancy, now or hereafter acquired (the "Premises"); (2) all Grantor's right, title and interest in all buildings, improvements, structures, paving, parking areas, walkways and landscaping now or hereafter erected or located upon the Land, and all fixtures of every kind and type affixed to the Premises or attached to or forming part of any structures, buildings or improvements and replacements thereof now or hereafter erected or located upon the Land (the "Improvements"); (3) all Grantor's right, title and interest in all general intangibles relating to design, development, operation, management and use of the Premises or the Improvements, all certificates of occupancy, zoning variances, building, use or other permits, approvals, authorizations and consents obtained from and all materials prepared for filing or filed with any governmental agency in connection with the development, use, operation or management of the Premises and Improvements, all construction, service, engineering, consulting, leasing, architectural and other similar contracts concerning the design, construction, management, operation, occupancy and/or use of the Premises and Improvements, all architectural drawings, plans, specifications, soil tests, feasibility studies, appraisals, environmental studies, engineering reports and similar materials relating to any portion of or all of the Premises and Improvements, and all payment and performance bonds or warranties or guarantees relating to the Premises or the Improvements, all to the extent assignable (the "Permits, Plans and Warranties"); (4) Grantor's interest in and rights under any and all now or hereafter existing leases or licenses (under which Grantor is landlord or licensor) and subleases (under which Grantor is sublandlord), concession, management, mineral 4 or other agreements of a similar kind that permit the use or occupancy of the Premises or the Improvements for any purpose in return for any payment, or the extraction or taking of any gas, oil, water or other minerals from the Premises in return for payment of any fee, rent or royalty (collectively, "Leases"), and all agreements or contracts for the sale or other disposition of all or any part of the Premises or the Improvements, now or hereafter entered into by Grantor, together with all charges, fees, income, issues, profits, receipts, rents, revenues or royalties payable thereunder ("Rents"); (5) all Grantor's right, title and interest in and to all real estate tax refunds and all proceeds of the conversion, voluntary or involuntary, of any of the Trust Property into cash or liquidated claims ("Proceeds"), including Proceeds of insurance maintained by the Grantor and condemnation awards, any awards that may become due by reason of the taking by eminent domain or any transfer in lieu thereof of the whole or any part of the Premises or Improvements or any rights appurtenant thereto, and any awards for change of grade of streets, together with any and all moneys now or hereafter on deposit for the payment of real estate taxes, assessments or common area charges levied against the Trust Property, unearned premiums on policies of fire and other insurance maintained by the Grantor covering any interest in the Trust Property or required by the Credit Agreement; and (6) all Grantor's right, title and interest in and to all extensions, improvements, betterments, renewals, substitutes and replacements of and all additions and appurtenances to, the Land, the Premises, the Improvements, the Personal Property, the Permits, Plans and Warranties and the Leases, hereinafter acquired by or released to the Grantor or constructed, assembled or placed by the Grantor on the Land, the Premises or the Improvements, and all conversions of the security constituted thereby, immediately upon such acquisition, release, construction, assembling, placement or conversion, as the case may be, and in each such case, without any further mortgage, deed of trust, conveyance, assignment or other act by the Grantor, all of which shall become subject to the lien of this Deed of Trust as fully and completely, and with the same effect, as though now owned by the Grantor and specifically described herein. TO HAVE AND TO HOLD the Trust Property unto the Trustee, its successors and assigns, for the benefit of the Beneficiary (for the ratable benefit of the Secured Parties), forever, subject only to the Permitted Encumbrances (as hereinafter defined) and to satisfaction and cancelation as provided in Section 3.04. IN TRUST NEVERTHELESS upon the terms and trust herein set forth for the benefit and security of the Beneficiary. ARTICLE I Representations, Warranties and Covenants of Grantor Grantor agrees, covenants, represents and/or warrants as follows: SECTION 1.01. Title. (a) Grantor has good and marketable title to an indefeasible fee estate in the Land and Improvements subject to no lien, charge or 5 encumbrance, and this Deed of Trust is and will remain a valid and enforceable first and prior lien on the Premises, Improvements and the Rents subject only to, in each case, Liens permitted by Section 6.2 of the Credit Agreement and the exceptions and encumbrances referred to in Schedule B to the title insurance policy being issued to insure the lien of this Deed of Trust (collectively, the "Permitted Encumbrances"). The Permitted Encumbrances do not materially interfere with the current use, enjoyment or operation of the Trust Property. (b) Grantor has good and marketable title to all the Personal Property subject to no lien, charge or encumbrance other than this Deed of Trust and the Permitted Encumbrances. Except as may be permitted under the Credit Agreement, the Personal Property is not and will not become the subject matter of any lease or other arrangement that is not a Permitted Encumbrance whereby the ownership of any Personal Property will be held by any person or entity other than Grantor; except as permitted under the Credit Agreement, none of the Personal Property will be removed from the Premises or the Improvements unless the same is no longer needed for the continued operation of the Premises and the Improvements as currently operated (or as then operated, to the extent that any change from the current manner of operation was permitted by the Credit Agreement) or is replaced by other Personal Property of substantially equal or greater utility and value; and Grantor will not create or cause to be created (other than Permitted Encumbrances) any security interest covering any of the Personal Property other than the security interest in the Personal Property created in favor of Beneficiary by this Deed of Trust or any other agreement collateral hereto. The Trust Property is served by water, gas, electric, storm and sanitary sewage facilities, and such utilities serving the Premises and the Improvements are located in and in the future will be located in the Premises as is reasonable and customary for like kind Improvements in the area. There is vehicular access to the Premises and the Improvements which is provided by, either a public right-of-way abutting and contiguous with the Land or valid recorded unsubordinated easements. (c) Except as set forth on Schedule A hereto, there are no leases affecting any portion of the Trust Property. Each Lease is in full force and effect, and, except as set forth on Schedule A hereto, Grantor has not given, nor to Grantor's knowledge has it received, any uncured or unwaived notice of default with respect to any material obligation under any Lease. Each Lease is subject to no lien, charge or encumbrance other than this Deed of Trust and the Permitted Encumbrances. (d) All easement agreements, covenant or restrictive agreements, supplemental agreements and any other material instruments hereinabove referred to and mortgaged hereby are and will remain valid, subsisting and in full force and effect, unless the failure to remain valid, subsisting and in full force and effect, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the Trust Property, and Grantor is not in default thereunder and has fully performed the material terms thereof required to be performed through the date hereof, and has no knowledge of any default thereunder or failure to fully perform the terms thereof by any other party, nor of the occurrence of any event that after notice or the passage of time or both will constitute a default thereunder. (e) Grantor has good and lawful right and full power and authority to mortgage the Trust Property and will forever warrant and defend its title to the Trust Property, the rights of Beneficiary therein under this Deed of Trust and the validity and priority of the 6 lien of this Deed of Trust thereon against the claims of all persons and parties except those having rights under Permitted Encumbrances to the extent of those rights. (f) This Deed of Trust, when duly recorded in the appropriate public records and when financing statements are duly filed in the appropriate public records, will create a valid and enforceable lien upon and security interest in all the Trust Property and there will be no defenses or offsets to this Deed of Trust that will be asserted by Grantor or its Affiliates (or any third party defense or offset now known to Grantor or its Affiliates) or to any of the Obligations secured hereby for so long as any portion of the Obligations is outstanding, other than payment of the Obligations. SECTION 1.02. Credit Agreement; Certain Amounts. (a) This Deed of Trust is given pursuant to the Credit Agreement. Each and every term and provision of the Credit Agreement, including the rights, remedies, obligations, covenants, conditions, agreements, indemnities, representations and warranties of the parties thereto shall be considered as if a part of this Deed of Trust and to the extent there is a specific conflict between the terms hereof and the terms of the Credit Agreement (except with respect to Section 1.01 hereof), the terms of the Credit Agreement shall control. (b) If any remedy or right of the Trustee or Beneficiary pursuant hereto is acted upon by the Trustee or Beneficiary or if any actions or proceedings (including any bankruptcy, insolvency or reorganization proceedings) are commenced in which the Trustee or Beneficiary is made a party and is obliged to defend or uphold or enforce this Deed of Trust or the rights of Beneficiary hereunder or the terms of any Lease, or if a condemnation proceeding is instituted affecting the Trust Property, Grantor will pay all reasonable sums, including reasonable attorneys' fees and disbursements, incurred by the Trustee or Beneficiary related to the exercise of any remedy or right of the Trustee or Beneficiary pursuant hereto or for the reasonable expense of any such action or proceeding together with all statutory or other costs, disbursements and allowances, interest thereon from the date of demand for payment thereof at the rate specified in clause (b) of Section 2.7 of the Credit Agreement (the "Default Interest Rate"), and such sums and the interest thereon shall, to the extent permissible by law, be a lien on the Trust Property prior to any right, title to, interest in or claim upon the Trust Property attaching or accruing subsequent to the recording of this Deed of Trust and shall be secured by this Deed of Trust to the extent permitted by law. Any payment of amounts due to Beneficiary under this Deed of Trust not made on or before the due date for such payments shall accrue interest daily without notice from the due date until paid at the Default Interest Rate, and such interest at the Default Interest Rate shall be immediately due upon demand by the Trustee or Beneficiary. SECTION 1.03. Payment of Taxes, Liens and Charges. (a) Except as may be permitted by Section 5.3 of the Credit Agreement, Grantor will pay and discharge from time to time prior to the time when the same shall become delinquent, and before any interest or penalty accrues thereon or attaches thereto, all taxes of every kind and nature, all general and special assessments, levies, permits, inspection and license fees, all water and sewer rents, all vault charges, and all other public charges, and all service charges, common area charges, private maintenance charges, utility charges and all other private charges, whether of a like or different nature, imposed upon or assessed against the Trust Property or any part thereof or upon the Rents from the Trust Property or arising in respect of the occupancy, use or possession thereof. 7 (b) In the event of the passage of any state, Federal, municipal or other governmental law, order, rule or regulation subsequent to the date hereof (i) deducting from the value of real property for the purpose of taxation any lien or encumbrance thereon or in any manner changing or modifying the laws now in force governing the taxation of this Deed of Trust or debts secured by mortgages or deeds of trust (other than laws governing income, franchise and similar taxes generally) or the manner of collecting taxes thereon and (ii) imposing a tax to be paid by Beneficiary, either directly or indirectly, on this Deed of Trust or any of the Credit Documents or to require an amount of taxes to be withheld or deducted therefrom, Grantor will promptly notify Beneficiary of such event. In such event Grantor shall (i) agree to enter into such further instruments as may be reasonably necessary or desirable to obligate Grantor to make any applicable additional payments and (ii) make such additional payments. (c) At any time that an Event of Default shall occur hereunder and be continuing, or if required by any law applicable to Grantor or to Beneficiary, Beneficiary shall have the right to direct Grantor to make an initial deposit on account of real estate taxes and assessments, insurance premiums and common area charges, levied against or payable in respect of the Trust Property in advance and thereafter semi-annually, each such deposit to be equal to one-half of any such annual charges estimated in a reasonable manner by Beneficiary in order to accumulate with Beneficiary sufficient funds to pay such taxes, assessments, insurance premiums and charges. SECTION 1.04. Payment of Closing Costs. Grantor shall pay all costs in connection with, relating to or arising out of the preparation, execution and recording of this Deed of Trust, including title company premiums and charges, inspection costs, survey costs, recording fees and taxes which are due, reasonable attorneys', engineers', appraisers' and consultants' fees and disbursements and all other similar reasonable expenses of every kind. SECTION 1.05. Alterations and Waste; Plans. (a) Except as may be permitted under the Credit Agreement, no Improvements will be materially altered or demolished or removed in whole or in part by Grantor. Grantor will not erect any additions to the existing Improvements or other structures on the Premises which will materially interfere with the operation conducted thereon on the date hereof, without the written consent of Beneficiary. Grantor will not commit any waste on the Trust Property or make any alteration to, or change in the use of, the Trust Property that will diminish the utility thereof for the operation of the business except as may be permitted under the Credit Agreement or materially increase any ordinary fire or other hazard arising out of construction or operation, but in no event shall any such alteration or change be contrary to the terms of any insurance policy required to be kept pursuant to Section 1.06. Grantor will maintain and operate the Improvements and Personal Property in good repair, working order and condition, reasonable wear and tear excepted (notwithstanding the terms of Section 5.1 of the Credit Agreement). (b) To the extent the same exist on the date hereof or are obtained in connection with future permitted alterations, Grantor shall maintain a complete set of final plans, specifications, blueprints and drawings for the Trust Property either at the Trust Property or in a particular office at the headquarters of Grantor to which Beneficiary shall have access upon reasonable advance notice and at reasonable times. SECTION 1.06. Insurance. Grantor will keep or cause to be kept the Improvements and Personal Property insured against such risks, and in the manner, required by Section 5.2 of the Credit Agreement. 8 SECTION 1.06. Insurance. Grantor will keep or cause to be kept the Improvements and Personal Property insured against such risks, and in the manner, required by Section 5.2 of the Credit Agreement. SECTION 1.07. Casualty; Condemnation. Beneficiary is authorized to collect and receive insurance and condemnation proceeds as provided by Section 5.12 of the Credit Agreement. SECTION 1.08. Assignment of Leases and Rents. (a) Grantor hereby irrevocably and absolutely grants, transfers and assigns to the Trustee for the benefit of Beneficiary all of its right title and interest in all Leases, together with any and all extensions and renewals thereof for purposes of securing and discharging the performance by Grantor of the Obligations. Grantor has not assigned or executed any assignment of, and will not assign or execute any assignment of, any other Lease or their respective Rents to anyone other than the Trustee for the benefit of Beneficiary. (b) Without Beneficiary's prior written consent, Grantor will not (i) modify, amend, terminate or consent to the cancelation or surrender of any Lease if such modification, amendment, termination or consent to the Trustee for the benefit of the Beneficiary would, in the reasonable judgment of the Beneficiary, be adverse in any material respect to the interests of the Lenders, the value of the Trust Property or the lien created by this Deed of Trust or (ii) consent to an assignment of any tenant's interest in any Lease or to a subletting thereof covering a material portion of the Trust Property. (c) Subject to Section 1.08(d), Grantor has assigned and transferred to Beneficiary all of Grantor's right, title and interest in and to the Rents now or hereafter arising from each Lease heretofore or hereafter made or agreed to by Grantor, it being intended that this assignment establish, subject to Section 1.08(d), an absolute transfer and assignment of all Rents and all Leases to Beneficiary and not merely to grant a security interest therein. Subject to Section 1.08(d), Beneficiary may in Grantor's name and stead (with or without first taking possession of any of the Trust Property personally or by receiver as provided herein) operate the Trust Property and rent, lease or let all or any portion of any of the Trust Property to any party or parties at such rental and upon such terms as Beneficiary shall, in its sole discretion, determine, and may collect and have the benefit of all of said Rents arising from or accruing at any time thereafter or that may thereafter become due under any Lease. (d) So long as an Event of Default shall not have occurred and be continuing, Beneficiary will not exercise any of its rights under Section 1.08(c), and Grantor shall receive and collect the Rents accruing under any Lease; but after the happening and during the continuance of any Event of Default, Beneficiary may, at its option, receive and collect all Rents and enter upon the Premises and Improvements through its officers, agents, employees or attorneys for such purpose and for the operation and maintenance thereof. Grantor hereby irrevocably authorizes and directs each tenant, if any, and each successor, if any, to the interest of any tenant under any Lease, respectively, to rely upon any written notice sent by Beneficiary to any such tenant or any of such tenant's successors in interest, and thereafter to pay Rents to Beneficiary. (e) Beneficiary will not become a Beneficiary in possession so long as it does not enter or take actual possession of the Trust Property. In addition, Beneficiary shall not be responsible or liable for performing any of the obligations of the landlord under any 9 Lease, for any waste by any tenant, or others, for any dangerous or defective conditions of any of the Trust Property, for negligence in the management, upkeep, repair or control of any of the Trust Property or any other act or omission by any other person. (f) Grantor shall furnish to Beneficiary, within 30 days after a request by Beneficiary to do so, a written statement containing the names of all tenants, subtenants and concessionaires of the Premises or Improvements, the terms of any Lease, the space occupied and the rentals or license fees payable thereunder. SECTION 1.09. Security Agreement. This Deed of Trust is both a mortgage of real property and a grant of a security interest in personal property, and shall constitute and serve as a "Security Agreement" within the meaning of the uniform commercial code as adopted in the state wherein the Premises are located. Grantor has hereby granted unto Beneficiary a security interest in and to all the Trust Property described in this Deed of Trust that is not real property, and simultaneously with the recording of this Deed of Trust, Grantor has filed or will file UCC financing statements, and will file continuation statements prior to the lapse thereof, at the appropriate offices in the state in which the Premises are located to perfect the security interest granted by this Deed of Trust in all the Trust Property that is not real property. Grantor hereby appoints Beneficiary as its true and lawful attorney-in-fact and agent, for Grantor and in its name, place and stead, in any and all capacities, to execute any document and to file the same in the appropriate offices (to the extent it may lawfully do so), and to perform each and every act and thing reasonably requisite and necessary to be done to perfect the security interest contemplated by the preceding sentence. Beneficiary shall have all rights with respect to the part of the Trust Property that is the subject of a security interest afforded by the uniform commercial code as adopted in the state wherein the Premises are located in addition to, but not in limitation of, the other rights afforded Beneficiary hereunder and under the Security Agreement. SECTION 1.10. Filing and Recording. Grantor will cause this Deed of Trust, any other security instrument creating a security interest in or evidencing the lien hereof upon the Trust Property and each instrument of further assurance to be filed, registered or recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and fully to protect the lien hereof upon, and the security interest of Beneficiary in, the Trust Property. Grantor will pay all filing, registration or recording fees, and all reasonable expenses incidental to the execution and acknowledgment of this Deed of Trust, any mortgage supplemental hereto, any security instrument with respect to the Personal Property, and any instrument of further assurance and all Federal, state, county and municipal recording, documentary or intangible taxes and other taxes, duties, imposts, assessments and charges arising out of or in connection with the execution, delivery and recording of this Deed of Trust, any mortgage supplemental hereto, any security instrument with respect to the Personal Property or any instrument of further assurance. SECTION 1.11. Further Assurances. Upon demand by Beneficiary, Grantor will, at the cost of Grantor and without expense to Trustee or Beneficiary, do, execute, acknowledge and deliver all such further acts, deeds, conveyances, mortgages or deeds of trust, as applicable, assignments, notices of assignment, transfers and assurances as Beneficiary shall from time to time reasonably require for the better assuring, conveying, assigning, transferring and confirming unto Beneficiary the property and rights hereby conveyed or assigned or intended now or hereafter so to be, or which Grantor may be or 10 may hereafter become bound to convey or assign to Beneficiary, or for carrying out the intention or facilitating the performance of the terms of this Deed of Trust, or for filing, registering or recording this Deed of Trust, and on demand, Grantor will also execute and deliver and hereby appoints Beneficiary as its true and lawful attorney-in-fact and agent, for Grantor and in its name, place and stead, in any and all capacities, to execute and file to the extent it may lawfully do so, one or more financing statements, chattel mortgages or comparable security instruments reasonably requested by Beneficiary to evidence more effectively the lien hereof upon the Personal Property and to perform each and every act and thing requisite and necessary to be done to accomplish the same. SECTION 1.12. Additions to Trust Property. All right, title and interest of Grantor in and to all extensions, improvements, betterments, renewals, substitutes and replacements of, and all additions and appurtenances to, the Trust Property hereafter acquired by or released to Grantor or constructed, assembled or placed by Grantor upon the Premises or the Improvements, and all conversions of the security constituted thereby, immediately upon such acquisition, release, construction, assembling, placement or conversion, as the case may be, and in each such case without any further mortgage, conveyance, assignment or other act by Grantor, shall become subject to the lien and security interest of this Deed of Trust as fully and completely and with the same effect as though now owned by Grantor and specifically described in the grant of the Trust Property above, but at any and all times Grantor will execute and deliver to Beneficiary any and all such further assurances, mortgages, conveyances or assignments thereof as Beneficiary may reasonably require for the purpose of expressly and specifically subjecting the same to the lien and security interest of this Deed of Trust. SECTION 1.13. No Claims Against Beneficiary. Nothing contained in this Deed of Trust shall constitute any consent or request by Trustee or Beneficiary, express or implied, for the performance of any labor or services or the furnishing of any materials or other property in respect of the Trust Property or any part thereof, nor as giving Grantor any right, power or authority to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would permit the making of any claim against Trustee or Beneficiary in respect thereof. SECTION 1.14. Fixture Filing. This Deed of Trust constitutes a financing statement filed as a fixture filing in the Official Records of the County Recorder of the county in which the Premises are located with respect to any and all fixtures included within the term Trust Property that is or may become fixtures. ARTICLE II Defaults and Remedies SECTION 2.01. Events of Default. It shall be an Event of Default under this Deed of Trust if any Event of Default (as therein defined) shall exist pursuant to the Credit Agreement. SECTION 2.02. Demand for Payment. If an Event of Default as set forth herein shall occur and be continuing, then, upon written demand of Beneficiary, Grantor will pay to Beneficiary all amounts due hereunder and such further amount as shall be sufficient to cover the costs and expenses of collection, including attorneys' fees, 11 disbursements and expenses incurred by Trustee or Beneficiary and Trustee or Beneficiary shall be entitled and empowered to institute an action or proceedings at law or in equity for the collection of the sums so due and unpaid, to prosecute any such action or proceedings to judgment or final decree, to enforce any such judgment or final decree against Grantor and to collect, in any manner provided by law, all moneys adjudged or decreed to be payable. SECTION 2.03. Rights To Take Possession, Operate and Apply Revenues. (a) To the extent permitted by applicable law, if an Event of Default shall occur and be continuing, Grantor shall, upon demand of Beneficiary, forthwith surrender to Beneficiary actual possession of the Trust Property and, if and to the extent permitted by law, Beneficiary itself, or by such officers or agents as it may appoint, may then enter and take possession of all the Trust Property without the appointment of a receiver or an application therefor, exclude Grantor and its agents and employees wholly therefrom, and have access to the books, papers and accounts of Grantor. (b) To the extent permitted by applicable law, if Grantor shall for any reason fail to surrender or deliver the Trust Property or any part thereof after such demand by Beneficiary, Beneficiary may obtain a judgment or decree conferring upon Beneficiary the right to immediate possession or requiring Grantor to deliver immediate possession of the Trust Property to Beneficiary, to the entry of which judgment or decree Grantor hereby specifically consents. Grantor will pay to Beneficiary, upon demand, all reasonable expenses of obtaining such judgment or decree, including reasonable compensation to Beneficiary's attorneys and agents with interest thereon at the Default Interest Rate; and all such expenses and compensation shall, until paid, be secured by this Deed of Trust. (c) To the extent permitted by applicable law, upon every such entry or taking of possession, Beneficiary may hold, store, use, operate, manage and control the Trust Property, conduct the business thereof and, from time to time, (i) make all necessary and proper maintenance, repairs, renewals, replacements, additions, betterments and improvements thereto and thereon, (ii) purchase or otherwise acquire additional fixtures, personalty and other property, (iii) insure or keep the Trust Property insured, (iv) manage and operate the Trust Property and exercise all the rights and powers of Grantor to the same extent as Grantor could in its own name or otherwise with respect to the same, or (v) enter into any and all agreements with respect to the exercise by others of any of the powers herein granted Beneficiary, all as may from time to time be directed or determined by Beneficiary to be in its best interest and Grantor hereby appoints Beneficiary as its true and lawful attorney-in-fact and agent, for Grantor and in its name, place and stead, in any and all capacities, to perform any of the foregoing acts. Beneficiary may collect and receive all the Rents, issues, profits and revenues from the Trust Property, including those past due as well as those accruing thereafter, and, after deducting (i) all expenses of taking, holding, managing and operating the Trust Property (including compensation for the services of all persons employed for such purposes), (ii) the costs of all such maintenance, repairs, renewals, replacements, additions, betterments, improvements, purchases and acquisitions, (iii) the costs of insurance, (iv) such taxes, assessments and other similar charges as Beneficiary may at its option pay, (v) other proper charges upon the Trust Property or any part thereof and (vi) the compensation, expenses and disbursements of the attorneys and agents of Beneficiary, Beneficiary shall apply the remainder of the moneys and proceeds so received first to the payment of the 12 Beneficiary for the satisfaction of the Obligations, and second, if there is any surplus, to Grantor, subject to the entitlement of others thereto under applicable law. (d) To the extent permitted by applicable law, whenever, before any sale of the Trust Property under Section 2.06, all Obligations that are then due shall have been paid and all Events of Default fully cured, Beneficiary will surrender possession of the Trust Property back to Grantor, its successors or assigns. The same right of taking possession shall, however, arise again if any subsequent Event of Default shall occur and be continuing. SECTION 2.04. Right To Cure Grantor's Failure to Perform. After any Event of Default at anytime (without requiring future notice) should Grantor fail in the payment, performance or observance of any term, covenant or condition required by this Deed of Trust or the Credit Agreement (with respect to the Trust Property), Beneficiary may pay, perform or observe the same, and all payments made or costs or expenses incurred by Beneficiary in connection therewith shall be secured hereby and shall be, without demand, immediately repaid by Grantor to Beneficiary with interest thereon at the Default Interest Rate. Beneficiary shall be the judge using reasonable discretion of the necessity for any such actions and of the amounts to be paid. Beneficiary is hereby empowered to enter and to authorize others to enter upon the Premises or the Improvements or any part thereof for the purpose of performing or observing any such defaulted term, covenant or condition without having any obligation to so perform or observe and without thereby becoming liable to Grantor, to any person in possession holding under Grantor or to any other person. SECTION 2.05. Right to a Receiver. If an Event of Default shall occur and be continuing, Beneficiary, upon application to a court of competent jurisdiction, shall be entitled as a matter of right to the appointment of a receiver to take possession of and to operate the Trust Property and to collect and apply the Rents. The receiver shall have all of the rights and powers permitted under the laws of the state wherein the Trust Property is located. Grantor shall pay to Beneficiary upon demand all reasonable expenses, including receiver's fees, reasonable attorney's fees and disbursements, costs and agent's compensation incurred pursuant to the provisions of this Section 2.05; and all such expenses shall be secured by this Deed of Trust and shall be, without demand, immediately repaid by Grantor to Beneficiary with interest thereon at the Default Interest Rate. SECTION 2.06. Foreclosure and Sale. (a) If an Event of Default shall occur and be continuing, Beneficiary may elect to sell or to cause and direct the Trustee to sell the Trust Property or any part of the Trust Property by exercise of the power of foreclosure or of sale granted to Trustee and/or Beneficiary by applicable law or this Deed of Trust. In such case, Trustee or Beneficiary may commence a civil action to foreclose this Deed of Trust, or Trustee may proceed and sell the Trust Property to satisfy any Obligation. Trustee, Beneficiary or an officer appointed by a judgment of foreclosure to sell the Trust Property, may sell all or such parts of the Trust Property as may be chosen by Trustee or Beneficiary at the time and place of sale fixed by it in a notice of sale, either as a whole or in separate lots, parcels or items as Trustee or Beneficiary shall deem expedient, and in such order as it may determine, at public auction to the highest bidder. Trustee or Beneficiary or an officer appointed by a judgment of foreclosure to sell the Trust Property may postpone any foreclosure or other sale of all or any portion of the Trust Property by public announcement at such time and place of sale, and from time to time thereafter may 13 postpone such sale by public announcement or subsequently noticed sale. Without further notice, Trustee or Beneficiary or an officer appointed to sell the Trust Property may make such sale at the time fixed by the last postponement, or may, in its discretion, give a new notice of sale. Any person, including Grantor or Beneficiary or any designee or affiliate thereof, may purchase at such sale. (b) The Trust Property may be sold subject to unpaid taxes and Permitted Encumbrances, and, after deducting all costs, fees and expenses of Trustee and Beneficiary (including costs of evidence of title in connection with the sale), Trustee or Beneficiary or an officer that makes any sale shall apply the proceeds of sale in the manner set forth in Section 2.08. (c) Any foreclosure or other sale of less than the whole of the Trust Property or any defective or irregular sale made hereunder shall not exhaust the power of foreclosure provided for herein; and subsequent sales may be made hereunder until the Obligations have been satisfied, or the entirety of the Trust Property has been sold. (d) If an Event of Default shall occur and be continuing, Trustee or Beneficiary may instead of, or in addition to, exercising the rights described in Section 2.06(a) above and either with or without entry or taking possession as herein permitted, proceed by a suit or suits in law or in equity or by any other appropriate proceeding or remedy (i) to specifically enforce payment of some or all of the Obligations, or the performance of any term, covenant, condition or agreement of this Deed of Trust or any other Credit Document or any other right, or (ii) to pursue any other remedy available to Trustee or Beneficiary, all as Trustee or Beneficiary shall determine most effectual for such purposes. SECTION 2.07. Other Remedies. (a) In case an Event of Default shall occur and be continuing, Beneficiary may also exercise, to the extent not prohibited by law, any or all of the remedies available to a secured party under the uniform commercial code of the State wherein the Trust Property is located. (b) In connection with a sale of the Trust Property or any Personal Property and the application of the proceeds of sale as provided in Section 2.08, Beneficiary shall be entitled to enforce payment of and to receive up to the principal amount of the Obligations, plus all other charges, payments and costs due under this Deed of Trust, and to recover a deficiency judgment for any portion of the aggregate principal amount of the Obligations remaining unpaid, with interest. SECTION 2.08. Application of Sale Proceeds and Rents. After any foreclosure sale of all or any of the Trust Property, Trustee or Beneficiary shall receive the proceeds of sale, no purchaser shall be required to see to the application of the proceeds and Trustee or Beneficiary shall apply the proceeds of the sale together with any Rents that may have been collected and any other sums that then may be held by Trustee or Beneficiary under this Deed of Trust as follows: FIRST, to the payment of the costs and expenses of such sale, including reasonable compensation to Trustee or to Beneficiary's attorneys and agents, and of any judicial proceedings wherein the same may be made, and of all expenses, liabilities and advances made or incurred by Beneficiary under this Deed of Trust, together with interest at the Default Interest Rate on all advances made by 14 Beneficiary hereunder, including all taxes or assessments (except any taxes, assessments or other charges subject to which the Trust Property shall have been sold) and the cost of removing any Permitted Encumbrance (except any Permitted Encumbrance subject to which the Trust Property was sold); SECOND, to the Beneficiary for the distribution to the Secured Parties for the satisfaction of the Obligations owed to the Secured Parties; and THIRD, to the Grantor, its successors or assigns, or as a court of competent jurisdiction may otherwise direct. The Beneficiary shall have absolute discretion as to the time of application of any such proceeds, moneys or balances in accordance with this Deed of Trust. Upon any sale of the Trust Property by the Trustee or Beneficiary (including pursuant to a power of sale granted by statute or under a judicial proceeding), the receipt of the Trustee or Beneficiary or of the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Trust Property 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 Trustee or Beneficiary or such officer or be answerable in any way for the misapplication thereof. SECTION 2.09. Grantor as Tenant Holding Over. If Grantor remains in possession of any of the Trust Property after any foreclosure sale by Beneficiary, at Beneficiary's election Grantor shall be deemed a tenant holding over and shall forthwith surrender possession to the purchaser or purchasers at such sale or be summarily dispossessed or evicted according to provisions of law applicable to tenants holding over. SECTION 2.10. Waiver of Appraisement, Valuation, Stay, Extension and Redemption Laws. Grantor waives, to the extent not prohibited by law, (i) the benefit of all laws now existing or that hereafter may be enacted providing for any appraisement of any portion of the Trust Property, (ii) the benefit of all laws now existing or that may be hereafter enacted in any way extending the time for the enforcement or the collection of amounts due under any of the Obligations or creating or extending a period of redemption from any sale made in collecting said debt or any other amounts due Beneficiary, (iii) any right to at any time insist upon, plead, claim or take the benefit or advantage of any law now or hereafter in force providing for any appraisement, valuation, stay, extension or redemption, or sale of the Trust Property as separate tracts, units or estates or as a single parcel in the event of foreclosure, and (iv) all rights of redemption, valuation, appraisement, stay of execution, notice of election to mature or declare due the whole of or each of the Obligations and marshaling in the event of foreclosure of this Deed of Trust. SECTION 2.11. Discontinuance of Proceedings. In case Trustee or Beneficiary shall proceed to enforce any right, power or remedy under this Deed of Trust by foreclosure, entry or otherwise, and such proceedings shall be discontinued or abandoned for any reason, or shall be determined adversely to Trustee or Beneficiary, then and in every such case Grantor, Trustee and Beneficiary shall be restored to their former positions and rights hereunder, and all rights, powers and remedies of Trustee or Beneficiary shall continue as if no such proceeding had been taken. 15 SECTION 2.12. Suits To Protect the Trust Property. Trustee and/or Beneficiary shall have power (a) to institute and maintain suits and proceedings to prevent any impairment of the Trust Property by any acts that may be unlawful or in violation of this Deed of Trust, (b) to preserve or protect its interest in the Trust Property and in the Rents arising therefrom and (c) to restrain the enforcement of or compliance with any legislation or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of or compliance with such enactment, rule or order would impair the security or be prejudicial to the interest of Trustee or Beneficiary hereunder. SECTION 2.13. Filing Proofs of Claim. In case of any receivership, insolvency, bankruptcy, reorganization, arrangement, adjustment, composition or other proceedings affecting Grantor, Beneficiary shall, to the extent permitted by law, be entitled to file such proofs of claim and other documents as may be necessary or advisable in order to have the claims of Beneficiary allowed in such proceedings for the Obligations secured by this Deed of Trust at the date of the institution of such proceedings and for any interest accrued, late charges and additional interest or other amounts due or that may become due and payable hereunder after such date. SECTION 2.14. Possession by Beneficiary. Notwithstanding the appointment of any receiver, liquidator or trustee of Grantor, any of its property or the Trust Property, Beneficiary shall be entitled, to the extent not prohibited by law, to remain in possession and control of all parts of the Trust Property now or hereafter granted under this Deed of Trust to Beneficiary in accordance with the terms hereof and applicable law. SECTION 2.15. Waiver. (a) No delay or failure by Trustee or Beneficiary to exercise any right, power or remedy accruing upon any breach or Event of Default shall exhaust or impair any such right, power or remedy or be construed to be a waiver of any such breach or Event of Default or acquiescence therein; and every right, power and remedy given by this Deed of Trust to Trustee or Beneficiary may be exercised from time to time and as often as may be deemed expedient by Trustee or Beneficiary. No consent or waiver by Beneficiary to or of any breach or default by Grantor in the performance of the Obligations shall be deemed or construed to be a consent or waiver to or of any other breach or Event of Default in the performance of the same or any other Obligations by Grantor hereunder. No failure on the part of Beneficiary to complain of any act or failure to act or to declare an Event of Default, irrespective of how long such failure continues, shall constitute a waiver by Beneficiary of its rights hereunder or impair any rights, powers or remedies consequent on any future Event of Default by Grantor. (b) Even if Beneficiary (i) grants some forbearance or an extension of time for the payment of any sums secured hereby, (ii) takes other or additional security for the payment of any sums secured hereby, (iii) waives or does not exercise some right granted herein or under the Credit Documents, (iv) releases a part of the Trust Property from this Deed of Trust, (v) agrees to change some of the terms, covenants, conditions or agreements of any of the Credit Documents, (vi) consents to the filing of a map, plat or replat affecting the Premises (vii) consents to the granting of an easement or other right affecting the Premises or (viii) makes or consents to an agreement subordinating Beneficiary's lien on the Trust Property hereunder; no such act or omission shall preclude Beneficiary from exercising any other right, power or privilege herein granted or intended to be granted in the event of any breach or Event of Default then made or of any subsequent default; nor, except as otherwise expressly provided in an instrument executed 16 by Trustee and Beneficiary, shall this Deed of Trust be altered thereby. In the event of the sale or transfer by operation of law or otherwise of all or part of the Trust Property, Beneficiary is hereby authorized and empowered to deal with any vendee or transferee with reference to the Trust Property secured hereby, or with reference to any of the terms, covenants, conditions or agreements hereof, as fully and to the same extent as it might deal with the original parties hereto and without in any way releasing or discharging any liabilities, obligations or undertakings. SECTION 2.16. Remedies Cumulative. No right, power or remedy conferred upon or reserved to Trustee or Beneficiary by this Deed of Trust is intended to be exclusive of any other right, power or remedy, and each and every such right, power and remedy shall be cumulative and concurrent and in addition to any other right, power and remedy given hereunder or now or hereafter existing at law or in equity or by statute. ARTICLE III Miscellaneous SECTION 3.01. Partial Invalidity. In the event any one or more of the provisions contained in this Deed of Trust shall for any reason be held to be invalid, illegal or unenforceable in any respect, such validity, illegality or unenforceability shall, at the option of Beneficiary, not affect any other provision of this Deed of Trust, and this Deed of Trust shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein or therein. SECTION 3.02. Notices. All notices hereunder shall be in writing and given, in the case of communications and notices to Trustee in accordance with the terms of the Credit Agreement at the address set forth on the first page of this Deed of Trust and to Grantor and Beneficiary as provided in the Credit Agreement. SECTION 3.03. Successors and Assigns. All of the grants, covenants, terms, provisions and conditions herein shall run with the Premises and the Improvements and shall apply to, bind and inure to, the benefit of the permitted successors and assigns of Grantor and the successors and assigns of Beneficiary. SECTION 3.04. Satisfaction and Cancelation. (a) The conveyance to Trustee of the Trust Property as security and for the benefit of Beneficiary, created and consummated by this Deed of Trust shall be null and void when all the Obligations have been paid in full in accordance with the terms of the Credit Documents and the Lenders have no further commitment to make Loans under the Credit Agreement, no Letters of Credit are outstanding and the Issuing Bank has no further obligation to issue Letters of Credit under the Credit Agreement. (b) The lien of this Deed of Trust shall be released from such portion of the Trust Property as is required pursuant to and in accordance with the operative provisions of Section 6.5 of the Credit Agreement. (c) In connection with any termination, or release pursuant to paragraph (a), upon written request of the Beneficiary and surrender of this Deed of Trust to the Trustee for cancellation, and upon payment to the Trustee of its fees and expenses by the Grantor, the 17 Trustee shall reconvey without warranty the then trust property. The recitals in any reconveyance shall be conclusive proof of the truthfulness thereof and the grantee in any reconveyance may be described as "the person or persons legally entitled thereto." Beneficiary and Trustee shall execute any documents reasonably requested by Grantor to accomplish the foregoing or to accomplish any release contemplated by paragraph (a) and Grantor will pay all costs and expenses, including reasonable attorneys' fees, disbursements and other charges, incurred by Beneficiary and Trustee in connection with the preparation and execution of such documents. SECTION 3.05. Definitions. As used in this Deed of Trust, the singular shall include the plural as the context requires and the following words and phrases shall have the following meanings: (a) "including" shall mean "including but not limited to"; (b) "provisions" shall mean "provisions, terms, covenants and/or conditions"; (c) "lien" shall mean "lien, charge, encumbrance, security interest, mortgage or deed of trust"; (d) "obligation" shall mean "obligation, duty, covenant and/or condition"; and (e) "any of the Trust Property" shall mean "the Trust Property or any part thereof or interest therein". Any act that Trustee or Beneficiary is permitted to perform hereunder may be performed at any time and from time to time by Trustee or Beneficiary or any person or entity designated by Trustee or Beneficiary. Any act that is prohibited to Grantor hereunder is also prohibited to all lessees of any of the Trust Property. Each appointment of Trustee or Beneficiary as attorney-in-fact for Grantor under this Deed of Trust is irrevocable, with power of substitution and coupled with an interest. Subject to the applicable provisions hereof, Beneficiary has the right to refuse to grant its consent, approval or acceptance or to indicate its satisfaction, in its sole discretion, whenever such consent, approval, acceptance or satisfaction is required hereunder. SECTION 3.06. Multisite Real Estate Transaction. Grantor acknowledges that this Deed of Trust is one of a number of Other Mortgages and Security Documents that secure the Obligations. Grantor agrees that the lien of this Deed of Trust shall be absolute and unconditional and shall not in any manner be affected or impaired by any acts or omissions whatsoever of Trustee or Beneficiary and without limiting the generality of the foregoing, the lien hereof shall not be impaired by any acceptance by the Trustee or Beneficiary of any security for or guarantees of any of the Obligations hereby secured, or by any failure, neglect or omission on the part of Trustee or Beneficiary to realize upon or protect any Obligation or indebtedness hereby secured or any collateral security therefor including the Other Mortgages and other Security Documents. The lien hereof shall not in any manner be impaired or affected by any release (except as to the property released), sale, pledge, surrender, compromise, settlement, renewal, extension, indulgence, alteration, changing, modification or disposition of any of the Obligations secured or of any of the collateral security therefor, including the Other Mortgages and other Security Documents or of any guarantee thereof, and Trustee or Beneficiary may at its discretion foreclose, exercise any power of sale, or exercise any other remedy available to it under any or all of the Other Mortgages and other Security Documents without first exercising or enforcing any of its rights and remedies hereunder. Such exercise of Beneficiary's rights and remedies under any or all of the Other Mortgages and other Security Documents shall not in any manner impair the indebtedness hereby secured or the lien of this Deed of Trust and any exercise of the rights or remedies of Trustee or Beneficiary hereunder shall not impair the lien of any of the Other Mortgages and other Security Documents or any of Trustee's or Beneficiary's rights and remedies thereunder. The Grantor specifically consents and agrees that Trustee or Beneficiary may exercise its rights and remedies hereunder and under the Other Mortgages and other 18 Security Documents separately or concurrently and in any order that it may deem appropriate and waives any rights of subrogation. ARTICLE IV Particular Provisions This Deed of Trust is subject to the following provisions relating to the particular laws of the state wherein the Premises are located: SECTION 4.01. Applicable Law. Pursuant to the terms thereof, the Credit Agreement and all of the other Credit Documents (other than this Deed of Trust) are to be governed by and construed and interpreted in accordance with the internal law of the State of New York without giving effect to the conflicts-of- law rules and principles of such state. The Grantor and Beneficiary acknowledge, agree, and stipulate that the State of New York has a substantial relationship to the parties involved in this transaction and to the underlying transaction secured by this Deed of Trust. The rights and obligations of the parties under this Deed of Trust shall, however, be governed by and construed and interpreted in accordance with the internal law of the State of California without giving effect to the conflicts-of-law rules and principles of California and the Grantor and the Beneficiary agree to submit to jurisdiction and the laying of venue for any suit on this Deed of Trust in California; provided, however, that nothing is this section shall in any event be construed to provide that the substantive law of the State of California shall apply to the Obligations secured by this Deed of Trust or evidenced by the other Credit Documents, which are and shall continue to be governed by the substantive law of the State of New York. In such connection, the Grantor further acknowledges and agrees that: (a) the Beneficiary may enforce its rights under the Credit Documents, including its right to sue the Grantor, to collect any outstanding indebtedness, or to obtain a judgment against the Grantor for any deficiency prior to or following foreclosure, in accordance with New York law, and if the Beneficiary obtains a deficiency judgment in a state other than in California, then the Beneficiary shall have the right to enforce such judgment in California, as well as in other states; (b) California's antideficiency, one- action, and security-first rules (including, without limitation, California Code of Civil Procedure Sections 580a, 580b, 580c, and 580d) are inapplicable to the Obligations secured by this Deed of Trust and to the enforcement or realization by the Beneficiary of its rights and remedies relating thereto; and (c) Section 726 of the California Code of Civil Procedure shall not apply (i) to prevent or limit exercise or enforcement or any other rights or remedies of the Beneficiary (including, but not limited to, the Beneficiary's right to obtain a deficiency judgment) either prior to or following foreclosure, or (ii) to prevent or limit the Beneficiary's right to foreclosure judicially or nonjudicially following any exercise or enforcement of any other rights or remedies of the Beneficiary. SECTION 4.02. Trustee's Powers and Liabilities. (a) Trustee, by acceptance hereof, covenants faithfully to perform and fulfill the trusts herein created, being liable, however, only for gross negligence, bad faith or wilful misconduct, and hereby waives any statutory fee and agrees to accept reasonable compensation, in lieu thereof, for any services rendered by it in accordance with the terms hereof. All authorities, powers and discretions given in this Deed of Trust to Trustee and/or Beneficiary may be exercised by either, without the other, with the same effect as if exercised jointly. 19 (b) Trustee may resign at any time upon giving 30 days' notice in writing to Grantor and to Beneficiary. (c) Beneficiary may remove Trustee at any time or from time to time and select a successor trustee. In the event of the death, removal, resignation, refusal to act, inability to act or absence of Trustee from the state in which the premises are located, or in its sole discretion for any reason whatsoever, Beneficiary may, upon notice to the Grantor and without specifying the reason therefor and without applying to any court, select and appoint a successor trustee, and all powers, rights, duties and authority of the former Trustee, as aforesaid, shall thereupon become vested in such successor. Such substitute trustee shall not be required to give bond for the faithful performance of his duties unless required by Beneficiary. Such substitute trustee shall be appointed by written instrument duly recorded in the county where the Land is located. Grantor hereby ratifies and confirms any and all acts that the herein named Trustee, or his successor or successors in this trust, shall do lawfully by virtue hereof. Grantor hereby agrees, on behalf of itself and its heirs, executors, administrators and assigns, that the recitals contained in any deed or deeds executed in due form by any Trustee or substitute trustee, acting under the provisions of this instrument, shall be prima facie evidence of the facts recited, and that it shall not be necessary to prove in any court, otherwise than by such recitals, the existence of the facts essential to authorize the execution and delivery of such deed or deeds and the passing of title thereby. (d) Trustee shall not be required to see that this Deed of Trust is recorded, nor liable for its validity or its priority as a first deed of trust, or otherwise, nor shall Trustee be answerable or responsible for performance or observance of the covenants and agreements imposed upon Grantor or Beneficiary by this Deed of Trust or any other agreement. Trustee, as well as Beneficiary, shall have authority in their respective discretion to employ agents and attorneys in the execution of this trust and to protect the interest of the Beneficiary hereunder, and to the extent permitted by law they shall be compensated and all expenses relating to the employment of such agents and/or attorneys, including expenses of litigations, shall be paid out of the proceeds of the sale of the Trust Property conveyed hereby should a sale be had, but if no such sale be had, all sums so paid out shall be recoverable to the extent permitted by law by all remedies at law or in equity. (e) At any time, or from time to time, without liability therefor and with 10 days' prior written notice to Grantor, upon written request of Beneficiary and without affecting the effect of this Deed of Trust upon the remainder of the Trust Property, Trustee may (i) reconvey any part of the Trust Property, (ii) consent in writing to the making of any map or plat thereof, so long as Grantor has consented thereto, (iii) join in granting any easement thereon, so long as Grantor has consented thereto, or (iv) join in any extension agreement or any agreement subordinating the lien or charge hereof. 20 IN WITNESS WHEREOF, this Deed of Trust has been duly authorized and has been executed and delivered to Trustee and Beneficiary by Grantor on the date first written above. HUDSON RESPIRATORY CARE INC., a California corporation, by /s/ Richard W. Johansen ---------------------------------- Name: Richard W. Johansen Title: President and Chief Executive Officer by /s/ Jay R. Ogram ---------------------------------- Name: Jay R. Ogram Title: Chief Financial Officer STATE OF NEW YORK ) ) ss. COUNTY OF NEW YORK ) On April 7, before me, Robert Harvey, a Notary Public in and for said state, personally appeared Richard W. Johansen and Jay R. Ogram, personally known to me (or proved to me on the basis of satisfactory evidence) to be the persons whose names are subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument, the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. /s/ Robert Harvey ______________________________________ Notary Public in and for said State [SEAL] EX-10.5 14 HOLDING GUARANTEE AGREEMENT DATED AS OF 4-7-98 EXHIBIT 10.5 HOLDING GUARANTEE AGREEMENT dated as of April 7, 1998, between RIVER HOLDING CORP., a Delaware corporation (the "Guarantor") and BANKERS TRUST COMPANY, a New York banking corporation, as collateral agent (the "Collateral Agent") for the Secured Parties (as defined in the Credit Agreement referred to below). Reference is made to the Credit Agreement dated as of April 7, 1998 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Hudson Respiratory Care Inc., a California corporation (the "Borrower"), the Guarantor, the lenders from time to time party thereto (the "Lenders"), Bankers Trust Company, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), Collateral Agent and issuing bank (in such capacity, the "Issuing Bank"). Capitalized terms used herein and not defined herein shall have the meanings assigned to such terms in the Credit Agreement. 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 Credit Agreement. As the owner of all of the issued and outstanding capital stock of the Borrower, the Guarantor acknowledges that it will derive substantial benefit from the making of the Loans by the Lenders and the issuance of the Letters of Credit by the Issuing Bank. The obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit are conditioned on, among other things, the execution and delivery by the Guarantor of a Guarantee Agreement in the form hereof. As consideration therefor and in order to induce the Lenders to make Loans and the Issuing Bank to issue Letters of Credit, the Guarantor is willing to execute this Agreement. Accordingly, the parties hereto agree as follows: SECTION 1. Guarantee. The Guarantor unconditionally guarantees, as a primary obligor and not merely as a surety, (a) the due and punctual payment 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 Credit Parties to the Secured Parties under the Credit Agreement and the other Credit Documents and (b) unless otherwise agreed upon in writing by the applicable Lender party thereto, all monetary obligations of the Borrower, under each Interest Rate Protection Agreement entered into with a counterparty that was a Lender at the time such Interest Rate Protection Agreement was entered into (all the monetary obligations referred to in the preceding clauses (a) through (b) being collectively called the "Obligations"). The Guarantor further agrees that the Obligations may be extended or renewed, in whole or in part, without notice to or further assent from it, and that it will remain bound upon its guarantee notwithstanding any extension or renewal of any Obligation. 2 Anything contained in this Agreement to the contrary notwithstanding, the obligations of the Guarantor hereunder shall be limited to a maximum aggregate amount equal to the greatest amount that would not render the Guarantor's obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any provisions of applicable state law (collectively, the "Fraudulent Transfer Laws"), in each case after giving effect to all other liabilities of the Guarantor, contingent or otherwise, that are relevant under the Fraudulent Transfer Laws (specifically excluding, however, any liabilities of the Guarantor (a) in respect of intercompany indebtedness to the Borrower or Affiliates of the Borrower to the extent that such indebtedness would be discharged in an amount equal to the amount paid by the Guarantor hereunder and (b) under any Guarantee of senior unsecured indebtedness or Indebtedness subordinated in right of payment to the Obligations which Guarantee contains a limitation as to maximum amount similar to that set forth in this clause, pursuant to which the liability of the Guarantor hereunder is included in the liabilities taken into account in determining such maximum amount) and after giving effect as assets to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation, contribution, reimbursement, indemnity or similar rights of the Guarantor pursuant to (i) applicable law or (ii) any agreement providing for an equitable allocation among the Guarantor and other Affiliates of the Borrower of obligations arising under Guarantees by such parties (including the Indemnity, Subrogation and Contribution Agreement). SECTION 2. Obligations Not Waived. To the fullest extent permitted by applicable law, the Guarantor waives presentment to, demand of payment from and protest to the Borrower of any of the Obligations, and also waives notice of acceptance of its guarantee and notice of protest for nonpayment. To the fullest extent permitted by applicable law, the obligations of the Guarantor hereunder shall not be affected by (a) the failure of the Collateral Agent or any other Secured Party to assert any claim or demand or to enforce or exercise any right or remedy against the Borrower or any other guarantor of the Obligations under the provisions of the Credit Agreement, any other Credit Document or otherwise, (b) any rescission, waiver, amendment or modification of, or any release from any of the terms or provisions of this Agreement, any other Credit Document, any Guarantee or any other agreement, including with respect to any other guarantor of the Obligations or (c) the failure to perfect any security interest in, or the release of, any of the security held by or on behalf of the Collateral Agent or any other Secured Party. SECTION 3. Security. The Guarantor authorizes the Collateral Agent and each of the other Secured Parties to (a) take and hold security for the payment of this Guarantee and the Obligations and exchange, enforce, waive and release any such security, (b) apply such security and direct the order or manner of sale thereof as they in their sole discretion may determine and (c) release or substitute any one or more endorsees, other guarantors or other obligers. SECTION 4. Guarantee of Payment. The Guarantor further agrees that its guarantee constitutes a guarantee of payment when due and not of collection, and waives any right to require that any resort be had by the Collateral Agent or any other Secured Party to any of the security held for payment of the Obligations or to any balance of any deposit account or credit on the books of the Collateral Agent or any other Secured Party in favor of the Borrower or any other person. 3 SECTION 5. No Discharge or Diminishment of Guarantee. The obligations of the Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason (other than the indefeasible payment in full in cash of the Obligations), including any claim of waiver, release, surrender, alteration or compromise of any of the Obligations, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of the Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Collateral Agent or any other Secured Party to assert any claim or demand or to enforce any remedy under the Credit Agreement, any other Credit Document or any other agreement, by any waiver or modification of any provision of any thereof, by any default, failure or delay, wilful or otherwise, in the performance of the Obligations, or by any other act or omission that may or might in any manner or to any extent vary the risk of the Guarantor or that would otherwise operate as a discharge of the Guarantor as a matter of law or equity (other than the indefeasible payment in full in cash of all the Obligations). SECTION 6. Defenses of Borrower Waived. To the fullest extent permitted by applicable law, the Guarantor waives any defense based on or arising out of any defense of the Borrower or the unenforceability of the Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower, other than the final and indefeasible payment in full in cash of the Obligations. The Collateral Agent and the other Secured Parties may, at their election, foreclose on any security held by one or more of them by one or more judicial or nonjudicial sales, accept an assignment of any such security in lieu of foreclosure, compromise or adjust any part of the Obligations, make any other accommodation with the Borrower or any other guarantor or exercise any other right or remedy available to them against the Borrower or any other guarantor, without affecting or impairing in any way the liability of the Guarantor hereunder except to the extent the Obligations have been fully, finally and indefeasibly paid in cash. To the fullest extent permitted by applicable law, the Guarantor waives any defense arising out of any such election even though such election operates, pursuant to applicable law, to impair or to extinguish any right of reimbursement or subrogation or other right or remedy of the Guarantor against the Borrower or any other guarantor, as the case may be, or any security. SECTION 7. Agreement to Pay; Subrogation. In furtherance of the foregoing and not in limitation of any other right that the Collateral Agent or any other Secured Party has at law or in equity against the Guarantor by virtue hereof, upon the failure of the Borrower or any other Credit Party to pay any Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, the Guarantor hereby promises to and will forthwith pay, or cause to be paid, to the Collateral Agent or such other Secured Party as designated thereby in cash the amount of such unpaid Obligations. Upon payment by the Guarantor of any sums to the Collateral Agent or any Secured Party as provided above, all rights of the Guarantor against the Borrower arising as a result thereof by way of right of subrogation, contribution, reimbursement, indemnity or otherwise shall in all respects be subordinate and junior in right of payment to the prior indefeasible payment in full in cash of all the Obligations. In addition, any indebtedness of the Borrower now or hereafter held by the Guarantor is hereby subordinated in right of payment to the prior payment in full of the Obligations. If any amount shall erroneously be paid to the Guarantor on account of (i) such subrogation, contribution, reimbursement, indemnity or similar right or (ii) any such indebtedness of the Borrower, such amount shall be held in trust for the benefit of the Secured Parties and shall forthwith be paid to the 4 Collateral Agent to be credited against the payment of the Obligations, whether matured or unmatured, in accordance with the terms of the Credit Documents. SECTION 8. Information. The Guarantor assumes all responsibility for being and keeping itself informed of the Borrower's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Obligations and the nature, scope and extent of the risks that the Guarantor assumes and incurs hereunder, and agrees that none of the Collateral Agent or the other Secured Parties will have any duty to advise the Guarantor of information known to it or any of them regarding such circumstances or risks. SECTION 9. Representations and Warranties. The Guarantor represents and warrants as to itself that all representations and warranties relating to it contained in the Credit Agreement are true and correct. SECTION 10. Termination. The Guarantee made hereunder (a) 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 and (b) shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Obligation is rescinded or must otherwise be restored by any Secured Party or the Guarantor upon the bankruptcy or reorganization of the Borrower, the Guarantor or otherwise. SECTION 11. Binding 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 Guarantor that are contained in this Agreement shall bind and inure to the benefit of each party hereto and their respective successors and assigns. This Agreement shall become effective when a counterpart hereof executed on behalf of the Guarantor 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 the Guarantor and the Collateral Agent and their respective successors and assigns, and shall inure to the benefit of the Guarantor, the Collateral Agent and the other Secured Parties, and their respective successors and assigns, except that the Guarantor shall not have the right to assign its rights or obligations hereunder or any interest herein (and any such attempted assignment shall be void). SECTION 12. 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 provision of this Agreement or consent to any departure by the Guarantor 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 Guarantor in any case shall entitle the Guarantor to any other or further notice or demand in similar or other circumstances. 5 (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to a written agreement entered into between the Guarantor and the Collateral Agent, with the prior written consent of the Required Lenders (except as otherwise provided in the Credit Agreement). SECTION 13. 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 14. 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 the Guarantor shall be given to it at 27711 Diaz Road, P.O. Box 9020, Temecula, CA 92589-9020. SECTION 15. Survival of Agreement. (a) All covenants, agreements, representations and warranties made by the Guarantors 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 and the issuance of the Letters of Credit by the Issuing Bank 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 Commitment have not been terminated. (b) 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 16. Counterparts. This Agreement may be executed in 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 10. Delivery of an executed signature page to this Agreement by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Agreement. SECTION 17. Rules of Interpretation. The rules of interpretation specified in Section 1.02 of the Credit Agreement shall be applicable to this Agreement. SECTION 18. Jurisdiction; Consent to Service of Process. (a) The Guarantor 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 6 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 or any other Secured Party may otherwise have to bring any action or proceeding relating to this Agreement or the other Credit Documents against the Guarantor or its properties in the courts of any jurisdiction. (b) The Guarantor 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 14. 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 19. 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 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 19. SECTION 20. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Secured Party is hereby authorized at any time and from time to time, to the fullest extent permitted by law, 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 Secured Party to or for the credit or the account of the Guarantor against any or all the obligations of the Guarantor now or hereafter existing under this Agreement and the other Credit Documents held by such Secured Party, irrespective of whether or not such Secured Party shall have made any demand under this Agreement or any other Credit Document and although such obligations may be unmatured. The rights of each Secured Party under this Section 20 are in addition to other rights and remedies (including other rights of setoff) which such Secured Party may have. SECTION 21. Certain Other Rights. (a) The Guarantor authorizes the Collateral Agent, without notice or demand and without affecting its liability hereunder, from time to time, either before or after revocation hereof, to (i) renew, compromise, extend, accelerate, or 7 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 Guarantor waives 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 Guarantor 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 Guarantor's 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 Guarantor's liability hereunder, the Guarantor 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 Guarantee Agreement, and until such payment in full, the Guarantor 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 Guarantor waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance of this Guarantee Agreement and of the existence, creation, or incurring of new or additional indebtedness. (c) (i) The Guarantor understands and acknowledges 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 Guarantor may have to seek reimbursement, contribution, or indemnification from the Borrower or others based on any right the Guarantor may have of subrogation, reimbursement, contribution, or indemnification for any amounts paid by the Guarantor under this Guarantee Agreement. The Guarantor further understands and acknowledges that in the absence of this paragraph, such potential impairment or destruction of the Guarantor's rights, if any, may entitle the Guarantor to assert a defense to this Guarantee 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 Guarantee Agreement, the Guarantor freely, irrevocably, and unconditionally: (A) waives and relinquishes that defense and agrees that the Guarantor will be fully liable under this Guarantee 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) agrees that the Guarantor will not assert that defense in any action or proceeding which the Collateral Agent may commence to enforce this Guarantee Agreement; (C) acknowledges and agrees that the rights and defenses waived by the Guarantor in this Guarantee Agreement include any right or defense that the Guarantor 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) acknowledges and agrees 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. 8 (ii) The Guarantor waives any rights and defenses that are or may become available to the Guarantor by reason of Sections 2787 to 2855, inclusive, of the California Civil Code. (iii) The Guarantor waive all rights and defenses that the Guarantor 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 Guarantor 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 Guarantor even if the Collateral Agent, by foreclosing on the real property collateral, has destroyed any right the Guarantor may have to collect from the Borrower. This is an unconditional and irrevocable waiver of any rights and defenses the Guarantor 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 Guarantor waives 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 Guarantee Agreement shall be construed as limiting the generality of any other waiver contained in this Guarantee Agreement. (d) The Guarantor acknowledges and agrees that it shall have the sole responsibility for obtaining from the Borrower such information concerning the Borrower's financial conditions or business operations as the Guarantor may require, and that the Collateral Agent has no duty at any time to disclose to the Guarantor any information relating to the business operations or financial conditions of the Borrower. 9 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. RIVER HOLDING CORP., as Guarantor, by /s/ Charles P. Rullman --------------------------------- Name: Charles P. Rullman Title: President BANKERS TRUST COMPANY, as Collateral Agent, by /s/ Robert R. Telesca --------------------------------- Name: Robert R. Telesca Title: Assistant Vice President EX-10.6 15 IDEMNITY, SUBROGATION & CONTRIBUTION AGRMNT EXHIBIT 10.6 INDEMNITY, SUBROGATION and CONTRIBUTION AGREEMENT dated as of April 7, 1998, among HUDSON RESPIRATORY 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"; Holding and Subsidiary Guarantors are referred to collectively herein as the "Guarantors") 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). 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, RIVER HOLDING CORP., the lenders from time to time party thereto (the "Lenders") and BTCo., as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), Collateral Agent, swingline lender and 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. 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 Credit Agreement. The Guarantors have guaranteed such Loans and the other Obligations (as defined in the Guarantee Agreement) of the Borrower under the Credit Agreement pursuant to the Guarantee Agreement; certain Guarantors have granted Liens on and security interests in certain of their assets to secure such guarantees. The obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit are conditioned on, among other things, the execution and delivery by the Borrower and the Guarantors of an agreement in the form hereof. Accordingly, the Borrower, each Guarantor and the Collateral Agent agree as follows: SECTION 1. Indemnity and Subrogation. In addition to all such rights of indemnity and subrogation as the Guarantors may have under applicable law (but subject to Section 3), the Borrower agrees that (a) in the event a payment shall be made by any Guarantor under the Guarantee Agreement, the Borrower shall indemnify such Guarantor for the full amount of such payment and such Guarantor shall be subrogated to the rights of the person to whom such payment shall have been made to the extent of such payment and (b) in the event any assets of any Guarantor shall be sold pursuant to any Security Document to satisfy a claim of any Secured Party, the Borrower shall indemnify such Guarantor in an amount equal to the greater of the book value or the fair market value of the assets so sold. SECTION 2. Contribution and Subrogation. Each Guarantor (a "Contributing Guarantor") agrees (subject to Section 3) that, in the event a payment shall be made by 2 any other Guarantor under the Guarantee Agreement or assets of any other Guarantor shall be sold pursuant to any Security Document to satisfy a claim of any Secured Party and such other Guarantor (the "Claiming Guarantor") shall not have been fully indemnified by the Borrower as provided in Section 1, the Contributing Guarantor shall indemnify the Claiming Guarantor in an amount equal to the amount of such payment or the greater of the book value or the fair market value of such assets, as the case may be, in each case multiplied by a fraction of which the numerator shall be the net worth of the Contributing Guarantor on the date hereof and the denominator shall be the aggregate net worth of all the Guarantors on the date hereof (or, in the case of any Guarantor becoming a party hereto pursuant to Section 12, the date of the Supplement hereto executed and delivered by such Guarantor). Any Contributing Guarantor making any payment to a Claiming Guarantor pursuant to this Section 2 shall be subrogated to the rights of such Claiming Guarantor under Section 1 to the extent of such payment. SECTION 3. Subordination. Notwithstanding any provision of this Agreement to the contrary, all rights of the Guarantors under Sections 1 and 2 and all other rights of indemnity, contribution or subrogation under applicable law or otherwise shall be fully subordinated to the indefeasible payment in full in cash of the Obligations. No failure on the part of the Borrower or any Guarantor to make the payments required by Sections 1 and 2 (or any other payments required under applicable law or otherwise) shall in any respect limit the obligations and liabilities of any Guarantor with respect to its obligations hereunder, and each Guarantor shall remain liable for the full amount of the obligations of such Guarantor hereunder. SECTION 4. Termination. This Agreement shall survive and be in full force and effect so long as any Obligation is outstanding and has not been indefeasibly paid in full in cash, and so long as the L/C Exposure has not been reduced to zero or any of the Commitments under the Credit Agreement have not been terminated, and shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Obligation is rescinded or must otherwise be restored by any Secured Party or any Guarantor upon the bankruptcy or reorganization of the Borrower, any Guarantor or otherwise. SECTION 5. 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 6. No Waiver; Amendment. (a) No failure on the part of the Collateral Agent or any Guarantor to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy by the Collateral Agent or any Guarantor preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law. None of the Collateral Agent and the Guarantors shall be deemed to have waived any rights hereunder unless such waiver shall be in writing and signed by such parties. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to a written agreement entered into between the Borrower, the Guarantors and the Collateral Agent, with the prior written consent of the Required Lenders (except as otherwise provided in the Credit Agreement). 3 SECTION 7. Notices. All communications and notices hereunder shall be in writing and given as provided in the Guarantee Agreement and addressed as specified therein. SECTION 8. Binding 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 parties that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. Neither the Borrower nor any Guarantor may assign or transfer any of its rights or obligations hereunder (and any such attempted assignment or transfer shall be void) without the prior written consent of the Required Lenders. Notwithstanding the foregoing, at the time any Guarantor is released from its obligations under the Guarantee Agreement in accordance with such Guarantee Agreement and the Credit Agreement, such Guarantor will cease to have any rights or obligations under this Agreement. SECTION 9. Survival of Agreement; Severability. (a) All covenants and agreements made by the Borrower and each Guarantor herein and in the certificates or other instruments prepared or delivered in connection with this Agreement or the other Credit Documents shall be considered to have been relied upon by the Collateral Agent, the other Secured Parties and each Guarantor and shall survive the making by the Lenders of the Loans and the issuance of the Letters of Credit by the Issuing Bank, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loans or any other fee or amount payable under the Credit Agreement or this Agreement or under any of the other Credit Documents is outstanding and unpaid or the L/C Exposure does not equal zero and as long as the Commitments have not been terminated. (b) In case any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, no 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 shall not in any way be affected or impaired thereby. 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 10. 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. This Agreement shall be effective with respect to any Guarantor when a counterpart bearing the signature of such Guarantor shall have been delivered to the Collateral Agent. Delivery of an executed signature page to this Agreement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Agreement. SECTION 11. Rules of Interpretation. The rules of interpretation specified in Section 1.02 of the Credit Agreement shall be applicable to this Agreement. SECTION 12. Jurisdiction; Consent to Service of Process. (a) Each Guarantor 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, to the extent permitted by 4 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 Guarantor or its properties in the courts of any jurisdiction. (b) Each Guarantor 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 7. 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 13. Additional Guarantors. Pursuant to Section 5.11 of the Credit Agreement, each Domestic Subsidiary of the Borrower that was not in existence or not such a Subsidiary on the date of the Credit Agreement is required to enter into the Guarantee Agreement as a Guarantor upon becoming such a Subsidiary. Upon execution and delivery, after the date hereof, by the Collateral Agent and such a Subsidiary of an instrument in the form of Annex 1 hereto, such Subsidiary shall become a Guarantor hereunder with the same force and effect as if originally named as a Guarantor hereunder. The execution and delivery of any instrument adding an additional Guarantor as a party to this Agreement shall not require the consent of any Guarantor hereunder. The rights and obligations of each Guarantor hereunder shall remain in full force and effect notwithstanding the addition of any new Guarantor as a party to this Agreement. 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the date first appearing above. HUDSON RESPIRATORY INC., by /s/ Richard W. Johansen ------------------------- Name: Richard W. Johansen Title: President and Chief Financial Officer by /s/ Jay R. Ogram ------------------------- Name: Jay R. Ogram Title: Chief Financial Officer RIVER HOLDING CORP., as a Guarantor, by /s/ Charles P. Rullman ------------------------- Name: Charles P. Rullman Title: President BANKERS TRUST COMPANY, as Collateral Agent, by /s/ Robert R. Telesca ------------------------- Name: Robert R. Telesca Title: Assistant Vice President EX-10.7 16 SHAREHOLDERS AGREEMENT DATED 4-7-98 EXHIBIT 10.7 ================================================================================ SHAREHOLDERS AGREEMENT BY AND AMONG RIVER HOLDING CORP. THE HELEN LOVAAS SEPARATE PROPERTY TRUST U/D/T DATED JULY 17, 1997 THE FS ENTITIES AND HUDSON RESPIRATORY CARE INC. APRIL 7, 1998 ================================================================================ SHAREHOLDERS AGREEMENT THIS SHAREHOLDERS AGREEMENT (this "Agreement") is made and entered into as of April 7, 1998 by and among HUDSON RESPIRATORY CARE INC. (the "Company"), RIVER HOLDING CORP., a Delaware corporation ("Holding"), THE HELEN LOVAAS SEPARATE PROPERTY TRUST U/D/T dated July 17, 1997 (the "Trust"), FS Equity Partners III, L.P., FS Equity Partners International, L.P., and FS Equity Partners IV, L.P. (the "FS Entities"). R E C I T A L S: - - - - - - - - A. Pursuant to an Amended and Restated Merger Agreement dated as of March 15, 1998 among the Company, Holding and the Trust (among others) (the "Merger Agreement"), Holding is making a substantial investment in the Common Stock and Preferred Stock of the Company. B. The execution and delivery of this Agreement by the parties is required by Section 6.11 and Section 7.05 of the Merger Agreement and is a material inducement to each of Holding, the FS Entities and the Trust to enter into and perform their obligations under the Merger Agreement and the other documents and instruments contemplated therein. C. The Company, Holding, the Trust and the FS Entities wish to establish through this Agreement certain rights, obligations and restrictions with respect to the securities of the Company. A G R E E M E N T: - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing, the mutual covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following ----------- capitalized terms shall have the following meanings: Additional Securities: All Securities which are issued and sold by --------------------- the Company other than (i) the Initial Shares, (ii) any Securities issued or issuable to all of the holders of Common Stock then outstanding on a proportionate basis, (iii) issuances of additional shares of capital stock in payment of dividends on any outstanding shares of capital stock of the Company, (iv) any Securities issued or issuable upon the exchange of Holding Preferred Stock or the Preferred Stock, (v) any Securities issued or issuable to any Employees pursuant to any equity incentive plan, individual agreement, bonus, award, stock purchase plan, stock option plan or other stock agreement or arrangement approved by the Company's Board of Directors (a "Benefit Plan"); (vi) any Securities 1 issued in exchange for debt securities of the Company or any Subsidiary or to any source of, or to any party (other than Holding, the FS Entities or their Affiliates or Associates) arranging, financing for the Company or any Subsidiary of the Company, (vii) any Securities issued pursuant to a public offering registered under the Securities Act, (viii) any Securities that are issued or issuable in connection with the acquisition by the Company or any Subsidiary of any business, business assets or securities from any Person; (ix) any Securities that are issued or issuable upon the exercise of rights, options or warrants to purchase Securities, or upon the conversion or exchange of Securities convertible into or exchangeable for Securities, where the parties to this Agreement received (or were not required to receive) an Issuance Notice pursuant to Section 2.1 of this Agreement; and (x) Securities issued in connection with the transactions described in Section 7. Affiliate or Associate: Such terms shall have the meanings given them ---------------------- pursuant to Rule 12b-2 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934, as amended. Board: The Board of Directors of the Company. ----- Charitable Organization: Shall mean Internal Revenue Code (S) ----------------------- 501(c)(3) charitable organizations or one or more trusts for the benefit of such organizations. Common Stock: The Common Stock, par value $.01 per share, of the ------------ Company. Employee: Any employee, director or consultant of the Company or any -------- Subsidiary of the Company. Exchangeable Preferred Stock Shall mean the 11 1/2% Senior ---------------------------- Exchangeable Preferred Stock of the Company. Family Members: Shall mean Helen Lovaas, Lee Lovaas, the issue of Lee -------------- Lovaas, and the issue of Helen Lovaas' brother, David Bartlett. FS Entities: FS Equity Partners III, L.P., FS Equity Partners ----------- International, L.P. and FS Equity Partners IV, L.P. FS Principals: Mark J. Doran, Bradford M. Freeman, Todd W. Halloran, ------------- J. Frederick Simmons, Ronald P. Spogli, Jon D. Ralph, John M. Roth, Charles P. Rullman, Jr. and William M. Wardlaw. Holding Common Stock: The Common Stock, par value $.01 per share, of -------------------- Holding. Holding Preferred Stock: Shall mean the 11 1/2% Senior Exchangeable ----------------------- Preferred Stock of Holding. 2 Initial Shares: Shall mean the 7,800,000 shares of Common Stock and -------------- the 300,000 shares of Preferred Stock issued and outstanding on the date hereof and held beneficially and of record by the Shareholders as follows:
INITIAL SHARES ----------------------- PREFERRED STOCKHOLDER COMMON STOCK STOCK - ------------ ------------ ----- Holding 6,300,000 300,000 The Trust 1,500,000 ---
Permitted Transferee: Subject to Section 5.1, Permitted Transferee -------------------- shall mean, (y) with respect to Holding or the FS Entities, (i) an Affiliate, which shall include any Person that is (A) an Affiliate or a shareholder of Holding or (B) organized and controlled by three or more of the FS Principals or (ii) after the Initial Public Offering (as defined below) any limited or general partner or employee of Holding, FS Entities or an Affiliate thereof; (z) with respect to the Trust, (i) The Helen Lovaas Foundation; (ii) Lee Lovaas; (iii) a trust solely for the benefit of Helen Lovaas, Lee Lovaas or any other Family Member; (iv) a partnership or limited liability company whose members consist solely of Helen Lovaas and Family Members; (v) one or more Charitable Organizations. Person: Any individual, corporation, entity, partnership, joint ------ venture, association, joint-stock company, trust, unincorporated organization or other entity. Preferred Stock: The 11 1/2% Senior Preferred Stock of the Company. --------------- Public Market Sale: Any sale of Common Stock after the Initial Public ------------------ Offering which is made pursuant to Rule 144 promulgated by the SEC under the Securities Act or which is made pursuant to a registration statement filed with and declared effective by the SEC. Public Offering: A public offering of shares of Voting Securities of --------------- the Company registered under the Securities Act, but shall not include an offering registered on Form S-4 or Form S-8 (or any substitute form that is adopted by the SEC), or an offering of Voting Securities in connection with a sale of debt securities of the Company. The term "Initial Public Offering" shall mean an underwritten Public Offering of Voting Securities which results in gross proceeds to the Company in excess of $25 million from the sale of Voting Securities. SEC: The Securities and Exchange Commission. --- Securities: Shall mean (i) Voting Securities, (ii) all rights, ---------- options, warrants to purchase such Voting Securities or the securities described in the following clause and (iii) all other securities or capital stock of any type whatsoever, including, without limitation, (A) preferred stock, debt securities and securities that are, or may become, convertible into or exchangeable for, or that entitle the holder to purchase, Voting Securities, (B) preferred stock and (C) debt securities. The 3 provisions of this Agreement shall apply to any and all shares of capital stock of or other securities of the Company or any successor and assign of the Company which may be issued in respect of, in exchange for or in substitution of, the Securities by reason of any stock dividend, stock split, reverse split, recapitalization, reclassification, combination, merger, consolidation or otherwise, and such shares or other securities shall be encompassed within the term "Securities" for purposes of this Agreement. Securities Act: The Securities Act of 1933, as amended. -------------- Shareholders: Holding and the Trust. ------------ Subsidiary: With respect to any Person, a corporation or other entity ---------- of which a majority of the shares of stock or other ownership interests are owned, directly or indirectly, by such Person. Voting Securities: All Securities of the Company (or, for purposes of ----------------- Section 6.1, securities of Holding) which possess general voting power to elect members of the Board; provided that Voting Securities shall not include any options or warrants to purchase Voting Securities. 2. Rights Upon Issuance of Additional Securities. The Company hereby --------------------------------------------- grants to each Shareholder the following rights with respect to any and all proposed issuances or sales of Additional Securities by the Company: 2.1 Issuance Notice. The Company shall give each Shareholder --------------- written notice of the Company's intention to issue and sell Additional Securities (the "Issuance Notice"), describing the type of Additional Securities, the price at which the Additional Securities will be issued and sold and the general terms upon which the Company proposes to issue and sell the Additional Securities, including the anticipated date of such issuance or sale. 2.2 Response Notice. Each Shareholder shall have 30 days from --------------- the date the Issuance Notice is received to agree to purchase all or any portion of its Pro Rata Share (as defined below in Subsection 2.4) of such Additional Securities by giving written notice to the Company of its desire to purchase Additional Securities (the "Response Notice") and stating therein the quantity of Additional Securities to be purchased. Such Response Notice shall constitute the irrevocable agreement of such Shareholder to purchase the quantity of Additional Securities indicated in the Response Notice at the price and upon the terms stated in the Issuance Notice. Any purchase by Shareholders of Additional Securities shall be consummated on the later of (1) the closing date specified in the Issuance Notice or (2) the closing date on which Additional Securities described in the applicable Issuance Notice are first issued and sold if other Persons are also purchasing Additional Securities. Each Shareholder that has elected to purchase its Pro Rata Share of Additional Securities will have the right to purchase all or any portion of the Additional Securities unsubscribed for by the other Shareholder and any other holder of Securities who have rights upon the issuance of Additional Securities, up to its pro rata share of such unsubscribed portion (determined by the number of Voting 4 Securities owned by the party or parties who elect to purchase such unsubscribed for portion) if oversubscribed. 2.3 Revised Issuance Notice. The Company shall have 90 days ----------------------- from the date of the Issuance Notice to consummate the proposed issuance and sale of the Additional Securities that are not being purchased by Shareholders at a price not less than and upon the terms that are not materially less favorable than those specified in the Issuance Notice. If the Company proposes to issue Additional Securities after such 90-day period or at a price less than or upon terms that are materially less favorable than those specified in the Issuance Notice it must again comply with this Section 2. 2.4 Pro Rata Share. For purposes of this Section 2, the Pro -------------- Rata Share of a Shareholder shall be a fraction, (1) the numerator of which shall be the total number of shares of Voting Securities then held by the Shareholder and (2) the denominator of which shall be the total number of shares of Voting Securities then issued and outstanding. 2.5 Termination and Assignment. The rights provided to each of -------------------------- the Shareholders under this Section 2 shall terminate upon the consummation of an Initial Public Offering. A Shareholder's rights under this Section 2 will terminate after the Shareholder has transferred a number of Voting Securities (other than Transfers to Permitted Transferees) which represents 75% or more of the number of Voting Securities held by the Shareholder on the date hereof. The rights granted under this Section 2 shall not be assignable; provided, however that a Shareholder may assign its rights with respect to the shares of Common Stock transferred to a Permitted Transferee provided that the Permitted Transferee executes a written undertaking to be and becomes bound by this Agreement in the same manner and to the same extent as the Shareholder. 3. Transfer of Shares by Holding; Rights of Inclusion. -------------------------------------------------- 3.1 Right of Inclusion. Holding agrees not to sell all or any ------------------ portion of the shares of Common Stock it holds to any Person (individually, a "Third Party" and, collectively, "Third Parties") unless the Trust is given an opportunity to sell to the Third Party such number of shares of Common Stock owned by the Trust as is determined in accordance with Section 3.3; provided, -------- however, that the Trust shall have no rights pursuant to this Section 3 with - ------- respect to sales or other transfers by Holding of Common Stock to any Permitted Transferee of Holding or the FS Entities; provided, further, that any such -------- ------- Permitted Transferee of Holding or an FS Entity described in clause (y)(i) of the definition of Permitted Transferee executes a written undertaking to be and becomes bound by this Agreement in the same manner and to the same extent as the transferring party. 3.2 Third-Party Offer. Prior to the consummation of any sale of ----------------- all or any portion of the shares of Common Stock held by Holding to a Third Party, Holding shall cause each bona fide offer from such Third Party to purchase such shares from Holding (a "Third-Party Offer") to be reduced to writing and shall send written notice of such Third-Party Offer (the "Initial Offer Notice") to the Trust. Each Third-Party Offer shall include an offer to purchase shares of Common 5 Stock from the Trust in the amounts determined in accordance with Section 3.3, at the same time, at the same price and on the same terms as the sale by Holding to the Third Party, and according to the terms and conditions of this Agreement. The Initial Offer Notice shall be accompanied by a true copy of the Third-Party Offer. If the Trust desires to accept the offer contained in the Initial Offer Notice, the Trust shall furnish written notice to Holding, within 20 days after its receipt of the Initial Offer Notice, indicating the Trust's irrevocable acceptance of the offer included in the Initial Offer Notice and setting forth the maximum number of shares of Common Stock the Trust agrees to sell to the Third Party (the "Acceptance Notice"). If the Trust does not furnish an Acceptance Notice to Holding in accordance with these provisions by the end of such 20-day period, the Trust shall be deemed to have irrevocably rejected the offer contained in the Initial Offer Notice. All shares of Common Stock set forth in the Acceptance Notice of the Trust together with the shares of Common Stock proposed to be sold by Holding to the Third Party are referred to collectively as "All Offered Shares". Within three days after the date on which the Third Party informs Holding of the total number of shares of Common Stock which such Third Party has agreed to purchase in accordance with the terms specified in the Initial Offer Notice, Holding shall send written notice (the "Final Notice") to the Trust setting forth the number of shares of Common Stock the Trust shall sell to the Third Party as determined in accordance with Section 3.3, which number shall not exceed the maximum number specified by the Trust in its Acceptance Notice. Within five days after the date of the Final Notice (or such shorter period as may reasonably be requested by Holding to facilitate the sale), the Trust shall furnish to Holding (i) a written undertaking to deliver, upon the consummation of the sale of Common Stock to the Third Party as indicated in the Final Notice, the certificates representing the shares of Common Stock held by the Trust which will be transferred pursuant to such Third- Party Offer (such shares shall be referred to herein as the "Included Shares") and (ii) a limited power-of-attorney authorizing Holding to transfer the Included Shares pursuant to the terms of such Third-Party Offer. Each Shareholder shall be required to make representations and warranties in connection with such transfer with respect to its own authority to transfer and its title to the shares of Common Stock transferred. In any such transaction the Company will cooperate with all Shareholders to facilitate the transaction. 3.3 Allocation of Included Shares. The maximum number of shares ----------------------------- of Common Stock that may be sold by Holding and the Trust and all other holders of Common Stock who have rights to participate in sales of Common Stock by Holding pursuant to written agreements by and between Holding and any such holder (the "Other Tag-Along Rights Holders") in any sale governed by this Section 3 shall be (i) All Offered Shares in the event the Third Party has agreed to purchase All Offered Shares and all shares of Common Stock that the Other Tag-Along Rights Holders who have elected to participate in such sale seek to include in such sale or (ii) such number of shares of Common Stock equal to the product of (a) the total number of shares of Common Stock which the Third Party has agreed to purchase times (b) a fraction, the numerator of which is the total number of shares of Common Stock owned by Holding, the Trust or each Other Tag-Along Rights Holder who has elected to participate in such sale, as the case may be, on the date of the Final Notice and the denominator of which is the total number of shares of Common Stock owned on the date of the Final Notice by Holding, the Trust and the Other Tag-Along Rights Holders who have elected to participate in such sale; provided, however, that, in the event Holding, the -------- ------- Trust or any Other Tag- 6 Along Rights Holder elects to sell a number of shares of Common Stock which is less than the number of shares such holder could sell pursuant to clause (ii) above, the shares of Common Stock that the others of such holders can sell in such transaction shall be increased by an aggregate amount equal to the number of shares which any of Holding, the Trust or any Other Tag-Along Rights Holder could have sold in such transaction but chose not to sell, and any such increase shall be allocated among such other holders on a pro rata basis based upon the total number of shares of Common Stock owned on the date of the Final Notice by such other holders. 3.4 Consummation. Holding shall have 180 days from the date of ------------ the Final Notice in which to sell to the Third Party the shares of Common Stock owned by Holding and the Included Shares of the Trust on terms which are not materially less favorable to the sellers of shares of Common Stock than those specified in the applicable Initial Offer Notice; provided, however, that in the -------- ------- event there is a decrease in the price to be paid by the Third Party for the shares of Common Stock to be sold from the price set forth in the Initial Offer Notice, which decrease is acceptable to Holding, or other material change in terms which are less favorable to Holding, but which are acceptable to Holding, Holding shall notify the Trust of such decrease or change in terms, and the Trust shall have five business days from the date of receipt of the notice of such decrease or change in terms to reduce the number of shares of Common Stock it will sell to such Third Party as previously indicated in the applicable Acceptance Notice and the number of shares that all other participating Shareholders (including Other Tag-Along Rights Holders) may transfer shall be increased in accordance with the provisions of Section 3.3. Holding shall act as agent for the Trust in connection with such sale and shall cause to be remitted to the Trust the total sales price of the Included Shares of the Trust sold pursuant thereto, which consideration shall be in the same form as the consideration received by Holding and as specified in the applicable Initial Offer Notice, net of the Trust's pro rata portion (based on the number of shares of Common Stock sold) of the reasonable, out-of-pocket expenses (not including any expenses paid or payable to an Affiliate or Associate of Holding) incurred and paid by Holding in connection with such sale. Holding shall furnish, or shall cause to be furnished, such other evidence of the completion and time of completion of such sale and the terms thereof as may be reasonably requested by the Trust including, without limitation, evidence of the expenses incurred by Holding in connection with such sale. If and to the extent that, at the end of 180 days following the date of the Final Notice, Holding has not completed the sale contemplated thereby, Holding shall return to the Trust all certificates representing the Included Shares and all powers-of-attorney which the Trust may have transmitted pursuant to the terms hereof. 3.5 Termination and Assignment. The obligations of Holding -------------------------- pursuant to the provisions of this Section 3 shall terminate upon the later to occur of (i) one year after the consummation of an Initial Public Offering or (ii) at such time as less than 20% of the outstanding Common Stock is held by the Shareholders and their Permitted Transferees (a "Liquidity Event"). A Shareholder's rights under this Section 3 will terminate after the Shareholder has transferred a number of Voting Securities which represents 75% or more of the number of Voting Securities held on the date hereof other than transfers to a Permitted Transferee. The rights granted to the Trust under this Section 3 shall not be assignable except to a Permitted Transferee in accordance with Section 5.1, provided that the Permitted Transferee executes a written undertaking to be and becomes 7 bound by this Agreement in the same manner and to the same extent as the Trust. The transactions contemplated by Section 7.4 shall not give rise to any rights under this Section 3. 3A. Transfer of Holding Shares by the FS Entities; Rights of -------------------------------------------------------- Inclusion. - --------- 3A.1 Right of Inclusion. Each of the FS Entities agrees not ------------------ to sell all or any portion of the shares of Holding Common Stock it holds to any Person (individually, a "Third Party" and, collectively, "Third Parties") unless the Trust is given an opportunity to sell to the Third Party such number of shares of Common Stock owned by the Trust as is determined in accordance with Section 3A.3; provided, however, that the Trust shall have no rights pursuant to -------- ------- this Section 3A with respect to sales or other transfers by the FS Entities of Holding Common Stock to any Permitted Transferee of the FS Entities; provided, -------- further, that any such Permitted Transferee of an FS Entity described in clause - ------- (y)(i) of the definition of Permitted Transferee executes a written undertaking to be and becomes bound by this Agreement in the same manner and to the same extent as the transferring party. 3A.2 Third-Party Offer. Prior to the consummation of any ----------------- sale of all or any portion of the shares of Holding Common Stock held by any of the FS Entities to a Third Party, such FS Entity shall cause each bona fide offer from such Third Party to purchase such shares from such FS Entity (an "FS Third-Party Offer") to be reduced to writing and shall send written notice of such FS Third-Party Offer (the "FS Initial Offer Notice") to the Trust. Each FS Third-Party Offer shall include an offer to purchase shares of Common Stock from the Trust in the amounts determined in accordance with Section 3A.3, at the same time, at the same price and on the same terms as the sale by the FS Entity to the Third Party, and according to the terms and conditions of this Agreement. The FS Initial Offer Notice shall be accompanied by a true copy of the FS Third- Party Offer. If the Trust desires to accept the offer contained in the FS Initial Offer Notice, the Trust shall furnish written notice to the FS Entities, within 20 days after its receipt of the FS Initial Offer Notice, indicating the Trust's irrevocable acceptance of the offer included in the FS Initial Offer Notice and setting forth the maximum number of shares of Common Stock the Trust agrees to sell to the Third Party (the "FS Acceptance Notice"). If the Trust does not furnish an FS Acceptance Notice to the FS Entities in accordance with these provisions by the end of such 20-day period, the Trust shall be deemed to have irrevocably rejected the offer contained in the FS Initial Offer Notice. All shares of Common Stock set forth in the FS Acceptance Notice of the Trust together with the shares of Holding Common Stock proposed to be sold by the FS Entities to the Third Party are referred to collectively as "All Holding and Company Offered Shares". Within three days after the date on which the Third Party informs the FS Entities of the total number of shares of Holding Common Stock (and Common Stock, in the case of the Trust) which such Third Party has agreed to purchase in accordance with the terms specified in the FS Initial Offer Notice, the FS Entities shall send written notice (the "FS Final Notice") to the Trust setting forth the number of shares of Common Stock the Trust shall sell to the Third Party as determined in accordance with Section 3A.3, which number shall not exceed the maximum number specified by the Trust in its FS Acceptance Notice. Within five days after the date of the FS Final Notice (or such shorter period as may reasonably be requested by the FS Entities to facilitate the sale), the Trust shall furnish to the FS Entities (i) a written undertaking 8 to deliver, upon the consummation of the sale of Holding Common Stock to the Third Party as indicated in the FS Final Notice, the certificates representing the shares of Common Stock held by the Trust which will be transferred pursuant to such FS Third-Party Offer (such shares shall be referred to herein as the "Trust Included Shares") and (ii) a limited power-of-attorney authorizing the FS Entities to transfer the Trust Included Shares pursuant to the terms of such FS Third-Party Offer. Each of the FS Entities and the Trust shall be required to make representations and warranties in connection with such transfer with respect to its own authority to transfer and its title to the shares of Holding Common Stock (or Common Stock, in the case of the Trust) transferred. In any such transaction Holding will cooperate with the FS Entities and the Trust to facilitate the transaction. 3A.3 Allocation of Included Shares. The maximum number of ----------------------------- shares of Holding Common Stock and Common Stock, as the case may be, that may be sold by the FS Entities and the Trust and all other holders of Holding Common Stock or Common Stock who have rights to participate in sales of Holding Common Stock by the FS Entities pursuant to written agreements by and between the FS Entities and any such holder (the "Other FS Tag-Along Rights Holders") in any sale governed by this Section 3A shall be (i) All Holding and Company Offered Shares in the event the Third Party has agreed to purchase All Holding and Company Offered Shares and all shares of Holding Common Stock or Common Stock, as the case may be, that the Other FS Tag-Along Rights Holders who have elected to participate in such sale seek to include in such sale or (ii) such number of shares of Holding Common Stock and Common Stock, as the case may be, equal to the product of (A) the total number of shares of Holding Common Stock and Common Stock which the Third Party has agreed to purchase times (B) a fraction, the numerator of which is the total number of shares of Holding Common Stock and/or Common Stock owned by the FS Entities, the Trust, or each Other FS Tag-Along Rights Holder who has elected to participate in such sale, as the case may be, specified in the FS Final Notice on the date of the FS Final Notice and the denominator of which is the total number of shares of Holding Common Stock and Common Stock owned on the date of the FS Final Notice by the FS Entities, the Trust and the Other FS Tag-Along Rights Holders who have elected to participate in such sale provided, however, that, in the event the FS Entities, the Trust or -------- ------- any Other FS Tag-Along Rights Holder elects to sell a number of shares of Holding Common Stock or Common Stock which is less than the number of shares such holder could sell pursuant to clause (ii) above, the shares of Holding Common Stock and Common Stock that the others of such holders can sell in such transaction shall be increased by an aggregate amount equal to the number of shares which any of the FS Entities, the Trust or any Other FS Tag-Along Rights Holder could have sold in such transaction but chose not to sell, and any such increase shall be allocated among such other holders on a pro rata basis based upon the total number of shares of Holding Common Stock and Common Stock owned on the date of the FS Final Notice by such other holders. 3A.4 Consummation. The FS Entities shall have 180 days from ------------ the date of the FS Final Notice in which to sell to the Third Party the shares of Holding Common Stock owned by the FS Entities and the Trust Included Shares on terms which are not materially less favorable to the sellers of shares of Holding Common Stock or Common Stock, as the case may be, than those specified in the applicable Initial Offer Notice; provided, however, that in the event -------- ------- there is a decrease in the price to be paid by the Third Party for the shares of Holding Common Stock and Common 9 Stock to be sold from the price set forth in the FS Initial Offer Notice, which decrease is acceptable to the FS Entities, or other material change in terms which are less favorable to the FS Entities, but which are acceptable to the FS Entities, the FS Entities shall notify the Trust of such decrease or change in terms, and the Trust shall have five business days from the date of receipt of the notice of such decrease or change in terms to reduce the number of shares of Common Stock it will sell to such Third Party as previously indicated in the applicable FS Acceptance Notice and the number of shares that all other participating shareholders (including Other FS Tag-Along Rights Holders) may transfer shall be increased in accordance with the provisions of Section 3A.3. The FS Entities shall act as agent for the Trust in connection with such sale and shall cause to be remitted to the Trust the total sales price of the Trust Included Shares sold pursuant thereto, which consideration shall be in the same form as the consideration received by the FS Entities and as specified in the applicable FS Initial Offer Notice, net of the Trust's pro rata portion (based on the total value of the consideration received by the Trust compared to the aggregate consideration received by all shareholders in the transaction) of the reasonable, out-of-pocket expenses (not including any expenses paid or payable to an Affiliate or Associate of the FS Entities) incurred and paid by the FS Entities in connection with such sale. The FS Entities shall furnish, or shall cause to be furnished, such other evidence of the completion and time of completion of such sale and the terms thereof as may be reasonably requested by the Trust including, without limitation, evidence of the expenses incurred by the FS Entities in connection with such sale. If and to the extent that, at the end of 180 days following the date of the FS Final Notice, the FS Entities have not completed the sale contemplated thereby, the FS Entities shall return to the Trust all certificates representing the Trust Included Shares and all powers-of- attorney which the Trust may have transmitted pursuant to the terms hereof. 3A.5 Termination and Assignment. The obligations of the FS -------------------------- Entities pursuant to the provisions of this Section 3A shall terminate upon the later to occur of (i) one year after the consummation of an Initial Public Offering or (ii) at such time as less than 20% of the outstanding Holding Common Stock is held by the FS Entities and the Trust and their Permitted Transferees, assuming for the purpose of such calculation that the shares of Common Stock held by the Trust are shares of Holding Common Stock held by the Trust (a "Holding Liquidity Event"). The Trust's rights under this Section 3A will terminate after the Trust has transferred a number of Voting Securities which represents 75% or more of the number of Voting Securities held on the date hereof other than transfers to a Permitted Transferee. The rights granted to the Trust under this Section 3A shall not be assignable except to a Permitted Transferee in accordance with Section 5.1, provided that the Permitted Transferee executes a written undertaking to be and becomes bound by this Agreement in the same manner and to the same extent as the Trust. The transactions contemplated by Section 7.4 shall not give rise to any rights under this Section 3A. 4. Obligation to Sell Securities. ----------------------------- 4.1 Sale Obligation. If Holding finds a buyer or transferee --------------- (other than a Permitted Transferee) for all of the shares of Common Stock held by Holding (whether such sale is by way of purchase, merger or other form of transaction), upon the request of Holding, the Trust 10 shall sell or transfer all or any portion of the Securities beneficially owned by the Trust to such third-party buyer on the same terms and conditions applicable to Holding, provided, however, that if the buyer is a party other than a company whose common stock is publicly traded, the Trust shall not be required to accept consideration other than cash, provided, further, that if the buyer's common stock is publicly traded, the Trust shall not be obligated to accept consideration other than cash and/or capital stock of the buyer. Subject to the first sentence of this Section 4.1, all holders of each class of Securities shall receive the same form and amount of consideration for such Securities. Any Security that is convertible into Common Stock shall be purchased on an "as converted" basis. Any series of preferred stock that is not convertible into Common Stock shall be purchased for its stated liquidation preference plus accrued and unpaid dividends. Any debt Security which is not convertible into Common Stock shall be purchased at its outstanding principal amount plus accrued and unpaid interest, plus any prepayment or redemption premium set forth in the instruments governing such Security. The exercise price (if any) of a Security shall be deducted from the consideration to be received; provided however that if the exercise price of such Security is greater than the consideration to be received, such Security shall be canceled without any payment to its holder. The Trust agrees to such sale and to execute such agreements, powers of attorney, voting proxies or other documents and instruments as may be necessary to consummate such sale; provided that no Shareholder or Permitted Transferee shall be obligated to make any representations and warranties with respect to such sale other than with respect to its own authority to transfer, no conflicts with other agreements and its title to the Securities transferred, provided, further, that if a Shareholder or Permitted Transferee elects to make other representations and warranties, it shall not obligate any other Shareholder or Permitted Transferee to do so. The Shareholders and their Permitted Transferees shall have no obligation to indemnify a buyer with respect to representations and warranties regarding the Company, provided, that if a Shareholder or Permitted Transferee elects to indemnify a buyer, it shall not obligate any other Shareholder or Permitted Transferee to do so. The Trust further agrees to timely take such other actions as Holding may reasonably request to enforce its obligation to sell its Securities, and otherwise as necessary in connection with the approval of the consummation of such sale, including voting all Securities in favor of such sale and waiving any appraisal or dissenters rights. Each Shareholder shall pay its pro rata portion (based on the total value of the consideration received by such Shareholder compared to the aggregate consideration received by all Shareholders in the transaction without giving effect to any deduction of exercise price of a Security) of the reasonable out-of-pocket expenses (not including any expenses paid or payable to an Affiliate or Associate of Holding) incurred and paid by Holding in connection with a sale consummated pursuant to this Section 4.1. 4.2 Termination and Assignment. The obligations of the Trust -------------------------- pursuant to Section 4.1 shall be binding on any transferee of Securities held by the Trust, other than transferees in a Public Market Sale, and the Trust shall obtain and deliver to Holding a written commitment to be bound by such provisions from each such transferee prior to any transfer. The rights of Holding under Section 4.1 shall not be assignable except to a Permitted Transferee or to a purchaser of more than 50% of the Shares of Common Stock then held by Holding (a "50% Transferee") and its Permitted Transferees (considered collectively) and shall terminate in the event that Holding, such Permitted Transferees and 50% Transferees (considered collectively) hold a number of shares of 11 Common Stock which represents less than 20% of the total number of shares of Common Stock outstanding at any time. 4.3 FS Sale Obligation. If the FS Entities find a buyer or ------------------ transferee (other than a Permitted Transferee) for all of the shares of Holding Common Stock held by the FS Entities (whether such sale is by way of purchase, merger or other form of transaction), upon the request of the FS Entities, the Trust shall sell or transfer all or any portion of the Securities beneficially owned by the Trust to such third-party buyer on the same terms and conditions applicable to the FS Entities, provided, however, that if the buyer is a party other than a company whose common stock is publicly traded, the Trust shall not be required to accept consideration other than cash, provided, further, that if the buyer's common stock is publicly traded, the Trust shall not be obligated to accept consideration other than cash and/or capital stock of the buyer. Subject to the first sentence of this Section 4.3, all holders of each class of Securities shall receive the same form and amount of consideration for such Securities, and shares of Holding Common Stock and Common Stock shall receive the same form and amount of consideration per share. Any Security that is convertible into Holding Common Stock or Common Stock shall be purchased on an "as converted" basis. Any series of preferred stock that is not convertible into Holding Common Stock or Common Stock shall be purchased for its stated liquidation preference plus accrued and unpaid dividends. Any debt Security which is not convertible into Holding Common Stock or Common Stock shall be purchased at its outstanding principal amount plus accrued and unpaid interest, plus any prepayment or redemption premium set forth in the instruments governing such Security. The exercise price (if any) of a Security shall be deducted from the consideration to be received; provided however that if the exercise price of such Security is greater than the consideration to be received, such Security shall be canceled without any payment to its holder. The Trust agrees to such sale and to execute such agreements, powers of attorney, voting proxies or other documents and instruments as may be necessary to consummate such sale; provided that no Shareholder, FS Entity or Permitted Transferee shall be obligated to make any representations and warranties with respect to such sale other than with respect to its own authority to transfer, no conflicts with other agreements and its title to the Securities transferred, provided, further, that if a Shareholder or FS Entity or a Permitted Transferee elects to make other representations and warranties, it shall not obligate any other Shareholder, FS Entity or Permitted Transferee to do so. The Shareholders, the FS Entities and their Permitted Transferees shall have no obligation to indemnify a buyer with respect to representations and warranties regarding the Company or Holding, provided, that if a Shareholder or FS Entity or a Permitted Transferee elects to indemnify a buyer, it shall not obligate any other Shareholder, FS Entity or Permitted Transferee to do so. The Trust further agrees to timely take such other actions as the FS Entities may reasonably request to enforce its obligation to sell its Securities, and otherwise as necessary in connection with the approval of the consummation of such sale, including voting all Securities in favor of such sale and waiving any appraisal or dissenters rights. Each of the FS Entities and the Trust shall pay its pro rata portion (based on the total value of the consideration received by such party compared to the aggregate consideration received by all parties in the transaction without giving effect to any deduction of exercise price of a Security) of the reasonable out-of- pocket expenses (not including any expenses paid or payable to an Affiliate or Associate of the FS Entities) incurred and paid by the FS Entities in connection with a sale consummated pursuant to this Section 4.3. 12 4.4 Termination and Assignment. The obligations of the Trust -------------------------- pursuant to Section 4.3 shall be binding on any transferee of Securities held by the Trust, other than transferees in a Public Market Sale, and the Trust shall obtain and deliver to the FS Entities a written commitment to be bound by such provisions from each such transferee prior to any transfer. The rights of the FS Entities under Section 4.3 shall not be assignable except to a Permitted Transferee or to a purchaser of more than 50% of the Shares of Holding Common Stock then held by the FS Entities (an "FS 50% Transferee") and their Permitted Transferees (considered collectively) and shall terminate in the event that the FS Entities, such Permitted Transferees and FS 50% Transferees (considered collectively) hold a number of shares of Holding Common Stock which represents less than 25% of the total number of shares of Holding Common Stock outstanding at any time. 5. Restrictions on Transfers of Securities; Right of First Offer. ------------------------------------------------------------- 5.1 Transfer Restrictions. (A) A Shareholder shall not (i) --------------------- pledge, hypothecate or encumber any Securities; (ii) sell, assign, transfer, or otherwise dispose of or convey or distribute to its beneficiaries (in the case of the Trust) ("Transfer") any Securities, or any right, title or interest therein, except in compliance with the Securities Act and all applicable state securities laws or (iii) Transfer any Securities, or any right, title or interest therein except for sales of Securities expressly permitted by and in compliance with this Agreement, including (without limitation) Section 5.2; provided that the Trust may not Transfer any Securities, or any right, title or interest therein, until April 7, 2000 (the "Transfer Restriction Period"), except to a Permitted Transferee, provided further, however, that following the Transfer Restriction Period the Trust may Transfer Securities, and/or its right, title or interest therein, to any party subject to compliance with Section 5.2 and the other terms and conditions of this Agreement. At any time, the Trust may Transfer Securities with the consent of Holding, which Holding may withhold in its sole discretion. At any time, the Trust may Transfer Securities with the consent of Holding, which Holding may withhold in its sole discretion. Any attempt to Transfer, pledge, hypothecate or encumber Securities, or any right, title or interest therein, not in compliance with this Agreement shall be null and void, and the Company shall not give effect to any such attempted transaction or Transfer. Any Securities Transferred pursuant to the terms and requirements of this Agreement shall be Transferred free and clear of all mortgages, liens, pledges, charges and security interests or encumbrances, or any obligations or liabilities in connection therewith, except as expressly provided otherwise in this Agreement. Each Shareholder, on the execution and delivery of this Agreement, agrees that such Shareholder will not Transfer any Securities (other than to a Permitted Transferee) prior to delivery to the Company of an opinion of counsel in form and substance satisfactory to the Company with respect to compliance with the Securities Act, or until a registration statement with respect to such Securities under the Securities Act has become effective. Except to the extent set forth below, all transferees of Securities will be bound by this Agreement in the same manner and to the same extent as the transferor and prior to any Transfer must deliver to the Company and the Shareholders a written undertaking to be and become so bound. A transferee of shares from the FS Entities described in clause (ii) of the definition of Permitted Transferee who receives such shares in connection with a partnership distribution thereof by the FS Entities shall not be bound by this Agreement. Upon completion of any 13 Transfer in compliance with this Agreement, the transferee shall become a Shareholder and entitled to the rights hereunder which may be duly and validly assigned to such transferee. The Trust at any time may transfer Securities to a Permitted Transferee provided that (i) such transferee executes and delivers to the Company and Holding a written undertaking to be and becomes bound by this Agreement in the same manner and to the same extent as the transferring Shareholder and an irrevocable power of attorney held by Helen Lovaas and one other person authorizing and requiring the attorneys-in-fact to perform the drag along obligation of the Permitted Transferee under Section 4 and to act as the Permitted Transferee's agent for the purpose of complying with such Permitted Transferee's obligations of first offer under Section 5.2 and, at Holding's election and expense, also delivers a legal opinion reasonably satisfactory to Holding that such undertaking is binding and enforceable; (ii) the Trust consults Holding to discuss the possible impact of a proposed transfer on the recapitalization treatment of the transactions contemplated by the Merger Agreement; (iii) Securities may not be transferred directly or indirectly by the Trust to more than five Charitable Organizations during the Transfer Restriction Period and the three-year period thereafter (or, if sooner, until the Initial Public Offering) or a total of 10 such Organizations prior to the Initial Public Offering; and (iv) a Permitted Transferee that is a Family Member or trust for the benefit of Family Members, a foundation, trust partnership or limited liability company controlled by the Trust or Helen Lovaas, or a Charitable Organization or foundation or trust not controlled by the Trust or Helen Lovaas shall be entitled to Transfer Securities it holds following the Transfer Restriction Period to the same extent as the Trust is entitled to Transfer such Securities, subject to Section 5.2. Except as permitted in this Section 5.1, a Permitted Transferee of the Trust may not subsequently transfer the Securities, except transfers of Securities back to the transferring Shareholder. Any Shareholder or Permitted Transferee shall, if requested by the underwriter in the Company's Initial Public Offering, execute and deliver a customary lockup agreement under which such Shareholder or Permitted Transferee will agree not to sell any Securities until six months after the consummation of the Initial Public Offering. 5.2 Right of First Offer. The Trust hereby agrees not to -------------------- Transfer any of the Securities held by it to any Person (other than a Permitted Transferee) unless Holding (or its designee) is given the right to acquire such Securities pursuant to the provisions of this Section 5.2. If the Trust receives an offer from any Person to acquire any Securities, or decides to solicit or cause to be solicited a proposal or proposals to acquire Securities, the Trust (the "Offering Shareholder") shall first give Holding (the "Offeree"), written notice (the "Shareholder Notice") of such intention, which notice shall include a term sheet stating, among other material terms, the minimum cash sales price (the "Target Price") that the Offering Shareholder would entertain for the Securities to be sold (the "Offered Securities"). The Offeree shall have the right for a period of 15 days following the delivery of the Shareholder Notice (the "Acceptance Period") to accept the offer to purchase all but not less than all of the Offered Securities at the Target Price and upon the other terms provided with the Shareholder Notice; provided that all and not less than all of the Offered Securities are purchased. The Offeree (or its designee) shall exercise its rights under this Section 5.2 by delivering to the Offering Shareholder written notice of its election prior to 5:00 p.m. Los Angeles time on the final day of the Acceptance Period. If the Offeree (or its designee) exercises its rights under this Section 5.2, the sale of such Securities shall be consummated within 30 days of the final day of the 14 Acceptance Period (the "Purchase Period"). If the Offeree does not elect to purchase such Securities on such terms or fails to consummate a purchase of such Securities within the Purchase Period, the Offering Shareholder shall have the right to consummate the sale of such Securities for a sales price equal to or greater than the Target Price and on terms not materially more favorable to the purchaser than specified in the Shareholder Notice for a period of 90 days (the "Consummation Period") after the expiration of the Acceptance Period or, if applicable, the Purchase Period. If the Offering Shareholder does not complete such sale, transfer or conveyance within the Consummation Period, the Offering Shareholder shall not have the right to sell, transfer or convey any of such Securities without again complying with this Section 5.2. In the event the Offering Shareholder intends to sell Securities for consideration other than cash, the Offering Shareholder shall notify the Offeree of the terms of such non-cash consideration. The Offeree may elect within ten days of such notice to have the fair market value of such non-cash consideration determined, with the parties jointly selecting an investment banking firm to resolve any dispute regarding the fair market value of such non-cash consideration; in the absence of agreement on such firm, Goldman, Sachs & Co. shall determine such fair market value. If the sum of the fair market value of the non-cash consideration and the cash consideration (in the case of a sale that is partially for cash) is less than the cash price offered to the Offeree pursuant to this Section 5.2, the Offeree (or its designee) may, within 10 days of the determination of the fair market value of the non-cash consideration, elect to purchase the Securities proposed to be sold for a lump sum cash amount equal to the sum of (i) the fair market value of the non-cash consideration and (ii) the cash consideration, if any. Such purchase must be consummated within 20 days of the determination of fair market value. If the Offering Shareholder receives a written offer for such Securities at any time during the Consummation Period which is acceptable to the Offering Shareholder but is less than the Target Price or is upon terms materially less favorable to the Offering Shareholder than the terms provided to the Offeree in the Shareholder Notice (the "Below Target Price Offer"), the Offering Shareholder shall promptly deliver a copy of such written offer to the Offeree (or its designee). During the 15-day period following delivery of such written offer, the Offeree shall have the right to accept the offer to purchase the Securities offered on the terms reflected in such written offer. The Offeree (or its designee) shall, if it so desires, exercise such right by delivery to the Offering Shareholder written notice of its election to purchase all but not less than all of the Offered Securities prior to 5:00 p.m. Los Angeles time on the final day of such additional 15 day period and the sale of such Securities shall be consummated within 30 days of the delivery of such written notice. If the Offeree (or its designee) does not elect to accept the offer to purchase the Offered Securities on such terms or fails to consummate the purchase of the Offered Securities within 30 days of the date of the Offerees' acceptance of the Below Target Price Offer, the Offering Shareholder shall have 90 days to consummate the sale of the Offered Securities at a price and upon terms that are not materially less favorable to the Offering Shareholder than the price and terms specified in the written offer delivered to the Offeree. In the event a Below Target Price Offer involves any non-cash consideration, the procedures for valuing such non-cash consideration set forth above in this Section 5.2 shall be utilized to determine the fair market value of such non-cash consideration. 5.3 Termination and Assignment. The obligations of a -------------------------- Shareholder pursuant to this Section 5 shall terminate upon an Initial Public Offering. The rights granted to 15 Holding under this Section 5 shall be assignable to its Permitted Transferees or any designee(s); provided, that such Permitted Transferees or designees execute and deliver to the Company and the Trust an irrevocable power of attorney held by Holding authorizing and requiring the attorney-in-fact to act as agent for the purpose of exercising such Permitted Transferee's or designee's rights under Section 5. Any transferee of Securities from a Shareholder other than a purchaser of shares from a Shareholder after the Shareholder has duly complied with its obligations under this Section 5 with respect to such sale, shall be bound by the provisions of this Section 5 and such Shareholder shall obtain and deliver to each other Shareholder a written commitment to be bound by such provisions from each such transferee prior to any transfer. 6. Representation on the Board of Directors. ---------------------------------------- 6.1 The Board. Subject to the terms and conditions of this --------- Section 6, at each annual or special meeting of shareholders of Holding or in any written consent executed in lieu of a shareholder meeting, at or pursuant to which persons are being elected to fill positions on the Board of Directors of Holding, the FS Entities agree to exercise, or cause to be exercised, voting rights with respect to the shares of Voting Securities of Holding then held of record or beneficially owned by them, in such a manner that Helen Lovaas shall be elected to the Board of Directors of Holding. Subject to the terms and conditions of this Section 6, at each annual or special meeting of shareholders of the Company, or in any written consent executed in lieu of a shareholder meeting, at or pursuant to which persons are being elected to fulfill positions on the Board, Holding and the Trust agree to exercise, or cause to be exercised, voting rights with respect to the shares of Voting Securities then held of record or beneficially owned by them, in such manner that Helen Lovaas shall be elected to the Board and all other nominees proposed for election by Holding to the Board shall be elected. If necessary, the Boards of the Company and Holding shall elect such additional independent members, if any, as may be required under applicable law or stock exchange requirements or by the National Association of Securities Dealers or underwriters in connection with the Initial Public Offering, and Holding and the Trust shall each take all actions necessary in connection therewith. If at any time from and after the date hereof, Holding shall give notice of its desire to remove any director previously nominated by it to serve on the Board, Holding and the Trust agree to exercise or cause to be exercised voting rights with respect to all shares of Voting Securities held of record or beneficially owned by it or them so as to remove such director of the Company. If at any time from and after the date hereof, any director previously nominated by Holding to serve on the Board ceases to be a director (whether by reason of death, resignation, removal or otherwise), Holding shall be entitled to nominate a successor director to fill the vacancy created thereby, and Holding and the Trust agree to exercise voting rights with respect to the shares of Voting Securities held of record or beneficially owned by them so as to elect such nominee as a director of the Company. 6.2 Termination and Assignment. Holding's rights contained in -------------------------- this Section 6 shall terminate upon the occurrence of a Liquidity Event or a Holding Liquidity Event or upon the sale by Holding or its Permitted Transferees of more than 50% of its Initial Shares to 16 transferees (other than Permitted Transferees) and shall not be assignable other than to Permitted Transferees. Helen Lovaas' rights under Section 6.1 shall terminate if the Trust and its Permitted Transferees own less then 5% of the issued and outstanding shares of Common Stock, and shall likewise terminate on the death of Helen Lovaas. 7. Other Agreements. ---------------- 7.1 Capitalization. Subject to Sections 7.3 and 7.4, Holding -------------- agrees that the number of outstanding shares of Holding Common Stock will at all times equal the number of outstanding shares of Common Stock. Holding further agrees that the number of shares of Holding Preferred Stock will equal the number of outstanding shares of Preferred Stock, provided that these numbers may differ to the extent that Holding declares and pays dividends on the Holding Preferred Stock in additional shares and the Company does not declare and pay dividends on its Preferred Stock in additional shares and to the extent that the Holding Preferred Stock is exchanged for shares of Exchangeable Preferred Stock. Upon Holding's determination to exchange the Holding Preferred Stock for Exchangeable Preferred Stock, as provided under the terms of the Holding Preferred Stock, the Company shall issue such Exchangeable Preferred Stock in accordance with Holding's request and shall reserve 600,000 shares of preferred stock to effect such exchange and issuance. 7.2 Business Activities of Holding. Holding will not engage in ------------------------------ any business other than its ownership of Securities and activities incidental thereto. 7.3 Employee Stock Matters. (i) The Company may issue ---------------------- Securities to Employees, pursuant to employee benefit plans approved by the Board. In addition, Holding may issue shares of its capital stock to Employees pursuant to employee benefit plans approved by its board of directors. (ii) Upon contribution to the Company by Holding, of cash and Employee Equity Interests (as defined below) delivered by Employees in connection with the purchase of capital stock of Holding by such Employees, the Company shall issue to Holding, a number of Shares equal to the number of shares of capital stock of Holding so purchased. (iii) Subject to clause (iv) below, at the request of Holding, the Company shall distribute funds to Holding, in order to permit Holding to repurchase its capital stock from Employees upon termination of service, or pursuant to a right of first refusal with respect to capital stock of Holding held by such Employees, and shall also distribute to Holding, upon request, any related promissory note, pledge agreement and certificates for shares of capital stock (collectively, the "Employee Equity Interest"), as necessary to permit Holding to repurchase such capital stock. The Company shall also distribute the Employee Equity Interests as necessary in connection with an Initial Public Offering. (iv) Immediately upon any distribution referred to in clause (iii) (other than a distribution of Employee Equity Interests in connection with an Initial Public Offering) to Holding, the Company shall retire a number of shares of capital stock of the Company held by 17 Holding equal to the number of shares of capital stock of Holding repurchased with the funds so distributed. 7.4 Liquidation. Upon the approval of the Company's Board of ----------- Directors to effect an Initial Public Offering, the Company and the Shareholders agree as follows: (i) Holding will transfer to the Company each share of Common Stock it holds in exchange for a new share of Common Stock, (ii) Holding shall either (A) cause the Company to redeem a number of shares of Preferred Stock held by Holding having an aggregate liquidation preference equal to the outstanding Holding Preferred Stock, and thereafter redeem the outstanding shares of Holding Preferred Stock or (B) cause the Company to issue to Holding in redemption thereof the Securities provided in the terms of the Holding Preferred Stock in an aggregate principal amount or having an aggregate liquidation preference, as the case may be, equal to the aggregate liquidation preference of the Holding Preferred Stock and thereafter exchange the outstanding shares of Holding Preferred Stock for such Securities, and (iii) Holding will liquidate and distribute a share of Common Stock in respect of each share of Holding Common Stock. This Agreement will continue in full force and effect and the rights and obligations of Holding under this Agreement will enure to the benefit of and will bind the FS Entities upon Holdings' liquidation and the other parties hereto will execute an amendment to this Agreement, in form and substance satisfactory to the FS Entities, to confirm the foregoing. 7.5 Registration Rights. Upon the consummation of an Initial ------------------- Public Offering, the Company will grant registration rights to the FS Entities and the Trust and commencing six months after the Initial Public Offering, three demand registration to the FS Entities and its affiliates and one demand registration to the Trust and its Permitted Transferees in substantially the form of Exhibit A hereto. If necessary, shares of Common Stock held by --------- employees, directors or consultants of the Company will be registered on a Form S-8 Registration Statement. 7.6 Further Action. All parties hereto agree to take all such -------------- actions, including voting, as may be necessary to give effect to transactions undertaken in accordance with this Section 7 and to execute such agreements, powers of attorney, consents or waivers of appraisal or dissenters rights, or other documents or instruments as may be necessary in connection with any such transactions. Subject to the provisions of this Section 7, all parties hereto shall use all reasonable efforts to take, or cause to be taken, all actions and to do or cause to be done, all things necessary (including without limitation, in connection with obtaining any requisite approval) to expeditiously consummate any transaction undertaken in accordance with this Section 7. 8. Copy of Agreement. A copy of this Agreement and all amendments ----------------- hereto shall be filed with the Secretary of Company and shall be kept at the principal executive offices of Company. 9. Governing Law. This Agreement shall be governed by and construed ------------- and enforced in accordance with the laws of the State of California without regard to the conflicts of laws rules thereof. 18 10. Representations and Warranties. Each Shareholder represents and ------------------------------ warrants (a) that such Shareholder has full power, capacity, right and authority, and any requisite approvals or consents to enter into and perform this Agreement; (b) that this Agreement and the performance of its obligations hereunder (i) will not violate any other agreement or organizational document of such Shareholder and (ii) have been duly authorized, and that this Agreement has been duly executed and delivered by such Shareholder and is a valid and binding agreement, enforceable against such Shareholder in accordance with its terms; (c) that such Shareholder owns beneficially and of record the shares of Common Stock and Preferred Stock and the rights, options or warrants to purchase any capital stock of the Company set forth opposite its name under the definition of "Initial Shares" free and clear of any lien, claim, charge, option, security interest, restriction or encumbrance, and (d) that such Shareholder does not own beneficially or of record any other securities or rights, options or warrants to purchase any securities of the Company. The Trust further represents and warrants that it is a trust duly organized, validly existing and in good standing under the laws of the State of California. During the lifetime of Helen Lovaas, the sole Trust beneficiary will be Helen Lovaas, and upon her death, the transferees of the Securities held by the Trust will only be Permitted Transferees. 11. Amendment and Waiver; Successors. This Agreement may be amended, -------------------------------- modified or supplemented, and compliance with any provision hereof may be waived, only with the written consent of those shareholders then holding a majority of the shares of Voting Securities now held by Holding and those shareholders then holding a majority of the shares of Voting Securities now held by the Trust, and any amendment, modification, supplement or waiver so consented to in writing shall be binding upon the parties hereto and their successors and permitted transferees and assigns. This Agreement shall be binding on the parties hereto and, their successors, transferees, assigns, heirs and personal representatives; provided however, that unless expressly permitted herein, this Agreement under the rights granted hereunder shall not be assignable without the written consent of all of the parties hereto, which consent may be withheld in each such party's sole discretion. This Agreement shall apply to all Securities now owned or hereafter acquired by any Shareholder and the term "Securities" includes any securities into which such Securities may hereafter be changed. 12. Interpretation. The headings of the Sections contained in this -------------- Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not affect the meaning or interpretation of this Agreement. 13. Notices. All notices and other communications provided for or ------- permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or delivered by telecopier, on the date of such delivery or transmission, or three (3) days after deposit in the mail, by registered or certified mail (return receipt requested) postage prepaid (i) if to Company, at the address or telecopier number set forth in the Merger Agreement, (ii) if to Holding, care of Freeman Spogli & Co. Incorporated, 11100 Santa Monica Boulevard, Suite 1900, Los Angeles, California 90025, Attention: William M. Wardlaw, telecopier: (310) 444-1870, (iii) if to the Trust c/o Helen Lovaas, 40 Via Largo, Bonsall, CA 92003, with a copy to Gerard J. Kenny, Gibson, Dunn & Crutcher LLP, 4 Park Plaza, Suite 1700, Irvine, CA 92614-8557 (or at such other address or telecopier number for any party as shall be specified by like notice provided that notices of a change of address or telecopier number shall be effective only upon receipt thereof). 19 14. Legends. All certificates evidencing Securities which are issued ------- to any of Shareholders shall be legended as follows (in addition to any other legend required to be placed thereon): "THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS AND OBLIGATIONS WITH RESPECT TO THE TRANSFER, PLEDGE, HYPOTHECATION AND VOTING THEREOF AS SET FORTH IN THAT CERTAIN SHAREHOLDERS AGREEMENT DATED AS OF APRIL 7, 1998, WHICH MAY BE REVIEWED AT THE PRINCIPAL PLACE OF BUSINESS OF THE CORPORATION AND A COPY OF WHICH MAY BE OBTAINED FROM THE CORPORATION WITHOUT CHARGE UPON WRITTEN REQUEST THEREFOR." 15. Further Assurances. The Shareholders shall exercise, or cause to ------------------ be exercised, voting rights with respect to Voting Securities held of record or beneficially owned by them in a manner so that, and shall otherwise take any necessary actions in order that, the covenants and understandings of the parties set forth in this Agreement shall be implemented. 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 and to make appropriate changes to the procedures set forth herein to implement such rights to the extent necessary to conform to the California Corporations Code or other applicable law. Each party hereto further agrees not to take any action violating the intent and purpose of this Agreement. The Company covenants and agrees that it will act in good faith to preserve for each of the Shareholders the benefits of this Agreement and that it will take no voluntary action to impair the benefit hereof or to avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder or to deny to any of the Shareholders any of the benefits or protections contemplated hereby. 16. Injunctive Relief; Disputes. It is acknowledged that it will be --------------------------- impossible to measure in money the damages that would be suffered if the parties hereto fail to comply with any of the obligations herein imposed on them and that, in the event of any such failure, an aggrieved party hereto will be irreparably damaged and will not have an adequate remedy at law. Any such party shall, therefore, be entitled to injunctive relief, including specific performance, to enforce such obligations, and if any action should be brought in equity to enforce any of the provisions of this Agreement, none of the parties hereto shall raise the defense that there is an adequate remedy at law. In the event of any dispute among the parties arising out of this Agreement, the prevailing party shall be entitled to recover from the non-prevailing party the reasonable expenses of the prevailing party, including, without limitation, reasonable attorneys' fees. 17. Severability. If any term or other provision of this Agreement ------------ is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect to the maximum extent permitted by applicable law. Upon such determination that any term or other provision is invalid, illegal or 20 incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that this Agreement be enforced as originally contemplated to the greatest extent possible. 18. Entire Agreement. This Agreement, together with the Company's ---------------- Articles of Incorporation and Bylaws as in effect on the date hereof constitute the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersede any and all prior agreements, whether written or oral, relating hereto. 19. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 21 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. HUDSON RESPIRATORY CARE INC. By: /s/ Richard W. Johansen ------------------------- Title: President and Chief Executive Officer --------------------------------------- By: /s/ Jay R. Ogram ------------------ Title: Chief Financial Officer ------------------------- RIVER HOLDING CORP. By: /s/ Charles P. Rullman ------------------------ Title: President ----------- By: /s/ Sanjay K. Morey --------------------- Title: Assistant Secretary --------------------- THE HELEN LOVAAS SEPARATE PROPERTY TRUST U/D/T JULY 17, 1997 By: /s/ Helen Hudson Lovaas -------------------------- By: --------------------------- 22 FS EQUITY PARTNERS III, L.P., a Delaware limited partnership By: FS Capital Partners L.P. Its: General Partner By: FS Holdings, Inc. Its: General Partner By: /s/ Charles P. Rullman ---------------------- Name: Charles P. Rullman Title: FS EQUITY PARTNERS INTERNATIONAL, L.P., a Delaware limited partnership By: FS & Co. International, L.P. Its: General Partner By: FS International Holdings Limited Its: General Partner By: /s/ Charles P. Rullman ---------------------- Name: Charles P. Rullman Title: FS EQUITY PARTNERS IV, L.P., a Delaware limited partnership By: FS Capital Partners LLC Its: General Partner By: /s/ Charles P. Rullman ---------------------- Name: Charles P. Rullman Title: Managing Member 23 EX-10.8 17 STOCK SUBSCRIPTION AGREEMENT DATED 4-7-98 EXHIBIT 10.8 STOCK SUBSCRIPTION AGREEMENT THIS STOCK SUBSCRIPTION AGREEMENT (the "Subscription Agreement") is made as of this 7th day of April 1998 by and among: RIVER ACQUISITION CORP., a corporation organized and existing under the laws of the State of California (the "Company"); and RIVER HOLDING CORP., a corporation organized and existing under the laws of the State of Delaware ("Investor"), which is subscribing for and purchasing 5,500,000 shares of common stock of the Company par value $ .01 per share (the "Shares"). 1. Subscription of Shares. ---------------------- 1.1 Subscriptions. Upon the terms and subject to the conditions of this ------------- Subscription Agreement, Investor hereby subscribes for the Shares, for a purchase price of $10.00 per Share, for an aggregate purchase price of $55,000,000. 1.2 Closing. Upon the terms and subject to the conditions of this ------- Agreement, the closing (the "Closing") of the transactions contemplated by this Subscription Agreement shall take place at the same time and place and substantially concurrently with the closing under the Amended and Restated Merger Agreement dated as of March 15, 1998, by and among the Company, Investor, Hudson Respiratory Care Inc., a California corporation ("Hudson RCI") and the Shareholders of Hudson RCI (the "Merger Agreement"). The only conditions to the Closing under this Subscription Agreement shall be the substantially concurrent satisfaction or waiver of the conditions to closing of the transactions contemplated by the Merger Agreement. At the Closing, the Company shall deliver to Investor a certificate for the Shares duly registered in the name of Investor. Investor shall thereupon immediately endorse and surrender such certificate for transfer in connection with the Merger. 1.3 Payment by Investor. At the Closing, Investor shall pay the purchase ------------------- price by wire transfer to an account designated by the Company. 2. Representations and Warranties of Investor. ------------------------------------------ 2.1 Investment Representation. Investor hereby represents and warrants to ------------------------- the Company with respect to itself as follows: (a) Investor is acquiring the Shares for its own account and not with a view to or for sale in connection with any distribution of the Shares; (b) Investor (i) is familiar with the business of the Company and Hudson RCI, (ii) has had an opportunity to discuss with representatives of the Company and Hudson RCI the condition of any prospects for the continued operation and financing of the Company and Hudson RCI and such other matters as Investor has deemed appropriate in considering whether to invest in the Shares, and (iii) has been provided access to all available information about the Company and Hudson RCI requested by Investor; and (c) Investor understands that the Shares have not been registered under the Securities Act of 1933, as amended (the "Act"), or registered or qualified under the securities laws of any state and that Investor may not sell or otherwise transfer the Shares unless they are subsequently registered under the Act and registered or qualified under applicable state securities laws, or unless an exemption is available which permits sale or other transfer without such registration and qualification. 2.2 Indemnification of the Company. Investor hereby agrees to indemnify, ------------------------------ defend and hold harmless the Company (including its officers, directors, assigns and successors) from and against any and all claims, actions, deficiencies, assessments, liabilities, losses, damages, costs, expenses, judgments and settlements, including reasonable legal fees, of any kind (collectively, "Claims") relating to or arising out of or in connection with or incidental to any breach of any representation or warranty of Investor under this Subscription Agreement. 3. Representations and Warranties of the Company. --------------------------------------------- 3.1 The Company represents and warrants as follows: (a) Organization and Corporate Authority; Binding Obligation. The -------------------------------------------------------- Company is a corporation duly organized, validly existing and in good standing under the laws of Delaware, and has full corporate power and authority to execute, deliver and perform this Agreement. The Company has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly authorized by all necessary corporate action and constitutes (or upon execution and delivery will constitute) a legal, valid and binding obligation of the Company, enforceable against it in accordance with its terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally. (b) Agreement not a Breach. The execution of this Agreement by the ---------------------- Company and the fulfillment, performance and compliance with the terms and provisions of this Agreement by the Company will not (i) conflict with or result in a breach of any provision of the Company's Articles of Incorporation or Bylaws; (ii) conflict with, violate or result in a breach of the terms, conditions or provisions of, or constitute a default or result in the acceleration of any obligation under, or result in the cancelation or modification of, or permit termination of, any material agreement or instrument to which the Company is a party or by which the Company is bound; or (iii) conflict with or violate the provisions of any law or any judgment, decree, order, regulation, arbitration award or rule of any court or governmental authority or any covenant or restriction binding upon the Company, including, without limitation, the Articles of Incorporation. 3.2 Indemnification. The Company hereby agrees to indemnify, defend and --------------- hold harmless the Investor (including its officers, directors, shareholders, employees, assigns and 2 successors and affiliates) from and against any and all claims, actions, deficiencies, assessments, liabilities, losses, damages, costs, expenses, judgments and settlements, including reasonable legal fees, of any kind (collectively, "Claims") relating to or arising out of or in connection with or incidental to (i) any breach of any representation or warranty of the Company under this Subscription Agreement, and (ii) any liability that Investor may incur, or litigation or Claims relating to, Investor's status as a shareholder of the Company or its successors or assigns (including litigation that Investor may be made party to as a result of their ownership of Common Stock or other securities of the Company, or its successors and assigns). 4. Miscellaneous. ------------- 4.1 Legends on Certificates. Any and all certificates now or hereafter ----------------------- issued evidencing the Shares shall have endorsed upon them a legend such legends and shall be subject to such restrictions on transfer as may be necessary to comply with all applicable federal and state securities laws and regulations. 4.2 Further Assurances. Each party hereto agrees to perform any further ------------------ acts and execute and deliver any document which may be reasonably necessary to carry out the intent of this Agreement. 4.3 Binding Agreement. This Agreement shall bind and inure to the benefit ----------------- of the successors and assigns of the Company, including Hudson Respiratory Care Inc. upon consummation of the Merger, and the successors and assigns of Investor. 4.4 Notices. Any notice required or permitted to be given pursuant to ------- this Agreement shall be in writing and shall be deemed given upon personal delivery or, if mailed, upon the expiration of 48 hours after mailing by any form of United States mail requiring a return receipt, addressed (i) to Investor at the address set forth on the signature page hereof, (ii) to the Company at 11100 Santa Monica Boulevard, Los Angeles, California 90025. A party may change its address by giving written notice to the other parties setting forth the new address for the giving of notices pursuant to this Agreement. 4.5 Amendments. This Agreement may be amended at any time by the written ---------- agreement and consent of the parties hereof. 4.6 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of California. 4.7 Disputes. In the event of any dispute among the parties arising out -------- of this Agreement, the prevailing party shall be entitled to recover from the nonprevailing party the reasonable expenses of the prevailing party, including, without limitation, reasonable attorneys' fees. 3 4.8 Entire Agreement. This Agreement, including the agreements referred ---------------- to herein, constitutes the entire agreement and understanding among the parties pertaining to the subject matter hereof and supersedes any and all prior agreements, whether written or oral, relating thereto. 4.9 Headings. Introductory headings at the beginning of each section of -------- this Agreement are solely for the convenience of the parties and shall not be deemed to be a limitation upon or description of the contents of any such section. 4.10 Counterparts. This Agreement may be executed in two or more ------------ counterparts, all of which, when taken together, shall constitute one and the same instrument. 4 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. RIVER ACQUISITION CORP. By: /s/ Charles P. Rullman ---------------------- Its: President RIVER HOLDING CORP. By: /s/ Charles P. Rullman ----------------------- Charles P. Rullman Its: President 5 EX-10.9 18 EMPLYMNT AGRMNT DATED 4-7-98 (R.W. JOHANSEN) EXHIBIT 10.9 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement ("Agreement") is entered into as of April 7, 1998, by and between HUDSON RESPIRATORY CARE INC., a California corporation ("Company"), and Richard W. Johansen ("Employee") (with Company and Employee sometimes being referred to herein individually as a "party" and collectively as the "parties"). R E C I T A L S: - - - - - - - - WHEREAS, Employee currently is an employee of Company; and WHEREAS, the parties desire to provide for Company's continued employment of Employee pursuant to the terms and provisions of this Agreement commencing as of April 7, 1998 (the "Effective Date"). A G R E E M E N T: - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing Recitals, the mutual covenants and conditions contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: ARTICLE I. SERVICES AND COMPENSATION. ------------------------- 1.1 Employment of Employee. The parties hereby acknowledge that ---------------------- prior to the Effective Date Employee has been employed by Company. Commencing as of the Effective Date, Company agrees to employ Employee and Employee agrees to be employed by Company pursuant and subject to the terms and provisions of this Agreement. Employee agrees to serve Company faithfully and to the best of his/her ability in such capacity or capacities and with such duties and responsibilities as may be determined by Company from time to time. Employee shall devote such his or her full time and attention to the business of Company during the term of this Agreement. Employee shall not, while employed by Company, directly or indirectly render any services of a business, commercial or professional nature to any other person or organization, whether for compensation or otherwise (other than service on the Board of Directors of Artema Medical AB), without the prior written consent of the Board of Directors. 1.2 Compensation. ------------ (a) As compensation for Employee's performance of his/her services under this Agreement, Company shall pay Employee an annual base salary in an amount as may be determined and adjusted by Company in its discretion from time to time. Such compensation shall be prorated for a partial year based on the number of days worked for Company during such year, and shall be payable in accordance with Company's customary employee payroll practices, including but not limited to all customary withholding practices. (b) As additional compensation for Employee's performance of his/her services under this Agreement, Company may pay Employee a cash bonus pursuant to Company's management incentive programs as in effect from time to time, provided, however, that Company shall have no obligation to pay any such bonus to Employee, and the amount of any such bonus, if paid, shall be entirely discretionary. Employee's eligibility to receive any such bonus for any year is expressly conditioned upon Employee being employed by Company as of December 31 of such year. The cash bonus (if any) payable to Employee pursuant to this subsection (b) with respect to any calendar year shall be paid in one lump sum on or before March 15 of the immediately succeeding calendar year. (c) By agreeing hereunder to pay Employee an annual salary Company is not agreeing to employ Employee for any specified term or to pay Employee, upon the termination of his/her employment, any amounts other than those set forth in Section 1.4 hereof. Company may in its sole discretion adjust Employee's compensation as it deems appropriate from time to time, provided, however, that any such adjustment shall apply prospectively only to years following notification to Employee of such adjustment. Without limitation upon said discretion of Company, such compensation adjustments may be made to reflect (i) any changes in Employee's employment position or responsibilities, (ii) Company's evaluation of Employee's job performance, and/or (iii) the nature and/or profitability of Company's business activities. Nothing contained herein shall be deemed contrary to Employee's right to effect a Qualifying Resignation under circumstances to which the provisions of Section 1.4(c)(iii) hereof apply. 1.3 Fringe Benefits. Employee shall be entitled to participate in --------------- all health, welfare, insurance, pension and other similar employee benefit plans and programs of Company which are open to participation by employees holding employment positions comparable to Employee's position; provided, however, that such participation by Employee shall in all cases be subject to the terms and provisions of each such employee plan or program and also to applicable federal, state or other governmental laws and regulations. 1.4 Termination of Employment; Severance Pay. ---------------------------------------- (a) The parties hereby expressly agree that Employee's employment by Company may be terminated by either party at any time and for any reason, whether with or without cause. (b) Except as provided in subsection (c) hereinbelow, if Employee's employment with Company is involuntarily terminated by Company, or if Employee resigns pursuant to a Qualifying Resignation (as defined hereinbelow), then, Company 2 shall pay to Employee a severance payment equal to 24 months' base salary determined at the rate in effect as of the date of employment termination ("Severance Payment"). Employee's Severance Payment shall be paid on a monthly basis over the 24 month period following Employee's termination of employment. (c) Notwithstanding the foregoing, Employee shall not be entitled to any Severance Payment in the event of the termination of Employee's employment with Company by reason of any one or more of the following: (i) Cause, as defined hereinbelow; (ii) Employee's death or Permanent Disability, as defined hereinbelow; or (iii) Employee's resignation, other than a Qualifying Resignation, as defined hereinbelow. As used herein, the following terms shall have the meanings set forth hereinbelow: (i) "Cause" shall mean (i) Employee's conviction of, or the entry of a pleading of guilty or nolo contendre by Employee to, a felony or a crime involving moral turpitude, (ii) Employee's material failure to perform his duties required under his employment relationship, material failure to comply with the Company's, its Parent's and/or any subsidiary's standard policies and procedures generally applicable to employees, or failure to comply with any provision of this employment agreement after having received written notice from the Company, its Parent 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, its Parent and/or a subsidiary if such failure is susceptible to cure, (iii) a willful act by Employee as a result of which he receives an improper personal benefit at the expense of the Company, its Parent and/or a subsidiary, (iv) an act of fraud or dishonesty committed by Employee against the Company, its Parent and/or a subsidiary, or (v) any other misconduct by Employee that is materially injurious to the business or reputation of the Company, its Parent and/or a subsidiary. "Parent" means River Holding Corp. (ii) "Permanent Disability" shall mean a disability which qualifies Employee for disability payments under Company's long-term disability plan. (iii) "Qualifying Resignation" shall mean a resignation by Employee within 60 days after any of the following: (A) a change of Employee's title to a title lower in rank than President and Chief Executive Officer; (B) a change of Employee's reporting responsibility so that he no longer reports directly to the Board of Directors; (C) a change of Employee's duties and responsibilities which cause Employee's position to be one of materially lesser responsibility and scope; (D) a reduction in Employee's base salary; or (E) a change to Employee's incentive bonus compensation arrangement which results in a material reduction in potential incentive compensation unless such change is accompanied by an increase in base salary which, when considered in light of the contingent nature of incentive compensation, fairly offsets the reduction in potential incentive compensation. 3 (d) The payment of any Severance Payment as provided under this Section 1.4 shall be subject to Company's usual and customary employee payroll practices and also subject to all applicable withholding requirements. Except for such Severance Payment, Employee shall not be entitled to any further compensation or other severance benefits by reason of a termination of his/her employment with Company. ARTICLE II. PROHIBITED ACTIVITIES; CONFIDENTIAL INFORMATION; NONDISCLOSURE, --------------------------------------------------------------- NONINTERFERENCE AND NONSOLICITATION COVENANTS. --------------------------------------------- 2.1 Prohibited Activity. As used herein the term "Prohibited ------------------- Activity" means (a) the direct or indirect diversion of business to, or solicitation of business for or on behalf of, any person, firm, corporation or other entity which is a competitor of Company, and (b) solicitation or inducement of any employee of Company to terminate his/her relationship with Company for the purpose of becoming employed by or associated with a competitor of Company. Employee hereby agrees that during the term of his/her employment with Company he/she will not engage in any Prohibited Activity. 2.2 Confidential Information: Nondisclosure Covenant. ------------------------------------------------ (a) As used herein the term "Confidential Information" shall mean all customer and contract lists, records, financial data, trade secrets, business and marketing plans and studies, manuals for employee and personnel policies, manufacturing and/or production manuals, computer programs and software, strategic plans, formulas, manufacturing and production processes and techniques (including without limitation types of machinery and equipment used together with improvements and modifications thereon), tools, applications for patents, designs, models, patterns, drawings, tracings, sketches, blueprints, and all other similar information developed and/or used by Company in the course of its business and which is not known by or readily available to the general public. (b) Employee acknowledges that, in the course of performing services for and on behalf of Company, Employee has had and will continue to have access to Confidential Information. Employee hereby covenants and agrees to maintain in strictest confidence all Confidential Information in trust for Company, its successors and assigns. During the period of Employee's employment with Company and at any and all times following Employee's termination of employment for any reason, including without limitation Employee's voluntary resignation or involuntary termination with or without cause, Employee agrees to not misappropriate, or disclose or make available to anyone outside Company's organization, any Confidential Information or anything relating thereto without the prior written consent of Company, which consent may be withheld by Company for any reason or no reason at all. (c) Upon Employee's termination of his/her employment with Company for any reason, including without limitation Employee's voluntary resignation or involuntary 4 termination with or without cause, Employee hereby agrees to promptly return to Company's possession all copies of any writings, drawings or other information relating to Confidential Information which are in Employee's possession or control. Employee further agrees that, upon the request of Company at any time during Employee's period of employment with Company, Employee shall promptly return to Company all such copies of writings, drawings or other information relating to Confidential Information which are in Employee's possession or control. (d) Employee hereby assigns to Company all right, title and interest in and to any ideas, inventions, original works or authorship, developments, improvements or trade secrets which Employee solely or jointly has conceived or reduced to practice, or will conceive or reduce to practice, or cause to be conceived or reduced to practice, during his/her employment with Company. All original works of authorship which are made by Employee (solely or jointly with others) within the scope of Employee's services hereunder and which are protectable by copyright are "works made for hire," as that term is defined in the United States Copyright Act. 2.3 Noninterference and Nonsolicitation Covenants. In further --------------------------------------------- reflection of Company's important interests in its proprietary information and trade and employee relationships, Employee agrees that, during the 24-month period following the termination of Employee's employment with Company for any reason, including without limitation Employee's voluntary resignation or involuntary termination with or without cause, Employee will not do any of the following without the prior written consent of Company: (a) directly or indirectly, for or on behalf of any person, firm, corporation or other entity, interfere with any contractual or other business relationship that Company has with any of its customers, clients, service providers or materials suppliers as of the date of Employee's termination of employment; or (b) directly or indirectly solicit or induce any employee of Company to terminate his/her employment relationship with Company. 2.4 Severance Payment Forfeiture for Breach. If Employee at any time --------------------------------------- breaches his/her covenants or obligations under the foregoing provisions of Sections 2.1, 2.2 and/or 2.3, Employee shall forfeit any remaining Severance Payments otherwise payable to Employee under this Agreement. 2.5 Injunctive Remedy. In the case of any breach or threatened ----------------- breach by Employee of any of his/her covenants or obligations under Sections 2.1, 2.2 and/or 2.3, the parties hereto agree that damages may not be an adequate remedy for Company and that, in the event of any such breach or threatened breach, the Company may, either with or without pursuing any potential damage remedies, immediately obtain and enforce an injunction prohibiting Employee from committing or continuing to commit such breach or threatened breach. 5 ARTICLE III MISCELLANEOUS ------------- 3.1 Notices. All notices, requests, or other communications ------- (hereinafter collectively referred to as "Notices") required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and may be personally delivered, or may be deposited in the United States mail, postage prepaid and addressed as follows: To Company at: Hudson Respiratory Care Inc. 27711 Diaz Street Temecula, CA 92390 To Employee at: Employee's current residential mailing address as reflected in Company's employee records A Notice which is delivered personally shall be deemed given as of the date of personal delivery, and a Notice mailed as provided herein shall be deemed given on the second business day following the date so mailed. Either party may change its address for purposes of Notices hereunder pursuant to a Notice, given as provided herein, advising the other party of such change. 3.2 Effective Date. Employee and Company understand and acknowledge -------------- that, as of the date of execution of this Agreement, Employee is an employee of Company. Employee and Company agree, however, that the employment relationship between Employee and Company shall be governed in all respects by the terms and provisions of this agreement effective as of April 7, 1998. 3.3 Governing Law. This Agreement shall be governed by, interpreted ------------- under, and construed and enforced in accordance with the laws of the State of California applicable to Agreements made and to be performed only within the State of California. 3.4 Entire Agreement. The terms of this Agreement are intended by ---------------- the parties as a final expression of their agreement with respect to such terms as are included in this Agreement and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement constitutes the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced into any judicial proceeding, if any, involving this Agreement, except for written modifications as provided under Section 3.5 hereof. The parties agree that there are no collateral agreements of any kind concerning Employee's employment with Company. The parties further agree that any and all prior employment agreements and agreements relating to the Company's former Equity Participation Plan by and between the parties are hereby revoked and superseded in their entirety by the provisions of this Agreement. 3.5 Modifications and Amendments. This Agreement may not be amended, ---------------------------- modified, changed or supplemented, nor may any obligations hereunder be waived, except by written instrument signed by both parties. 6 3.6 Successors and Assigns. This Agreement and the provisions hereof ---------------------- shall be binding upon each of the parties, their successors, assigns and/or heirs. 3.7 Assignment. Employee's rights, duties, and obligations under ---------- this Agreement may not be assigned by Employee without the prior written consent of Company. In connection with any sale, transfer or other disposition of all or any part of Company's business, Company may assign to the transferee Company's rights, duties and obligations under this Agreement. 3.8 Third Party Rights. The parties do not intend to confer any ------------------ benefit hereunder on any person, firm or corporation other than the parties hereto. 3.9 Non-Waiver of Rights. The failure or delay of either party in -------------------- the exercise of any right given to such party hereunder shall not constitute a waiver of rights unless the time specified herein for exercise of such rights has expired, nor shall any single or partial exercise of any right preclude the other or further exercise thereof or of any other right. 3.10 Partial Invalidity. If any provision of this Agreement is found ------------------ to be invalid or otherwise unenforceable by any court or other tribunal of competent jurisdiction, the invalidity or unenforceability of such provision shall not affect the validity and enforceability of the remaining provisions hereof. 3.11 Pronouns and Plurals. Wherever the context may require, any -------------------- pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. 3.12 Counterparts. This Agreement may be executed in two ------------ counterparts, each of which may be deemed an original, but both of which together shall constitute one and the same agreement. 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as provided hereinabove. "COMPANY" HUDSON RESPIRATORY CARE INC., a California corporation By: /s/ Jay R. Ogram ________________________ Jay R. Ogram Chief Financial Officer "EMPLOYEE" By: /s/ Richard W. Johansen ------------------------ Richard W. Johansen 8 EX-10.10 19 EMPLYMNT AGRMNT DATED 4-7-98 (J.R. OGRAM) EXHIBIT 10.10 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement ("Agreement") is entered into as of April 7, 1998, by and between HUDSON RESPIRATORY CARE INC., a California corporation ("Company"), and Jay R. Ogram ("Employee") (with Company and Employee sometimes being referred to herein individually as a "party" and collectively as the "parties"). R E C I T A L S: - - - - - - - - WHEREAS, Employee currently is an employee of Company; and WHEREAS, the parties desire to provide for Company's continued employment of Employee pursuant to the terms and provisions of this Agreement commencing as of April 7, 1998 (the "Effective Date"). A G R E E M E N T: - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing Recitals, the mutual covenants and conditions contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: ARTICLE I. SERVICES AND COMPENSATION. ------------------------- 1.1. Employment of Employee. The parties hereby acknowledge that ---------------------- prior to the Effective Date Employee has been employed by Company. Commencing as of the Effective Date, Company agrees to employ Employee and Employee agrees to be employed by Company pursuant and subject to the terms and provisions of this Agreement. Employee agrees to serve Company faithfully and to the best of his/her ability in such capacity or capacities and with such duties and responsibilities as may be determined by Company from time to time. Employee shall devote such his or her full time and attention to the business of Company during the term of this Agreement. Employee shall not, while employed by Company, directly or indirectly render any services of a business, commercial or professional nature to any other person or organization, whether for compensation or otherwise, without the prior written consent of the President of the Company. 1.2. Compensation. ------------ (a) As compensation for Employee's performance of his/her services under this Agreement, Company shall pay Employee an annual base salary in an amount as may be determined and adjusted by Company in its discretion from time to time. Such compensation shall be prorated for a partial year based on the number of days worked for Company during such year, and shall be payable in accordance with Company's customary employee payroll practices, including but not limited to all customary withholding practices. (b) As additional compensation for Employee's performance of his/her services under this Agreement, Company may pay Employee a cash bonus pursuant to Company's management incentive programs as in effect from time to time, provided, however, that Company shall have no obligation to pay any such bonus to Employee, and the amount of any such bonus, if paid, shall be entirely discretionary. Employee's eligibility to receive any such bonus for any year is expressly conditioned upon Employee being employed by Company as of December 31 of such year. The cash bonus (if any) payable to Employee pursuant to this subsection (b) with respect to any calendar year shall be paid in one lump sum on or before March 15 of the immediately succeeding calendar year. (c) By agreeing hereunder to pay Employee an annual salary Company is not agreeing to employ Employee for any specified term or to pay Employee, upon the termination of his/her employment, any amounts other than those set forth in Section 1.4 hereof. Company may in its sole discretion adjust Employee's compensation as it deems appropriate from time to time, provided, however, that any such adjustment shall apply prospectively only to years following notification to Employee of such adjustment. Without limitation upon said discretion of Company, such compensation adjustments may be made to reflect (i) any changes in Employee's employment position or responsibilities, (ii) Company's evaluation of Employee's job performance, and/or (iii) the nature and/or profitability of Company's business activities. Nothing contained herein shall be deemed contrary to Employee's right to effect a Qualifying Resignation under circumstances to which the provisions of Section 1.4(c)(iii) hereof apply. 1.3. Fringe Benefits. Employee shall be entitled to participate in --------------- all health, welfare, insurance, pension and other similar employee benefit plans and programs of Company which are open to participation by employees holding employment positions comparable to Employee's position; provided, however, that such participation by Employee shall in all cases be subject to the terms and provisions of each such employee plan or program and also to applicable federal, state or other governmental laws and regulations. 1.4. Termination of Employment; Severance Pay. ---------------------------------------- (a) The parties hereby expressly agree that Employee's employment by Company may be terminated by either party at any time and for any reason, whether with or without cause. (b) Except as provided in subsection (c) hereinbelow, if Employee's employment with Company is involuntarily terminated by Company, or if Employee resigns pursuant to a Qualifying Resignation (as defined hereinbelow), then, Company shall pay to Employee a severance payment equal to 18 months' base salary determined 2 at the rate in effect as of the date of employment termination ("Severance Payment"). Employee's Severance Payment shall be paid on a monthly basis over the 18 month period following Employee's termination of employment. (c) Notwithstanding the foregoing, Employee shall not be entitled to any Severance Payment in the event of the termination of Employee's employment with Company by reason of any one or more of the following: (i) Cause, as defined hereinbelow; (ii) Employee's death or Permanent Disability, as defined hereinbelow; or (iii) Employee's resignation, other than a Qualifying Resignation, as defined hereinbelow. As used herein, the following terms shall have the meanings set forth hereinbelow: (i) "Cause" shall mean (i) Employee's conviction of, or the entry of a pleading of guilty or nolo contendre by Employee to, a felony or a crime involving moral turpitude, (ii) Employee's material failure to perform his duties required under his employment relationship, material failure to comply with the Company's, its Parent's and/or any subsidiary's standard policies and procedures generally applicable to employees, or failure to comply with any provision of this employment agreement after having received written notice from the Company, its Parent 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, its Parent and/or a subsidiary if such failure is susceptible to cure, (iii) a willful act by Employee as a result of which he receives an improper personal benefit at the expense of the Company, its Parent and/or a subsidiary, (iv) an act of fraud or dishonesty committed by Employee against the Company, its Parent and/or a subsidiary, or (v) any other misconduct by Employee that is materially injurious to the business or reputation of the Company, its Parent and/or a subsidiary. "Parent" means River Holding Corp. (ii) "Permanent Disability" shall mean a disability which qualifies Employee for disability payments under Company's long-term disability plan. (iii) "Qualifying Resignation" shall mean a resignation by Employee within 60 days after any of the following: (A) a change of Employee's duties and responsibilities which cause Employee's position to be one of materially lesser responsibility and scope; or (B) a reduction in Employee's base salary. (d) The payment of any Severance Payment as provided under this Section 1.4 shall be subject to Company's usual and customary employee payroll practices and also subject to all applicable withholding requirements. Except for such Severance Payment, Employee shall not be entitled to any further compensation or other severance benefits by reason of a termination of his/her employment with Company. 3 ARTICLE II. PROHIBITED ACTIVITIES; CONFIDENTIAL INFORMATION; NONDISCLOSURE, --------------------------------------------------------------- NONINTERFERENCE AND NONSOLICITATION COVENANTS. --------------------------------------------- 2.1. Prohibited Activity. As used herein the term "Prohibited ------------------- Activity" means (a) the direct or indirect diversion of business to, or solicitation of business for or on behalf of, any person, firm, corporation or other entity which is a competitor of Company, and (b) solicitation or inducement of any employee of Company to terminate his/her relationship with Company for the purpose of becoming employed by or associated with a competitor of Company. Employee hereby agrees that during the term of his/her employment with Company he/she will not engage in any Prohibited Activity. 2.2. Confidential Information: Nondisclosure Covenant. ------------------------------------------------ (a) As used herein the term "Confidential Information" shall mean all customer and contract lists, records, financial data, trade secrets, business and marketing plans and studies, manuals for employee and personnel policies, manufacturing and/or production manuals, computer programs and software, strategic plans, formulas, manufacturing and production processes and techniques (including without limitation types of machinery and equipment used together with improvements and modifications thereon), tools, applications for patents, designs, models, patterns, drawings, tracings, sketches, blueprints, and all other similar information developed and/or used by Company in the course of its business and which is not known by or readily available to the general public. (b) Employee acknowledges that, in the course of performing services for and on behalf of Company, Employee has had and will continue to have access to Confidential Information. Employee hereby covenants and agrees to maintain in strictest confidence all Confidential Information in trust for Company, its successors and assigns. During the period of Employee's employment with Company and at any and all times following Employee's termination of employment for any reason, including without limitation Employee's voluntary resignation or involuntary termination with or without cause, Employee agrees to not misappropriate, or disclose or make available to anyone outside Company's organization, any Confidential Information or anything relating thereto without the prior written consent of Company, which consent may be withheld by Company for any reason or no reason at all. (c) Upon Employee's termination of his/her employment with Company for any reason, including without limitation Employee's voluntary resignation or involuntary termination with or without cause, Employee hereby agrees to promptly return to Company's possession all copies of any writings, drawings or other information relating to Confidential Information which are in Employee's possession or control. Employee further agrees that, upon the request of Company at any time during Employee's period of employment with Company, Employee shall promptly return to Company all such 4 copies of writings, drawings or other information relating to Confidential Information which are in Employee's possession or control. (d) Employee hereby assigns to Company all right, title and interest in and to any ideas, inventions, original works or authorship, developments, improvements or trade secrets which Employee solely or jointly has conceived or reduced to practice, or will conceive or reduce to practice, or cause to be conceived or reduced to practice, during his/her employment with Company. All original works of authorship which are made by Employee (solely or jointly with others) within the scope of Employee's services hereunder and which are protectable by copyright are "works made for hire," as that term is defined in the United States Copyright Act. 2.3. Noninterference and Nonsolicitation Covenants. In further --------------------------------------------- reflection of Company's important interests in its proprietary information and trade and employee relationships, Employee agrees that, during the 18-month period following the termination of Employee's employment with Company for any reason, including without limitation Employee's voluntary resignation or involuntary termination with or without cause, Employee will not do any of the following without the prior written consent of Company: (a) directly or indirectly, for or on behalf of any person, firm, corporation or other entity, interfere with any contractual or other business relationship that Company has with any of its customers, clients, service providers or materials suppliers as of the date of Employee's termination of employment; or (b) directly or indirectly solicit or induce any employee of Company to terminate his/her employment relationship with Company. 2.4. Severance Payment Forfeiture for Breach. If Employee at any --------------------------------------- time breaches his/her covenants or obligations under the foregoing provisions of Sections 2.1, 2.2 and/or 2.3, Employee shall forfeit any remaining Severance Payments otherwise payable to Employee under this Agreement. 2.5. Injunctive Remedy. In the case of any breach or threatened ----------------- breach by Employee of any of his/her covenants or obligations under Sections 2.1, 2.2 and/or 2.3, the parties hereto agree that damages may not be an adequate remedy for Company and that, in the event of any such breach or threatened breach, the Company may, either with or without pursuing any potential damage remedies, immediately obtain and enforce an injunction prohibiting Employee from committing or continuing to commit such breach or threatened breach. ARTICLE III. MISCELLANEOUS ------------- 3.1 Notices. All notices, requests, or other communications ------- (hereinafter collectively referred to as "Notices") required or permitted to be given hereunder or which are 5 given with respect to this Agreement shall be in writing and may be personally delivered, or may be deposited in the United States mail, postage prepaid and addressed as follows: To Company at: Hudson Respiratory Care Inc. 27711 Diaz Street Temecula, CA 92390 To Employee at: Employee's current residential mailing address as reflected in Company's employee records A Notice which is delivered personally shall be deemed given as of the date of personal delivery, and a Notice mailed as provided herein shall be deemed given on the second business day following the date so mailed. Either party may change its address for purposes of Notices hereunder pursuant to a Notice, given as provided herein, advising the other party of such change. 3.2. Effective Date. Employee and Company understand and acknowledge -------------- that, as of the date of execution of this Agreement, Employee is an employee of Company. Employee and Company agree, however, that the employment relationship between Employee and Company shall be governed in all respects by the terms and provisions of this agreement effective as of April 7, 1998. 3.3. Governing Law. This Agreement shall be governed by, interpreted ------------- under, and construed and enforced in accordance with the laws of the State of California applicable to Agreements made and to be performed only within the State of California. 3.4. Entire Agreement. The terms of this Agreement are intended by ---------------- the parties as a final expression of their agreement with respect to such terms as are included in this Agreement and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement constitutes the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced into any judicial proceeding, if any, involving this Agreement, except for written modifications as provided under Section 3.5 hereof. The parties agree that there are no collateral agreements of any kind concerning Employee's employment with Company. The parties further agree that any and all prior employment agreements and agreements relating to the Company's former Equity Participation Plan by and between the parties are hereby revoked and superseded in their entirety by the provisions of this Agreement. 3.5. Modifications and Amendments. This Agreement may not be amended, ---------------------------- modified, changed or supplemented, nor may any obligations hereunder be waived, except by written instrument signed by both parties. 3.6. Successors and Assigns. This Agreement and the provisions hereof ---------------------- shall be binding upon each of the parties, their successors, assigns and/or heirs. 6 3.7. Assignment. Employee's rights, duties, and obligations under ---------- this Agreement may not be assigned by Employee without the prior written consent of Company. In connection with any sale, transfer or other disposition of all or any part of Company's business, Company may assign to the transferee Company's rights, duties and obligations under this Agreement. 3.8. Third Party Rights. The parties do not intend to confer any ------------------ benefit hereunder on any person, firm or corporation other than the parties hereto. 3.9. Non-Waiver of Rights. The failure or delay of either party in -------------------- the exercise of any right given to such party hereunder shall not constitute a waiver of rights unless the time specified herein for exercise of such rights has expired, nor shall any single or partial exercise of any right preclude the other or further exercise thereof or of any other right. 3.10. Partial Invalidity. If any provision of this Agreement is found ------------------ to be invalid or otherwise unenforceable by any court or other tribunal of competent jurisdiction, the invalidity or unenforceability of such provision shall not affect the validity and enforceability of the remaining provisions hereof. 3.11. Pronouns and Plurals. Wherever the context may require, any -------------------- pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. 3.12. Counterparts. This Agreement may be executed in two ------------ counterparts, each of which may be deemed an original, but both of which together shall constitute one and the same agreement. 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as provided hereinabove. "COMPANY" HUDSON RESPIRATORY CARE INC., a California corporation By: /s/ Richard W. Johansen _____________________________________ Richard W. Johansen President and Chief Executive Officer "EMPLOYEE" By: /s/ Jay R. Ogram _____________________________________ Jay R. Ogram 8 EX-10.11 20 EMPLYMNT AGRMNT DATED 4-7-98 (L. WILLIAMS) EXHIBIT 10.11 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement ("Agreement") is entered into as of April 7, 1998, by and between HUDSON RESPIRATORY CARE INC., a California corporation ("Company"), and Lougene Williams ("Employee") (with Company and Employee sometimes being referred to herein individually as a "party" and collectively as the "parties"). R E C I T A L S: - - - - - - - - WHEREAS, Employee currently is an employee of Company; and WHEREAS, the parties desire to provide for Company's continued employment of Employee pursuant to the terms and provisions of this Agreement commencing as of April 7, 1998 (the "Effective Date"). A G R E E M E N T: - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing Recitals, the mutual covenants and conditions contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: ARTICLE I. SERVICES AND COMPENSATION. ------------------------- 1.1. Employment of Employee. The parties hereby acknowledge that ---------------------- prior to the Effective Date Employee has been employed by Company. Commencing as of the Effective Date, Company agrees to employ Employee and Employee agrees to be employed by Company pursuant and subject to the terms and provisions of this Agreement. Employee agrees to serve Company faithfully and to the best of his/her ability in such capacity or capacities and with such duties and responsibilities as may be determined by Company from time to time. Employee shall devote such his or her full time and attention to the business of Company during the term of this Agreement. Employee shall not, while employed by Company, directly or indirectly render any services of a business, commercial or professional nature to any other person or organization, whether for compensation or otherwise, without the prior written consent of the President of the Company. 1.2. Compensation. ------------ (a) As compensation for Employee's performance of his/her services under this Agreement, Company shall pay Employee an annual base salary in an amount as may be determined and adjusted by Company in its discretion from time to time. Such compensation shall be prorated for a partial year based on the number of days worked for Company during such year, and shall be payable in accordance with Company's customary employee payroll practices, including but not limited to all customary withholding practices. (b) As additional compensation for Employee's performance of his/her services under this Agreement, Company may pay Employee a cash bonus pursuant to Company's management incentive programs as in effect from time to time, provided, however, that Company shall have no obligation to pay any such bonus to Employee, and the amount of any such bonus, if paid, shall be entirely discretionary. Employee's eligibility to receive any such bonus for any year is expressly conditioned upon Employee being employed by Company as of December 31 of such year. The cash bonus (if any) payable to Employee pursuant to this subsection (b) with respect to any calendar year shall be paid in one lump sum on or before March 15 of the immediately succeeding calendar year. (c) By agreeing hereunder to pay Employee an annual salary Company is not agreeing to employ Employee for any specified term or to pay Employee, upon the termination of his/her employment, any amounts other than those set forth in Section 1.4 hereof. Company may in its sole discretion adjust Employee's compensation as it deems appropriate from time to time, provided, however, that any such adjustment shall apply prospectively only to years following notification to Employee of such adjustment. Without limitation upon said discretion of Company, such compensation adjustments may be made to reflect (i) any changes in Employee's employment position or responsibilities, (ii) Company's evaluation of Employee's job performance, and/or (iii) the nature and/or profitability of Company's business activities. Nothing contained herein shall be deemed contrary to Employee's right to effect a Qualifying Resignation under circumstances to which the provisions of Section 1.4(c)(iii) hereof apply. 1.3. Fringe Benefits. Employee shall be entitled to participate in --------------- all health, welfare, insurance, pension and other similar employee benefit plans and programs of Company which are open to participation by employees holding employment positions comparable to Employee's position; provided, however, that such participation by Employee shall in all cases be subject to the terms and provisions of each such employee plan or program and also to applicable federal, state or other governmental laws and regulations. 1.4. Termination of Employment; Severance Pay. ---------------------------------------- (a) The parties hereby expressly agree that Employee's employment by Company may be terminated by either party at any time and for any reason, whether with or without cause. (b) Except as provided in subsection (c) hereinbelow, if Employee's employment with Company is involuntarily terminated by Company, or if Employee resigns pursuant to a Qualifying Resignation (as defined hereinbelow), then, Company shall pay to Employee a severance payment equal to 18 months' base salary determined 2 at the rate in effect as of the date of employment termination ("Severance Payment"). Employee's Severance Payment shall be paid on a monthly basis over the 18 month period following Employee's termination of employment. (c) Notwithstanding the foregoing, Employee shall not be entitled to any Severance Payment in the event of the termination of Employee's employment with Company by reason of any one or more of the following: (i) Cause, as defined hereinbelow; (ii) Employee's death or Permanent Disability, as defined hereinbelow; or (iii) Employee's resignation, other than a Qualifying Resignation, as defined hereinbelow. As used herein, the following terms shall have the meanings set forth hereinbelow: (i) "Cause" shall mean (i) Employee's conviction of, or the entry of a pleading of guilty or nolo contendre by Employee to, a felony or a crime involving moral turpitude, (ii) Employee's material failure to perform his duties required under his employment relationship, material failure to comply with the Company's, its Parent's and/or any subsidiary's standard policies and procedures generally applicable to employees, or failure to comply with any provision of this employment agreement after having received written notice from the Company, its Parent 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, its Parent and/or a subsidiary if such failure is susceptible to cure, (iii) a willful act by Employee as a result of which he receives an improper personal benefit at the expense of the Company, its Parent and/or a subsidiary, (iv) an act of fraud or dishonesty committed by Employee against the Company, its Parent and/or a subsidiary, or (v) any other misconduct by Employee that is materially injurious to the business or reputation of the Company, its Parent and/or a subsidiary. "Parent" means River Holding Corp. (ii) "Permanent Disability" shall mean a disability which qualifies Employee for disability payments under Company's long-term disability plan. (iii) "Qualifying Resignation" shall mean a resignation by Employee within 60 days after any of the following: (A) a change of Employee's duties and responsibilities which cause Employee's position to be one of materially lesser responsibility and scope; or (B) a reduction in Employee's base salary. (d) The payment of any Severance Payment as provided under this Section 1.4 shall be subject to Company's usual and customary employee payroll practices and also subject to all applicable withholding requirements. Except for such Severance Payment, Employee shall not be entitled to any further compensation or other severance benefits by reason of a termination of his/her employment with Company. 3 ARTICLE II. PROHIBITED ACTIVITIES; CONFIDENTIAL INFORMATION; NONDISCLOSURE, --------------------------------------------------------------- NONINTERFERENCE AND NONSOLICITATION COVENANTS. --------------------------------------------- 2.1. Prohibited Activity. As used herein the term "Prohibited ------------------- Activity" means (a) the direct or indirect diversion of business to, or solicitation of business for or on behalf of, any person, firm, corporation or other entity which is a competitor of Company, and (b) solicitation or inducement of any employee of Company to terminate his/her relationship with Company for the purpose of becoming employed by or associated with a competitor of Company. Employee hereby agrees that during the term of his/her employment with Company he/she will not engage in any Prohibited Activity. 2.2. Confidential Information: Nondisclosure Covenant. ------------------------------------------------ (a) As used herein the term "Confidential Information" shall mean all customer and contract lists, records, financial data, trade secrets, business and marketing plans and studies, manuals for employee and personnel policies, manufacturing and/or production manuals, computer programs and software, strategic plans, formulas, manufacturing and production processes and techniques (including without limitation types of machinery and equipment used together with improvements and modifications thereon), tools, applications for patents, designs, models, patterns, drawings, tracings, sketches, blueprints, and all other similar information developed and/or used by Company in the course of its business and which is not known by or readily available to the general public. (b) Employee acknowledges that, in the course of performing services for and on behalf of Company, Employee has had and will continue to have access to Confidential Information. Employee hereby covenants and agrees to maintain in strictest confidence all Confidential Information in trust for Company, its successors and assigns. During the period of Employee's employment with Company and at any and all times following Employee's termination of employment for any reason, including without limitation Employee's voluntary resignation or involuntary termination with or without cause, Employee agrees to not misappropriate, or disclose or make available to anyone outside Company's organization, any Confidential Information or anything relating thereto without the prior written consent of Company, which consent may be withheld by Company for any reason or no reason at all. (c) Upon Employee's termination of his/her employment with Company for any reason, including without limitation Employee's voluntary resignation or involuntary termination with or without cause, Employee hereby agrees to promptly return to Company's possession all copies of any writings, drawings or other information relating to Confidential Information which are in Employee's possession or control. Employee further agrees that, upon the request of Company at any time during Employee's period of employment with Company, Employee shall promptly return to Company all such 4 copies of writings, drawings or other information relating to Confidential Information which are in Employee's possession or control. (d) Employee hereby assigns to Company all right, title and interest in and to any ideas, inventions, original works or authorship, developments, improvements or trade secrets which Employee solely or jointly has conceived or reduced to practice, or will conceive or reduce to practice, or cause to be conceived or reduced to practice, during his/her employment with Company. All original works of authorship which are made by Employee (solely or jointly with others) within the scope of Employee's services hereunder and which are protectable by copyright are "works made for hire," as that term is defined in the United States Copyright Act. 2.3. Noninterference and Nonsolicitation Covenants. In further --------------------------------------------- reflection of Company's important interests in its proprietary information and trade and employee relationships, Employee agrees that, during the 18-month period following the termination of Employee's employment with Company for any reason, including without limitation Employee's voluntary resignation or involuntary termination with or without cause, Employee will not do any of the following without the prior written consent of Company: (a) directly or indirectly, for or on behalf of any person, firm, corporation or other entity, interfere with any contractual or other business relationship that Company has with any of its customers, clients, service providers or materials suppliers as of the date of Employee's termination of employment; or (b) directly or indirectly solicit or induce any employee of Company to terminate his/her employment relationship with Company. 2.4. Severance Payment Forfeiture for Breach. If Employee at any time --------------------------------------- breaches his/her covenants or obligations under the foregoing provisions of Sections 2.1, 2.2 and/or 2.3, Employee shall forfeit any remaining Severance Payments otherwise payable to Employee under this Agreement. 2.5. Injunctive Remedy. In the case of any breach or threatened ----------------- breach by Employee of any of his/her covenants or obligations under Sections 2.1, 2.2 and/or 2.3, the parties hereto agree that damages may not be an adequate remedy for Company and that, in the event of any such breach or threatened breach, the Company may, either with or without pursuing any potential damage remedies, immediately obtain and enforce an injunction prohibiting Employee from committing or continuing to commit such breach or threatened breach. ARTICLE III MISCELLANEOUS ------------- 3.1. Notices. All notices, requests, or other communications ------- (hereinafter collectively referred to as "Notices") required or permitted to be given hereunder or which are 5 given with respect to this Agreement shall be in writing and may be personally delivered, or may be deposited in the United States mail, postage prepaid and addressed as follows: To Company at: Hudson Respiratory Care Inc. 27711 Diaz Street Temecula, CA 92390 To Employee at: Employee's current residential mailing address as reflected in Company's employee records A Notice which is delivered personally shall be deemed given as of the date of personal delivery, and a Notice mailed as provided herein shall be deemed given on the second business day following the date so mailed. Either party may change its address for purposes of Notices hereunder pursuant to a Notice, given as provided herein, advising the other party of such change. 3.2 Effective Date. Employee and Company understand and acknowledge -------------- that, as of the date of execution of this Agreement, Employee is an employee of Company. Employee and Company agree, however, that the employment relationship between Employee and Company shall be governed in all respects by the terms and provisions of this agreement effective as of April 7, 1998. 3.3 Governing Law. This Agreement shall be governed by, interpreted ------------- under, and construed and enforced in accordance with the laws of the State of California applicable to Agreements made and to be performed only within the State of California. 3.4 Entire Agreement. The terms of this Agreement are intended by ---------------- the parties as a final expression of their agreement with respect to such terms as are included in this Agreement and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Agreement constitutes the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced into any judicial proceeding, if any, involving this Agreement, except for written modifications as provided under Section 3.5 hereof. The parties agree that there are no collateral agreements of any kind concerning Employee's employment with Company. The parties further agree that any and all prior employment agreements and agreements relating to the Company's former Equity Participation Plan by and between the parties are hereby revoked and superseded in their entirety by the provisions of this Agreement. 3.5 Modifications and Amendments. This Agreement may not be amended, ---------------------------- modified, changed or supplemented, nor may any obligations hereunder be waived, except by written instrument signed by both parties. 3.6 Successors and Assigns. This Agreement and the provisions hereof ---------------------- shall be binding upon each of the parties, their successors, assigns and/or heirs. 6 3.7. Assignment. Employee's rights, duties, and obligations under ---------- this Agreement may not be assigned by Employee without the prior written consent of Company. In connection with any sale, transfer or other disposition of all or any part of Company's business, Company may assign to the transferee Company's rights, duties and obligations under this Agreement. 3.8. Third Party Rights. The parties do not intend to confer any ------------------ benefit hereunder on any person, firm or corporation other than the parties hereto. 3.9. Non-Waiver of Rights. The failure or delay of either party in -------------------- the exercise of any right given to such party hereunder shall not constitute a waiver of rights unless the time specified herein for exercise of such rights has expired, nor shall any single or partial exercise of any right preclude the other or further exercise thereof or of any other right. 3.10. Partial Invalidity. If any provision of this Agreement is found ------------------ to be invalid or otherwise unenforceable by any court or other tribunal of competent jurisdiction, the invalidity or unenforceability of such provision shall not affect the validity and enforceability of the remaining provisions hereof. 3.11. Pronouns and Plurals. Wherever the context may require, any -------------------- pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. 3.12. Counterparts. This Agreement may be executed in two ------------ counterparts, each of which may be deemed an original, but both of which together shall constitute one and the same agreement. 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as provided hereinabove. "COMPANY" HUDSON RESPIRATORY CARE INC., a California corporation By: /s/ Richard W. Johansen _______________________________________ Richard W. Johansen President and Chief Executive Officer "EMPLOYEE" By: /s/ Lougene Williams _______________________________________ Lougene Williams 8 EX-10.12 21 EMPLYMNT AGRMNT DATED 4-7-98 (B.W. MOGAN) EXHIBIT 10.12 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement ("Agreement") is entered into as of April 7, 1998, by and between HUDSON RESPIRATORY CARE INC., a California corporation ("Company"), and Brian W. Morgan ("Employee") (with Company and Employee sometimes being referred to herein individually as a "party" and collectively as the "parties"). R E C I T A L S: - - - - - - - - WHEREAS, Employee currently is an employee of Company; and WHEREAS, the parties desire to provide for Company's continued employment of Employee pursuant to the terms and provisions of this Agreement commencing as of April 7, 1998 (the "Effective Date"). A G R E E M E N T: - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing Recitals, the mutual covenants and conditions contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: ARTICLE I. SERVICES AND COMPENSATION. ------------------------- 1.1. Employment of Employee. The parties hereby acknowledge that ---------------------- prior to the Effective Date Employee has been employed by Company. Commencing as of the Effective Date, Company agrees to employ Employee and Employee agrees to be employed by Company pursuant and subject to the terms and provisions of this Agreement. Employee agrees to serve Company faithfully and to the best of his/her ability in such capacity or capacities and with such duties and responsibilities as may be determined by Company from time to time. Employee shall devote such his or her full time and attention to the business of Company during the term of this Agreement. Employee shall not, while employed by Company, directly or indirectly render any services of a business, commercial or professional nature to any other person or organization, whether for compensation or otherwise. 1.2. Compensation. ------------ (a) As compensation for Employee's performance of his/her services under this Agreement, Company shall pay Employee an annual base salary in an amount as may be determined and adjusted by Company in its discretion from time to time. Such compensation shall be prorated for a partial year based on the number of days worked for Company during such year, and shall be payable in accordance with Company's customary employee payroll practices, including but not limited to all customary withholding practices. (b) As additional compensation for Employee's performance of his/her services under this Agreement, Company may pay Employee a cash bonus pursuant to Company's management incentive programs as in effect from time to time, provided, however, that Company shall have no obligation to pay any such bonus to Employee, and the amount of any such bonus, if paid, shall be entirely discretionary. Employee's eligibility to receive any such bonus for any year is expressly conditioned upon Employee being employed by Company as of December 31 of such year. The cash bonus (if any) payable to Employee pursuant to this subsection (b) with respect to any calendar year shall be paid in one lump sum on or before March 15 of the immediately succeeding calendar year. (c) By agreeing hereunder to pay Employee an annual salary Company is not agreeing to employ Employee for any specified term or to pay Employee, upon the termination of his/her employment, any amounts other than those set forth in Section 1.4 hereof. Company may in its sole discretion adjust Employee's compensation as it deems appropriate from time to time, provided, however, that any such adjustment shall apply prospectively only to years following notification to Employee of such adjustment. Without limitation upon said discretion of Company, such compensation adjustments may be made to reflect (i) any changes in Employee's employment position or responsibilities, (ii) Company's evaluation of Employee's job performance, and/or (iii) the nature and/or profitability of Company's business activities. Nothing contained herein shall be deemed contrary to Employee's right to effect a Qualifying Resignation under circumstances to which the provisions of Section 1.4(c)(iii) hereof apply. 1.3. Fringe Benefits. --------------- (a) Employee shall be entitled to participate in all health, welfare, insurance, pension and other similar employee benefit plans and programs of Company which are open to participation by employees holding employment positions comparable to Employee's position; provided, however, that such participation by Employee shall in all cases be subject to the terms and provisions of each such employee plan or program and also to applicable federal, state or other governmental laws and regulations. (b) Employee's eligibility for the use of a Company automobile or to payment of an automobile allowance from Company, and the terms of such automobile use or allowance, shall be determined from time to time by Company in its discretion in accordance with its periodic review of all elements of its management compensation arrangements. 2 1.4. Termination of Employment; Severance Pay. ---------------------------------------- (a) The parties hereby expressly agree that Employee's employment by Company may be terminated by either party at any time and for any reason, whether with or without cause. (b) Except as provided in subsection (c) hereinbelow, if Employee's employment with Company is involuntarily terminated by Company, or if Employee resigns pursuant to a Qualifying Resignation (as defined hereinbelow), then, Company shall pay to Employee a severance payment equal to 12 months' base salary determined at the rate in effect as of the date of employment termination ("Severance Payment"). Employee's Severance Payment shall be paid on a monthly basis over the 12 month period following Employee's termination of employment. If Employee shall be reemployed by another employer within 12 months following Employee's termination of employment with Company, Employee's Severance Payment hereunder shall be reduced by the amount of monthly base compensation which Employee shall earn pursuant to such other employment during said 12 month period. Employee shall be obligated (A) to exercise good-faith efforts to obtain such other employment, and (B) to provide Company with adequate verification of the amount of compensation which Employee will earn pursuant to such other employment. (c) Notwithstanding the foregoing, Employee shall not be entitled to any Severance Payment in the event of the termination of Employee's employment with Company by reason of any one or more of the following: (I) Cause, as defined hereinbelow; (ii) Employee's death or Permanent Disability, as defined hereinbelow; or (iii) Employee's resignation, other than a Qualifying Resignation, as defined hereinbelow. As used herein, the following terms shall have the meanings set forth hereinbelow: (i) "Cause" shall mean (i) Employee's conviction of, or the entry of a pleading of guilty or nolo contendre by Employee to, a felony or a crime involving moral turpitude, (ii) Employee's material failure to perform his duties required under his employment relationship, material failure to comply with the Company's, its Parent's and/or any subsidiary's standard policies and procedures generally applicable to employees, or failure to comply with any provision of this employment agreement after having received written notice from the Company, its Parent 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, its Parent and/or a subsidiary if such failure is susceptible to cure, (iii) a willful act by Employee as a result of which he receives an improper personal benefit at the expense of the Company, its Parent and/or a subsidiary, (iv) an act of fraud or dishonesty committed by Employee against the Company, its Parent and/or a subsidiary, or (v) any other misconduct by Employee that is materially 3 injurious to the business or reputation of the Company, its Parent and/or a subsidiary. "Parent" means River Holding Corp. (ii) "Permanent Disability" shall mean a disability which qualifies Employee for disability payments under Company's long-term disability plan. (iii) "Qualifying Resignation" shall mean a resignation by Employee within 60 days after any of the following: (A) a change of Employee's duties and responsibilities which cause Employee's position to be one of materially lesser responsibility and scope; or (B) a reduction in Employee's base salary. (d) The payment of any Severance Payment as provided under this Section 1.4 shall be subject to Company's usual and customary employee payroll practices and also subject to all applicable withholding requirements. Except for such Severance Payment, Employee shall not be entitled to any further compensation or other severance benefits by reason of a termination of his/her employment with Company. ARTICLE II. PROHIBITED ACTIVITIES; CONFIDENTIAL INFORMATION; NONDISCLOSURE, --------------------------------------------------------------- NONINTERFERENCE AND NONSOLICITATION COVENANTS. --------------------------------------------- 2.1. Prohibited Activity. As used herein the term "Prohibited ------------------- Activity" means (a) the direct or indirect diversion of business to, or solicitation of business for or on behalf of, any person, firm, corporation or other entity which is a competitor of Company, and (b) solicitation or inducement of any employee of Company to terminate his/her relationship with Company for the purpose of becoming employed by or associated with a competitor of Company. Employee hereby agrees that during the term of his/her employment with Company he/she will not engage in any Prohibited Activity. 2.2. Confidential Information: Nondisclosure Covenant. ------------------------------------------------ (a) As used herein the term "Confidential Information" shall mean all customer and contract lists, records, financial data, trade secrets, business and marketing plans and studies, manuals for employee and personnel policies, manufacturing and/or production manuals, computer programs and software, strategic plans, formulas, manufacturing and production processes and techniques (including without limitation types of machinery and equipment used together with improvements and modifications thereon), tools, applications for patents, designs, models, patterns, drawings, tracings, sketches, blueprints, and all other similar information developed and/or used by Company in the course of its business and which is not known by or readily available to the general public. (b) Employee acknowledges that, in the course of performing services for and on behalf of Company, Employee has had and will continue to have access to Confidential Information. Employee hereby covenants and agrees to maintain in strictest confidence 4 all Confidential Information in trust for Company, its successors and assigns. During the period of Employee's employment with Company and at any and all times following Employee's termination of employment for any reason, including without limitation Employee's voluntary resignation or involuntary termination with or without cause, Employee agrees to not misappropriate, or disclose or make available to anyone outside Company's organization, any Confidential Information or anything relating thereto without the prior written consent of Company, which consent may be withheld by Company for any reason or no reason at all. (c) Upon Employee's termination of his/her employment with Company for any reason, including without limitation Employee's voluntary resignation or involuntary termination with or without cause, Employee hereby agrees to promptly return to Company's possession all copies of any writings, drawings or other information relating to Confidential Information which are in Employee's possession or control. Employee further agrees that, upon the request of Company at any time during Employee's period of employment with Company, Employee shall promptly return to Company all such copies of writings, drawings or other information relating to Confidential Information which are in Employee's possession or control. (d) Employee hereby assigns to Company all right, title and interest in and to any ideas, inventions, original works or authorship, developments, improvements or trade secrets which Employee solely or jointly has conceived or reduced to practice, or will conceive or reduce to practice, or cause to be conceived or reduced to practice, during his/her employment with Company. All original works of authorship which are made by Employee (solely or jointly with others) within the scope of Employee's services hereunder and which are protectable by copyright are "works made for hire," as that term is defined in the United States Copyright Act. 2.3. Noninterference and Nonsolicitation Covenants. In further --------------------------------------------- reflection of Company's important interests in its proprietary information and trade and employee relationships, Employee agrees that, during the 12-month period following the termination of Employee's employment with Company for any reason, including without limitation Employee's voluntary resignation or involuntary termination with or without cause, Employee will not do any of the following without the prior written consent of Company: (a) directly or indirectly, for or on behalf of any person, firm, corporation or other entity, interfere with any contractual or other business relationship that Company has with any of its customers, clients, service providers or materials suppliers as of the date of Employee's termination of employment; or (b) directly or indirectly solicit or induce any employee of Company to terminate his/her employment relationship with Company. 5 2.4. Severance Payment Forfeiture for Breach. If Employee at any time --------------------------------------- breaches his/her covenants or obligations under the foregoing provisions of Sections 2.1, 2.2 and/or 2.3, Employee shall forfeit any remaining Severance Payments otherwise payable to Employee under this Agreement. 2.5. Injunctive Remedy. In the case of any breach or threatened ----------------- breach by Employee of any of his/her covenants or obligations under Sections 2.1, 2.2 and/or 2.3, the parties hereto agree that damages may not be an adequate remedy for Company and that, in the event of any such breach or threatened breach, the Company may, either with or without pursuing any potential damage remedies, immediately obtain and enforce an injunction prohibiting Employee from committing or continuing to commit such breach or threatened breach. ARTICLE III. MISCELLANEOUS ------------- 3.1. Notices. All notices, requests, or other communications ------- (hereinafter collectively referred to as "Notices") required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and may be personally delivered, or may be deposited in the United States mail, postage prepaid and addressed as follows: To Company at: Hudson Respiratory Care Inc. 27711 Diaz Street Temecula, CA 92390 To Employee at: Employee's current residential mailing address as reflected in Company's employee records A Notice which is delivered personally shall be deemed given as of the date of personal delivery, and a Notice mailed as provided herein shall be deemed given on the second business day following the date so mailed. Either party may change its address for purposes of Notices hereunder pursuant to a Notice, given as provided herein, advising the other party of such change. 3.2. Effective Date. Employee and Company understand and -------------- acknowledge that, as of the date of execution of this Agreement, Employee is an employee of Company. Employee and Company agree, however, that the employment relationship between Employee and Company shall be governed in all respects by the terms and provisions of this agreement effective as of April 7, 1998. 3.3. Governing Law. This Agreement shall be governed by, ------------- interpreted under, and construed and enforced in accordance with the laws of the State of California applicable to Agreements made and to be performed only within the State of California. 3.4. Entire Agreement. The terms of this Agreement are intended by ---------------- the parties as a final expression of their agreement with respect to such terms as are included in this Agreement and may not be contradicted by evidence of any prior or contemporaneous agreement. 6 The parties further intend that this Agreement constitutes the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced into any judicial proceeding, if any, involving this Agreement, except for written modifications as provided under Section 3.5 hereof. The parties agree that there are no collateral agreements of any kind concerning Employee's employment with Company. The parties further agree that any and all prior employment agreements and agreements relating to the Company's former Equity Participation Plan by and between the parties are hereby revoked and superseded in their entirety by the provisions of this Agreement. 3.5. Modifications and Amendments. This Agreement may not be ---------------------------- amended, modified, changed or supplemented, nor may any obligations hereunder be waived, except by written instrument signed by both parties. 3.6. Successors and Assigns. This Agreement and the provisions ---------------------- hereof shall be binding upon each of the parties, their successors, assigns and/or heirs. 3.7. Assignment. Employee's rights, duties, and obligations under ---------- this Agreement may not be assigned by Employee without the prior written consent of Company. In connection with any sale, transfer or other disposition of all or any part of Company's business, Company may assign to the transferee Company's rights, duties and obligations under this Agreement. 3.8. Third Party Rights. The parties do not intend to confer any ------------------ benefit hereunder on any person, firm or corporation other than the parties hereto. 3.9. Non-Waiver of Rights. The failure or delay of either party in -------------------- the exercise of any right given to such party hereunder shall not constitute a waiver of rights unless the time specified herein for exercise of such rights has expired, nor shall any single or partial exercise of any right preclude the other or further exercise thereof or of any other right. 3.10. Partial Invalidity. If any provision of this Agreement is found ------------------ to be invalid or otherwise unenforceable by any court or other tribunal of competent jurisdiction, the invalidity or unenforceability of such provision shall not affect the validity and enforceability of the remaining provisions hereof. 3.11. Pronouns and Plurals. Wherever the context may require, any ------------------- pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. 3.12. Counterparts. This Agreement may be executed in two ------------ counterparts, each of which may be deemed an original, but both of which together shall constitute one and the same agreement. 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as provided hereinabove. "COMPANY" HUDSON RESPIRATORY CARE INC., a California corporation By: /s/ Richard W. Johansen ______________________________________ Richard W. Johansen President and Chief Executive Officer "EMPLOYEE" By: /s/ Brian W. Morgan ________________________________________ Brian W. Morgan 8 EX-12.1 22 STATEMENT RE COMPUTATION OF EARNINGS EXHIBIT 12.1 RATIO SUPPORT RATIO OF EARNINGS TO FIXED CHARGES
Hudson Pro Forma 1993 1994 1995 1996 1997 1997 ---- ---- ---- ---- ---- --------- Earnings: Pre-Tax Income 5,357 7,845 (118) 7,154 11,443 5,333 Fixed Charges: Interest Expense 2,253 2,299 2,424 2,177 1,834 13,694 Amort. of Debt Expense 486 386 147 59 62 1,405 Interest Factor of Rental Expense 349 321 355 369 377 377 ----- ------ ----- ----- ------ ------ Total Fixed Charges 3,088 3,006 2,926 2,605 2,273 15,476 ----- ------ ----- ----- ------ ------ Total Earnings 8,445 10,851 2,808 9,759 13,716 20,809 Total Fixed Charges 3,088 3,006 2,926 2,605 2,273 15,476 ----- ------ ----- ----- ------ ------ ----- ------ ----- ----- ----- ------ Ratio of earnings to fixed charges 2.7 3.6 1.0 3.7 6.0 1.3 Deficiency of earnings to cover fixed charges ----- ------ ----- ----- ----- ------
Hudson March 28, March 27, Pro Forma 1997 1998 27-Mar-98 --------- --------- --------- Earnings: Pre-Tax Income 3,240 1,521 312 Fixed Charges: Interest Expense 505 419 3,423 Amort. of Debt Expense 16 24 351 Interest Factor of Rental Expense 94 94 94 ----- ----- ----- Total Fixed Charges 615 537 3,869 ----- ----- ----- Total Earnings 3,855 2,058 4,180 Total Fixed Charges 615 537 3,869 ----- ----- ----- ----- ----- ----- Ratio of earnings to fixed charges 6.3 3.8 1.1 Deficiency of earnings to cover fixed charges ----- ----- -----
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Hudson Pro Forma 1993 1994 1995 1996 1997 1997 ---- ---- ---- ---- ---- --------- Earnings: Pre-Tax Income 5,357 7,845 (118) 7,154 11,443 5,333 Fixed Charges: Interest Expense 2,253 2,299 2,424 2,177 1,834 13,694 Amort. of Debt Expense 486 386 147 59 62 1,405 Interest Factor of Rental Expense 349 321 355 369 377 377 Preferred Stock Dividend Expense -- -- -- -- -- 5,915 ----- ------ ----- ----- ------ ------ Total Fixed Charges 3,088 3,006 2,926 2,605 2,273 21,391 ----- ------ ----- ----- ------ ------ Total Earnings 8,445 10,851 2,808 9,759 13,716 20,809 Total Fixed Charges 3,088 3,006 2,926 2,605 2,273 21,391 ----- ------ ----- ----- ------ ------ ----- ------ ----- ----- ------ ------ Ratio of earnings to fixed charges 2.7 3.6 1.0 3.7 6.0 1.0 and preferred stock dividends Deficiency of earnings to cover fixed charges ----- ------ ----- ----- ------ ------
Hudson March 28, March 27, Pro Forma 1997 1998 27-Mar-98 --------- --------- --------- Earnings: Pre-Tax Income 3,240 1,521 312 Fixed Charges: Interest Expense 505 419 3,423 Amort. of Debt Expense 16 24 351 Interest Factor of Rental Expense 94 94 94 Preferred Stock Dividend Expense -- -- 1,438 ----- ----- ------ Total Fixed Charges 615 537 5,307 ----- ----- ------ Total Earnings 3,855 2,058 4,180 Total Fixed Charges 615 537 5,307 ----- ----- ------ ----- ----- ------ Ratio of earnings to fixed charges 6.3 3.8 0.8 and preferred stock dividends (1,127) Deficiency of earnings to cover fixed charges ----- ----- ------
Computation if Interest Factor of Rental - ---------------------------------------- Operating rental expense 1,047 963 1,065 1,106 1,132 1,132 Interest Factor 33% 33% 33% 33% 33% 33% ----- --- ----- ----- ----- ----- Total 349 321 355 369 377 377 ===== === ===== ===== ===== ===== Computation of Preferred Stock Expense - -------------------------------------- Preferred stock expense 863 Tax effect (1.0-40) 60% ----- Total 1,438 =====
Computation if Interest Factor of Rental - ---------------------------------------- Operating rental expense 283 283 283 Interest Factor 33% 33% 33% --- --- --- Total 94 94 94 === === ===
EX-21.1 23 SUBSIDIARIES OF HUDSON RCI EXHIBIT 21.1 SUBSIDIARIES OF HUDSON RESPIRATORY CARE INC. (1) Name and jurisdiction of incorporation or organization of each subsidiary of Hudson Respiratory Care Inc.: Industrias Hudson Hudson EX-23.2 24 CONSENT & RPRT ON SCHEDULE OF ARTHUR ANDERSON LLP Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use in this registration statement of our reports dated February 27, 1998 except with respect to the matter discussed in Note 11, as to which the date is April 7, 1998 included herein and to all references to our Firm included in this registration statement. ARTHUR ANDERSEN LLP Orange County, California June 3, 1998 EX-25.1 25 FORM T-1 STATEMENT EXHIBIT 25.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 __________________________ FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE __________________________ CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) _______ __________________________ UNITED STATES TRUST COMPANY OF NEW YORK (Exact name of trustee as specified in its charter) New York 13-3818954 (Jurisdiction of incorporation (I. R. S. Employer if not a U.S. national bank) Identification No.) 114 West 47th Street 10036-1532 New York, New York (Zip Code) (Address of principal executive offices) __________________________ HUDSON RESPIRATORY CARE INC. (Exact name of OBLIGOR 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 92589 P. O. Box 9020 (Zip code) Temecula, CA (Address of principal executive offices) __________________________ 9 1/8% Senior Subordinated Notes Due 2008 (Title of the indenture securities) ================================================================================ - 2 - GENERAL 1. GENERAL INFORMATION ------------------- Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Federal Reserve Bank of New York (2nd District), New York, New York (Board of Governors of the Federal Reserve System) Federal Deposit Insurance Corporation, Washington, D.C. New York State Banking Department, Albany, New York (b) Whether it is authorized to exercise corporate trust powers. The trustee is authorized to exercise corporate trust powers. 2. AFFILIATIONS WITH THE OBLIGOR ----------------------------- If the obligor is an affiliate of the trustee, describe each such affiliation. None 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15: The obligor currently is not in default under any of its outstanding securities for which United States Trust Company of New York is Trustee. Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15 of Form T-1 are not required under General Instruction B. 16. LIST OF EXHIBITS ---------------- T-1.1 -- Organization Certificate, as amended, issued by the State of New York Banking Department to transact business as a Trust Company, is incorporated by reference to Exhibit T-1.1 to Form T-1 filed on September 15, 1995 with the Commission pursuant to the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990 (Registration No. 33-97056). T-1.2 -- Included in Exhibit T-1.1. T-1.3 -- Included in Exhibit T-1.1. - 3 - 16. LIST OF EXHIBITS ---------------- (cont'd) T-1.4 -- The By-Laws of United States Trust Company of New York, as amended, is incorporated by reference to Exhibit T-1.4 to Form T-1 filed on September 15, 1995 with the Commission pursuant to the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990 (Registration No. 33-97056). T-1.6 -- The consent of the trustee required by Section 321(b) of the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990. T-1.7 -- A copy of the latest report of condition of the trustee pursuant to law or the requirements of its supervising or examining authority. NOTE ==== As of May 12, 1998, the trustee had 2,999,020 shares of Common Stock outstanding, all of which are owned by its parent company, U.S. Trust Corporation. The term "trustee" in Item 2, refers to each of United States Trust Company of New York and its parent company, U. S. Trust Corporation. In answering Item 2 in this statement of eligibility as to matters peculiarly within the knowledge of the obligor or its directors, the trustee has relied upon information furnished to it by the obligor and will rely on information to be furnished by the obligor and the trustee disclaims responsibility for the accuracy or completeness of such information. __________________ Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, United States Trust Company of New York, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York, and State of New York, on the 13th day of May 1998. UNITED STATES TRUST COMPANY OF NEW YORK, Trustee By: /s/ James E. Logan ---------------------- James E. Logan Vice President EXHIBIT T-1.6 ------------- The consent of the trustee required by Section 321(b) of the Act. United States Trust Company of New York 114 West 47th Street New York, NY 10036 September 1, 1995 Securities and Exchange Commission 450 5th Street, N.W. Washington, DC 20549 Gentlemen: Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990, and subject to the limitations set forth therein, United States Trust Company of New York ("U.S. Trust") hereby consents that reports of examinations of U.S. Trust by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. Very truly yours, UNITED STATES TRUST COMPANY OF NEW YORK ------------------------ By: /S/Gerard F. Ganey Senior Vice President EXHIBIT T-1.7 UNITED STATES TRUST COMPANY OF NEW YORK CONSOLIDATED STATEMENT OF CONDITION MARCH 31, 1998 -------------- ($ IN THOUSANDS)
ASSETS - ------ Cash and Due from Banks $ 303,692 Short-Term Investments 325,044 Securities, Available for Sale 650,954 Loans 1,717,101 Less: Allowance for Credit Losses 16,546 ---------- Net Loans 1,700,555 Premises and Equipment 58,868 Other Assets 120,865 ---------- TOTAL ASSETS $3,159,978 ========== LIABILITIES - ----------- Deposits: Non-Interest Bearing $ 602,769 Interest Bearing 1,955,571 ---------- Total Deposits 2,558,340 Short-Term Credit Facilities 293,185 Accounts Payable and Accrued Liabilities 136,396 ---------- TOTAL LIABILITIES $2,987,921 ========== STOCKHOLDER'S EQUITY - -------------------- Common Stock 14,995 Capital Surplus 49,541 Retained Earnings 105,214 Unrealized Gains on Securities Available for Sale (Net of Taxes) 2,307 ---------- TOTAL STOCKHOLDER'S EQUITY 172,057 ---------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $3,159,978 ==========
I, Richard E. Brinkmann, Senior Vice President & Comptroller of the named bank do hereby declare that this Statement of Condition has been prepared in conformance with the instructions issued by the appropriate regulatory authority and is true to the best of my knowledge and belief. Richard E. Brinkmann, SVP & Controller May 6, 1998 EX-27.1 26 FINANCIAL DATA SCHEDULE
5 3-MOS 12-MOS DEC-25-1998 DEC-26-1997 MAR-27-1998 DEC-26-1997 734 470 0 0 19,044 21,540 (303) (258) 15,938 16,613 36,333 39,516 82,472 81,771 (49,915) (48,728) 73,602 77,554 11,476 33,086 0 0 0 0 0 0 3,789 3,789 20,035 18,726 73,602 77,554 24,265 99,509 0 0 13,026 51,732 0 0 1,923 7,085 0 0 419 1,834 1,521 11,443 23 150 1,498 11,293 0 0 0 0 0 0 1,498 11,293 0 0 0 0
EX-99.1 27 FORM OF LETTER OF TRANSMITTAL LETTER OF TRANSMITTAL - -------------------------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON __________ __, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). - -------------------------------------------------------------------------------- HUDSON RESPIRATORY CARE INC. LETTER OF TRANSMITTAL 9 1/8% SENIOR SUBORDINATED NOTES DUE 2008 To: U.S. Trust Company of New York, The Exchange Agent By Registered or Certified Mail: By Overnight Courier and By Hand after 4:30 p.m.: United States Trust Company of New York United States Trust Company of New York P.O. Box 843 Cooper Station 770 Broadway, 13th Floor New York, New York 10276 New York, New York 10003 Attention: Corporate Trust Services By Hand before 4:30 p.m.: By Facsimile: United States Trust Company of New York (212) 780-0592 111 Broadway Attention: Customer Service New York, New York 10006 Attention: Lower Level Confirm by telephone: Corporate Trust Window (800) 548-6565
Delivery of this instrument to an address other than as set forth above or transmission of instructions via a facsimile number other than the one listed above will not constitute a valid delivery. The instructions accompanying this Letter of Transmittal should be read carefully before this Letter of Transmittal is completed. The undersigned acknowledges that he or she has received the Prospectus dated June __, 1998, (the "Prospectus") of Hudson Respiratory Care Inc. (the "Company") and this Letter of Transmittal (the "Letter of Transmittal"), which together constitute the Company's offer (the "Exchange Offer") to exchange $1,000 principal amount of its 9 1/8% Senior Subordinated Notes due 2008 (the "Exchange Notes") which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which the Prospectus is a part, for each $1,000 principal amount of its outstanding 9 1/8% Senior Subordinated Notes due 2008 (the "Notes"), of which $115,000,000 principal amount is outstanding. Other capitalized terms used but not defined herein have the meaning given to them in the Prospectus. The Letter of Transmittal is to be used by Holders of Notes (i) if certificates representing the Notes are to be physically delivered herewith; or (ii) if tender of Notes is to be made by book-entry transfer to the Exchange Agent's account at The Depository Trust Company ("DTC"), pursuant to the procedures set forth in the Prospectus under "The Exchange Offer - Procedures for Tendering" by any financial institution that is a participant in DTC and whose name appears on a security position listing as the owner of Notes; or (iii) if tender of Notes is to be made according to the guaranteed delivery procedures set forth in the Prospectus under "The Exchange Offer - Guaranteed Delivery Procedures." Delivery of documents to DTC does not constitute delivery to the Exchange Agent. The term "Holder" with respect to the Exchange Offer means any person (i) in whose name Notes are registered on the books of the Company or any other person who has obtained a properly completed bond power from the registered holder; or (ii) whose Notes are held of record by DTC who desires to deliver such Notes by book-entry transfer at DTC. The undersigned has completed, executed and delivered this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. Holders who wish to tender their Notes must complete this letter in its entirety. PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE CHECKING ANY BOX BELOW
- --------------------------------------------------------------------------------------------------------------------- DESCRIPTION OF 9 1/8% SENIOR SUBORDINATED NOTES DUE 2008 ("NOTES"): - --------------------------------------------------------------------------------------------------------------------- NAME(S) AND ADDRESS(ES) OF AGGREGATE PRINCIPAL AMOUNT PRINCIPAL AMOUNT TENDERED REGISTERED HOLDER(S) REPRESENTED BY CERTIFICATE(S) (MUST BE IN INTEGRAL MULTIPLE OF (PLEASE FILL IN, IF BLANK) $1,000)* - -------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Total - -------------------------------------------------------------------------------------------------------------------- * Unless indicated in the column labeled "Principal Amount Tendered," any tendering Holder of Notes will be deemed to have tendered the entire aggregate principal amount represented by the column labeled "Aggregate Principal Amount Represented by Certificate(s)." If the space provided above is inadequate, list the principal amounts on a separate signed schedule and affix the list to this Letter of Transmittal. The minimum permitted tender is $1,000 in principal amount of Notes. All other tenders must be in integral multiples of $1,000. - -------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------- ------------------------------------------------------ SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 4, 5 AND 6) (SEE EXCHANGE INSTRUCTIONS 4, 5 AND 6) To be completed ONLY if certificates for Notes in a To be completed ONLY if certificates for Notes in principal amount not tendered or not accepted for a principal amount not tendered or not accepted for exchange, or Exchange Notes issued in exchange for exchange, or Exchange Notes issued in exchange for Notes accepted for exchange, are to be issued in the Notes accepted for exchange, are to be sent to name of someone other than the undersigned, or if someone other than the undersigned, or to the the Notes tendered by book-entry transfer that are not undersigned at an address other than that shown accepted for exchange are to be credited to an above. account maintained by DTC. ISSUE CERTIFICATE(S) TO: MAIL TO: Name_____________________________________ Nme____________________________________________ (Please Print) (Please Print) Address___________________________________ Address________________________________________ __________________________________________ _______________________________________________ (Include Zip Code) (Include Zip Code) __________________________________________ _______________________________________________ (Tax Identification or Social Security No.) (Tax Identification or Social Security No.) - ------------------------------------------------------------------------------------------------------------
[_] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED BY DTC TO THE EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING: Name of Tendering Institution: _____________________________________________________________________ DTC Book-Entry Account No. _____________________________________________________________________ Transaction Code No. _____________________________________________________________________ [_] CHECK HERE IF YOU ARE A BROKER-DEALER. Name: _____________________________________________________________________ Address: _____________________________________________________________________ _____________________________________________________________________ [_] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. [_] CHECK HERE IF YOU ARE A BROKER-DEALER AND ANY OF THE NOTES YOU ARE TENDERING WERE ACQUIRED DIRECTLY FROM THE COMPANY. Principal Amount of Tendered Notes Acquired from the Company: $ ___________________________________
2 LADIES AND GENTLEMEN: Subject to the terms and conditions of the Exchange Offer, the undersigned hereby tenders to the Company the principal amount of Notes indicated above. Subject to and effective upon the acceptance for exchange of the principal amount of Notes tendered in accordance with this Letter of Transmittal, the undersigned sells, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to the Notes tendered hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent its agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as the agent of the Company) with respect to the tendered Notes with full power of substitution to (i) deliver certificates for such Notes to the Company, or transfer ownership of such Notes on the account books maintained by DTC, and deliver all accompanying evidences of transfer and authenticity to, or upon the order of, the Company; and (ii) present such Notes for transfer on the books of the Company and receive all benefits and otherwise exercise all rights of beneficial ownership of such Notes, all in accordance with the terms of the Exchange Offer. The power of attorney granted in this paragraph shall be deemed irrevocable and coupled with an interest. The undersigned hereby represents and warrants that he or she has full power and authority to tender, sell, assign and transfer the Notes tendered hereby and that the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim, when the same are acquired by the Company. THE UNDERSIGNED HEREBY FURTHER REPRESENTS THAT ANY EXCHANGE NOTES ACQUIRED IN EXCHANGE FOR NOTES TENDERED HEREBY WILL HAVE BEEN ACQUIRED IN THE ORDINARY COURSE OF BUSINESS OF THE HOLDER RECEIVING SUCH EXCHANGE NOTES, WHETHER OR NOT THE UNDERSIGNED, THAT NEITHER THE HOLDER NOR ANY SUCH OTHER PERSON HAS AN ARRANGEMENT WITH ANY PERSON TO PARTICIPATE IN THE DISTRIBUTION OF SUCH EXCHANGE NOTES AND THAT NEITHER THE HOLDER NOR ANY SUCH OTHER PERSON IS AN "AFFILIATE," AS DEFINED UNDER RULE 405 OF THE SECURITIES ACT, OF THE COMPANY OR ANY OF ITS SUBSIDIARIES. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange Notes, it represents that, except to the extent indicated at the bottom of the preceding page, the Notes to be exchanged for Exchange Notes were acquired as a result of market-making activities or other trading activities and not acquired directly from the Company, and it acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. IF THE UNDERSIGNED IS A BROKER-DEALER, IT ACKNOWLEDGES THAT IT MAY NOT USE THE PROSPECTUS IN CONNECTION WITH RESALES OF EXCHANGE NOTES RECEIVED IN EXCHANGE FOR NOTES THAT WERE ACQUIRED DIRECTLY FROM THE COMPANY. The undersigned will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Company to be necessary or desirable to complete the assignment, transfer and purchase of the Notes tendered hereby. For purposes of the Exchange Offer, the Company shall be deemed to have accepted validly tendered Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. If any tendered Notes are not accepted for exchange pursuant to the Exchange Offer for any reason, certificates for any such unaccepted Notes will be returned (except as noted below with respect to tenders through DTC), without expense, to the undersigned at the address shown below or at a different address as may be indicated herein under "Special Payment Instructions" as promptly as practicable after the Expiration Date. All authority conferred or agreed to be conferred by this Letter of Transmittal shall survive the death, incapacity or dissolution of the undersigned and every obligation of the undersigned under this Letter of Transmittal shall be binding upon the undersigned's heirs, personal representatives, successors and assigns. The undersigned understands that tenders of Notes pursuant to the procedures described under the caption "The Exchange Offer - Procedures for Tendering" in the Prospectus and in the instructions hereto will constitute a binding agreement between the undersigned and the Company upon the terms and subject to the conditions of the Exchange Offer. Unless otherwise indicated under "Special Payment Instructions," please issue the certificates representing the Exchange Notes issued in exchange for the Notes accepted for exchange and return any Notes not tendered or not exchanged, in the name(s) of the undersigned (or in either such event in the case of Notes tendered by DTC, by credit to the undersigned's account at DTC). Similarly, unless otherwise indicated under "Special Delivery Instructions," please send the certificates representing the Exchange Notes issued in exchange for the Notes accepted for exchange and any certificates for Notes not tendered or not exchanged (and accompanying documents, as appropriate) to the undersigned at the address shown below the undersigned's signature(s), unless, in either event, tender is being made through DTC. In the event that both "Special Payment Instructions" and "Special Delivery Instructions" are completed, please issue the certificates representing the Exchange Notes issued in exchange for the Notes accepted for exchange and return any Notes not tendered or not exchanged in the name(s) of, and send said certificates to, the person(s) so indicated. The undersigned 3 recognizes that the Company has no obligation pursuant to the "Special Payment Instructions" and "Special Delivery Instructions" to transfer any Notes from the name of the registered holder(s) thereof if the Company does not accept for exchange any of the Notes so tendered. Holders of Notes who wish to tender their Notes and (i) whose Notes are not immediately available, or (ii) who cannot deliver their Notes, this Letter of Transmittal or any other documents required hereby to the Exchange Agent, or cannot complete the procedure for book-entry transfer, prior to the Expiration Date, may tender their Notes according to the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer - Guaranteed Delivery Procedures". See Instruction 1 regarding the completion of the Letter of Transmittal printed below. PLEASE SIGN HERE WHETHER OR NOT NOTES ARE BEING PHYSICALLY TENDERED HEREBY X - --------------------------------------- ---------------------------------- Date X - --------------------------------------- ---------------------------------- Signature(s) of Registered Holder(s) Date or Authorized Signatory Area Code and Telephone Number:____________________________ The above lines must be signed by the registered holder(s) of Notes as their name(s) appear(s) on the Notes or, if the Notes are tendered by a participant in DTC, as such participant's name appears on a security position listing as the owner of the Notes, or by person(s) authorized to become registered holder(s) by a properly completed bond power from the registered holder(s), a copy of which must be transmitted with this Letter of Transmittal. If Notes to which this Letter of Transmittal relates are held of record by two or more joint holders, then all such holders must sign this Letter of Transmittal. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person must (i) set forth his or her full title below and (ii) unless waived by the Company, submit evidence satisfactory to the Company of such person's authority so to act. See Instruction 4 regarding the completion of this Letter of Transmittal printed below. Names(s): __________________________________________________________________ __________________________________________________________________ (Please Print) Capacity: __________________________________________________________________ Address: __________________________________________________________________ __________________________________________________________________ (Include Zip Code) Signature(s) Guaranteed by an Eligible Institution: (If required by Instruction 4) __________________________________________________________________ (Authorized Signature) __________________________________________________________________ (Name of Firm) Dated:______________________, 1998 4 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND NOTES. The tendered Notes (or a confirmation of a book-entry transfer into the Exchange Agent's account at DTC of all Notes delivered electronically), as well as a properly completed and duly executed copy of this Letter of Transmittal or facsimile hereof and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent at its address set forth herein prior to 5:00 P.M., New York City time, on the Expiration Date. The method of delivery of the tendered Notes, this Letter of Transmittal and all other required documents to the Exchange Agent is at the election and risk of the Holder and, except as otherwise provided below, the delivery will be deemed made only when actually received by the Exchange Agent. Instead of delivery by mail, it is recommended that the Holder use an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure timely delivery. No Letter of Transmittal or Notes should be sent to the Company. Holders who wish to tender their Notes and (i) whose Notes are not immediately available; or (ii) who cannot deliver their Notes, this Letter of Transmittal or any other documents required hereby to the Exchange Agent, or cannot complete the procedure for book-entry transfer, prior to 5:00 P.M., New York City time, on the Expiration Date must tender their Notes according to the guaranteed delivery procedures set forth in the Prospectus. Pursuant to such procedures: (i) such tender must be made by or through a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States or an institution which falls within the definition of "Eligible Guarantor Institution" contained in Regulation 17Ad-15 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, which is a member of one of the following recognized signature guarantee programs: (A) the Securities Transfer Agents Medallion Program (STAMP), (B) the New York Stock Exchange Medallion Signature Program (MSP) or (C) the Stock Exchange Medallion Program (SEMP) (each, an "Eligible Institution"); (ii) prior to the Expiration Date, the Exchange Agent must have received from the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder of the Notes and the principal amount of Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the Expiration Date, this Letter of Transmittal (or facsimile hereof) together with the certificate(s) representing the Notes (or a confirmation of electronic delivery of book-entry delivery into the Exchange Agent's account at DTC) and any other required documents will be deposited by the Eligible Institution with the Exchange Agent; and (iii) such properly completed and executed Letter of Transmittal (or facsimile hereof), as well as all other documents required by this Letter of Transmittal and the certificate(s) representing all tendered Notes in proper form for transfer (or a confirmation of electronic delivery of book-entry delivery into the Exchange Agent's account at DTC), must be received by the Exchange Agent within three New York Stock Exchange trading days after the Expiration Date, all as provided in the Prospectus under the caption "Exchange Offer - Guaranteed Delivery Procedures." Any Holder of Notes who wishes to tender his or her Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00 P.M., New York City time, on the Expiration Date. Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to tender their Notes according to the guaranteed delivery procedures set forth above. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of tendered Notes and withdrawal of tendered Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Notes not properly tendered or any Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any defects or irregularities or conditions of tender as to the Exchange Offer and/or particular Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in this Letter of Transmittal) shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Notes must be cured within such time as the Company shall determine. Neither the Company, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering Holders of Notes, unless otherwise provided in this Letter of Transmittal, as soon as practicable following the Expiration Date. 5 2. TENDER BY HOLDER. Only a Holder of Notes may tender such Notes in the Exchange Offer. Any beneficial holder of Notes who is not the registered holder and who wishes to tender should arrange with the registered holder to execute and deliver this Letter of Transmittal on his or her behalf or must, prior to completing and executing this Letter of Transmittal and delivering his or her Notes, either make appropriate arrangements to register ownership of the Notes in such Holder's name or obtain a properly completed bond power from the registered holder. 3. PARTIAL TENDERS. Tenders of Notes will be accepted only in integral multiples of $1,000. If less than the entire principal amount of any Notes is tendered, the tendering Holder should fill in the principal amount tendered in the third column of the box entitled "Description of 9 1/8% Senior Subordinated Notes due 2008 ("Notes")" above. The entire principal amount of Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. If the entire principal amount of all Notes is not tendered, then Notes for the principal amount of Notes not tendered and a certificate or certificates representing Exchange Notes issued in exchange for any Notes accepted will be sent to the Holder at his or her registered address, unless a different address is provided in the appropriate box on this Letter of Transmittal, promptly after the Notes are accepted for exchange. 4. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or facsimile hereof) is signed by the record Holder(s) of the Notes tendered hereby, the signature must correspond with the name(s) as written on the face of the Notes or, if the Notes are tendered by a participant in DTC, as such participant's name appears on a security position listing as the owner of the Notes, without alteration, enlargement or any change whatsoever. If this Letter of Transmittal (or facsimile hereof) is signed by the registered Holder or Holders of Notes tendered and the certificate or certificates for Exchange Notes issued in exchange therefor are to be issued (or any untendered principal amount of Notes is to be reissued) to the registered Holder, the said Holder need not and should not endorse any tendered Notes, nor provide a separate bond power. In any other case, such Holder must either properly endorse the Notes tendered or transmit a properly completed separate bond power with this Letter of Transmittal, with the signatures on the endorsement or bond power guaranteed by an Eligible Institution. If this Letter of Transmittal (or facsimile hereof) is signed by a person other than the registered Holder or Holders of any Notes listed, such Notes must be endorsed or accompanied by appropriate bond powers signed as the name of the registered Holder or Holders appears on the Notes. If this Letter of Transmittal (or facsimile hereof) or any Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys- in-fact or officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Company, evidence satisfactory to the Company of their authority so to act must be submitted with this Letter of Transmittal. Endorsements on Notes or signatures on bond powers required by this Instruction 4 must be guaranteed by an Eligible Institution. Except as otherwise provided below, all signatures on this Letter of Transmittal (or facsimile hereof) must be guaranteed by an Eligible Institution. Signatures on this Letter of Transmittal need not be guaranteed if (i) this Letter of Transmittal is signed by the registered Holder(s) of the Notes tendered herewith and such Holder(s) have not completed the box set forth herein entitled "Special Payment Instructions" or the box entitled "Special Delivery Instructions;" or (ii) such Notes are tendered for the account of an Eligible Institution. 5. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. Tendering Holders should indicate, in the applicable box or boxes, the name and address to which Exchange Notes or substitute Notes for principal amounts not tendered or not accepted for exchange are to be issued or sent, if different from the name and address of the person signing this Letter of Transmittal (or in the case of tender of Notes through DTC, if different from DTC). In the case of issuance in a different name, the taxpayer identification or social security number of the person named must also be indicated. 6. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a Holder whose offered Notes are accepted for exchange must provide the Company (as payor) with his, her or its correct Taxpayer Identification Number ("TIN"), which, in the case of an exchanging Holder who is an individual, is his or her social security number. If the Company is not provided with the correct TIN or an adequate basis for exemption, such Holder may be subject to a $50 penalty imposed by the Internal Revenue Service (the "IRS"). In addition, delivery to such Holder of Exchange Notes 6 may be subject to backup withholding in an amount equal to 31% of the gross proceeds resulting from the Exchange Offer. If withholding results in an overpayment of taxes, a refund may be obtained from the IRS by the Holder. Exempt Holders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. See instructions to the enclosed Form W-9. To prevent backup withholding, each exchanging Holder must provide his, her or its correct TIN by completing the Form W-9 enclosed herewith, certifying that the TIN provided is correct (or that such Holder is awaiting a TIN) and that (i) the Holder is exempt from backup withholding; (ii) the Holder has not been notified by the IRS that he, she or it is subject to backup withholding as a result of a failure to report all interest or dividends; or (iii) the IRS has notified the Holder that he, she or it is no longer subject to backup withholding. In order to satisfy the Exchange Agent that a foreign individual qualifies as an exempt recipient, such Holder must submit a statement signed under penalty of perjury attesting to such exempt status. Such statements may be obtained from the Exchange Agent. If the Notes are in more than one name or are not in the name of the actual owner, consult the Form W-9 for information on which TIN to report. If you do not provide your TIN to the Company within 60 days, backup withholding will begin and continue until you furnish your TIN to the Company. 7. TRANSFER TAXES. The Company will pay all transfer taxes, if any, applicable to the exchange of Notes pursuant to the Exchange Offer. If, however, certificates representing Exchange Notes or Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered Holder of the Notes tendered hereby, or if tendered Notes are registered in the name of any person other than the person signing this Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered Holder or on any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with this Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering Holder. Except as provided in this Instruction 7, it will not be necessary for transfer tax stamps to be affixed to the Notes listed in this Letter of Transmittal. 8. WAIVER OF CONDITIONS. The Company reserves the absolute right to amend, waive or modify specified conditions in the Exchange Offer in the case of any Notes tendered. 9. MUTILATED, LOST, STOLEN OR DESTROYED NOTES. Any tendering Holder whose Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated herein for further instructions. 10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance and requests for additional copies of the Prospectus or this Letter of Transmittal may be directed to the Exchange Agent at the address specified in the Prospectus. Holders may also contact their broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Exchange Offer. (DO NOT WRITE IN SPACE BELOW) --------------------------------------------- CERTIFICATE NOTES NOTES SURRENDERED TENDERED ACCEPTED --------------------------------------------- --------------------------------------------- --------------------------------------------- Delivery Prepared by___________________ Checked By_____________ Date____________ 7 - ------------------------------------------------------------------------------------------------------------------------------ Name (If joint names, see attached guidelines) - ----------------------------------------------------------------------------------------------------------------------------- Business name (Sole proprietors, see attached guidelines) - ----------------------------------------------------------------------------------------------------------------------------- Please check appropriate box: [_] Individual/Sole Proprietor [_] Corporation [_] Partnership [_] Other - ----------------------------------------------------------------------------------------------------------------------------- Address (number, street, and apt. or suite no.) - ----------------------------------------------------------------------------------------------------------------------------- City, state, and ZIP code - ----------------------------------------------------------------------------------------------------------------------------- SUBSTITUTE PART I -- TAXPAYER IDENTIFICATION PART II -- FOR PAYEES NO. EXEMPT FROM BACKUP WITHHOLDING Form W-9 Enter your taxpayer (SEE ENCLOSED Department of the Treasury identification number in the GUIDELINES) Internal Revenue Service appropriate box. For most individuals, this is your social ------------------------ security number. If you do not Social Security Number Payer's Request for Taxpayer have a number, see How to Identification Number (TIN) Obtain a "TIN" in the enclosed Guidelines. Note: If the account is more ------------------------ than one name, see the chart in Employer Identification enclosed Guidelines to Number determine what number to give. - ----------------------------------------------------------------------------------------------------------------------------- PART III -- CERTIFICATION -- Under penalties of perjury, I certify that: (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me), and (2) I am not subject to backup withholding because (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding. Certification Instructions. -- You must cross out item (2) above if you have been notified by the IRS that you are subject to backup withholding because of under-reporting interest or dividends on your tax return. However, if after being notified by the IRS that you are subject to backup withholding, you received another notification from the IRS that you are no longer subject to backup withholding, do not cross out item (2). - ----------------------------------------------------------------------------------------------------------------------------- SIGNATURE__________________________________________________ DATE________________________, 1998 - -----------------------------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. 8 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 WHAT IS BACKUP WITHHOLDING? -- Persons making certain payments to you are required to withhold and pay to IRS 31% of such payments under certain conditions. This is called "backup withholding." Payments that could be subject to backup withholding include interest, dividends, broker and barter exchange transactions, rents, royalties, nonemployee compensation, and certain payments from fishing boat operators, but do not include real estate transactions. If you give the requester your correct TIN, make the appropriate certifications, and report all your taxable interest and dividends on your tax return, your payments will not be subject to backup withholding. Payments you receive will be subject to backup withholding if: (1) You do not furnish your TIN to the requester, or (2) IRS notifies the requester that you furnished an incorrect TIN, or (3) You are notified by IRS that you are subject to backup withholding because you failed to report all your interest and dividends on your tax return (for interest and dividend accounts only), or (4) You fail to certify to the requester that you are not subject to backup withholding under (3) above (for interest and dividend accounts opened after 1983 only), or (5) You fail to certify your TIN. This applies only to interest, dividend, broker or barter exchange accounts opened after 1983, or broker accounts considered inactive in 1983. For other payments, you are subject to backup withholding only if (1) or (2) above applies. Certain Payees and payments are exempt from backup withholding and information reporting. See payees and Payments Exempt From Backup Withholding, below, and Exempt Payees and Payments under Specific Instructions below if you are an exempt payee. PAYEES AND PAYMENTS EXEMPT FROM BACKUP WITHHOLDING. -- The following is a list of payees exempt from backup withholding and for which no information reporting is required. For interest and dividends, all listed payees are exempt except item (9). For broker transactions, payees listed in (1) through (13), and a person registered under the Investment Advisers Act of 1940 who regularly acts as a broker are exempt. Payments subject to reporting under sections 6041 and 6041A are generally exempt from backup withholding only if made to payees described in items (1) through (7), except that a corporation that provides medical and health care services or bills and collects payments for such services is not exempt from backup withholding or information reporting. Only payees described in items (2) through (6) are exempt from backup withholding for barter exchange transactions, patronage dividends, and payments by certain fishing boat operators. 11. A corporation. 12. An organization exempt from tax under section 501(a), or an individual retirement plan (IRA), or a custodial account under 403(b)(7). 13. The United States or any of its agencies or instrumentalities. 14. A state, the District of Columbia, a possession of the United States, or any of their political subdivisions or instrumentalities. 15. A foreign government or any of its political subdivisions, agencies or instrumentalities. 16. An international organization or any of its agencies or instrumentalities. 17. A foreign central bank of issue. 18. A dealer in securities or commodities required to register in the U.S. or a possession of the U.S. 19. A futures commission merchant registered with the Commodity Futures Trading Commission. 20. A real estate investment trust. 21. An entity registered at all times during the tax year under the Investment Company Act of 1940. 22. A common trust fund operated by a bank under section 584(a). 23. A financial institution. 24. A middleman known in the investment community as a nominee or listed in the most recent publication of the American Society of Corporate Securities, Inc., Nominee List. 25. A trust exempt from tax under section 664 or described in section 4947. Payments of dividends and patronage dividends generally not subject to backup withholding also include the following: . Payments to nonresident aliens subject to withholding under section 1441. . Payments to partnerships not engaged in a trade or business in the U.S. and that have at least one nonresident partner. Payments of interest generally not subject to backup withholding include the following: . Payments of interest on obligations issued by individuals. NOTE: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct TIN to the payer. Payments that are not subject to information reporting are also not subject to backup withholding. For details, see sections 6041, 6041A(a), 6042, 6044, 6045, 6049, 6050A, and 6050N, and the regulations under such sections. PENALTIES FAILURE TO FURNISH TIN. -- If you fail to furnish your TIN to a requester, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. MISUSE OF TINS. -- If the requester discloses or uses TINs in violation of Federal laws, the requester may be subject to civil and criminal penalties. CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you make a false statement with no reasonable basis that results in no imposition of backup withholding, you are subject to a penalty of $500. CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. SPECIFIC INSTRUCTIONS NAME. -- If you are an individual, generally provide the name shown on your social security card. However, if you have changed your last name, for instance, due to marriage, without informing the Social Security Administration of the name change, please enter your first name and both the last name shown on your social security card and your new last name. SIGNING THE CERTIFICATION. -- (1) INTEREST, DIVIDEND, AND BARTER EXCHANGE ACCOUNTS OPENED BEFORE 1984 AND BROKER ACCOUNTS THAT WERE CONSIDERED ACTIVE DURING 1983. -- You are not required to sign the certification; however, you may do so. You are required to provide your correct TIN. (2) INTEREST, DIVIDEND, BROKER AND BARTER EXCHANGE ACCOUNTS OPENED AFTER 1983 AND BROKER ACCOUNTS THAT WERE CONSIDERED INACTIVE DURING 1983. -- You must sign the certification or backup withholding will apply. If you are subject to backup withholding and you are merely providing your correct TIN to the requester, you must cross out item (2) in the certification before signing the form. (3) OTHER PAYMENTS. -- You are required to furnish your correct TIN, but you are not required to sign the certification unless you have been notified of an incorrect TIN. Other payments include payments made in the course of the requestor's trade or business for rents, royalties, goods (other than bills for merchandise), medical and health care services, payments to a nonemployee for services (including attorney and accounting fees), and payments to certain fishing boat crew members. (4) EXEMPT PAYEES AND PAYMENTS -- If you are exempt from backup withholding, you should complete this form to avoid possible erroneous backup withholding. Enter your correct TIN in Part I, write "EXEMPT" in the block in Part II, sign and date the form. If you are a nonresident alien or foreign entity not subject to backup withholding, give the requester a completed FORM W-8, Certificate of Foreign Status. (5) TIN "APPLIED FOR." -- Follow the instructions under How To Obtain a TIN, on page 1, sign and date this form. SIGNATURE.-- For a joint account, only the person whose TIN is shown in Part I should sign the form. PRIVACY ACT NOTICE. -- Section 6109 requires you to furnish your correct taxpayer identification number (TIN) to persons who must file information returns with IRS to report interest, dividends, and certain other income paid to you, mortgage interest you paid, the acquisition or abandonment of secured property, or contributions you made to an individual retirement arrangement (IRA). IRS uses the numbers for identification purposes and to help verify the accuracy of your tax return. You must provide your TIN whether or not you are required to file a tax return. Payers must generally withhold 20% of taxable interest, dividend, and certain other payments to a payee who does not furnish a TIN to a payer. Certain penalties may also apply. 9 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER (TIN) ON SUBSTITUTE FORM W-9 (SECTION REFERENCES ARE TO THE INTERNAL REVENUE CODE) GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER. - - - Social Security numbers have nine digits separated by two hyphens: i.e. 000- 00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e. 00-0000000. The table below will help determine the number to give the payer.
- -------------------------------------------------------------------------- GIVE THE FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY NUMBER OF -- - -------------------------------------------------------------------------- 1. An individual's account The individual 2. Two or more individuals The actual owner of the (joint account) account or, if combined funds, any one of the individuals (1) 3. Custodian account of a minor The minor (2) (Uniform Gift to Minors Act) 4. a. The usual revocable savings trust The grantor-trustee (1) account (grantor is also trustee) b. So-called trust account that is not The actual owner (1) a legal or valid trust under State law 5. Sole proprietorship account The owner (3) 6. Sole Proprietorship The owner (3) - --------------------------------------------------------------------------
- -------------------------------------------------------------------------- GIVE THE FOR THIS TYPE OF ACCOUNT: EMPLOYER IDENTIFICATION NUMBER OF -- - -------------------------------------------------------------------------- 7. A valid trust, estate, or pension The legal entity (5) trust 8. Corporate account The corporation 9. Association, club, religious, The organization charitable, educational or other tax- exempt organization account 10. Partnership account held in the The partnership name of the business 11. A broker or registered nominee The broker or nominee 12. Account with the Department of The public entity Agriculture in the name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments - --------------------------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Show the name of the owner. (5) List first and circle the name of the valid trust, estate, or pension trust. (Do not furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title) NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. EX-99.2 28 FORM OF NOTICE OF GUARANTEED DELIVERY EXHIBIT 99.2 NOTICE OF GUARANTEED DELIVERY FOR 9 1/8% SENIOR SUBORDINATED NOTES DUE 2008 OF HUDSON RESPIRATORY CARE INC. This form, or one substantially equivalent hereto, must be used to accept the Exchange Offer of Hudson Respiratory Care Inc. (the "Company") made pursuant to the Prospectus dated June __, 1998 (the "Prospectus"), if certificates for the 9 1/8% Senior Subordinated Notes due 2008 (the "Notes") of the Company are not immediately available or if the Notes, the Letter of Transmittal or any other documents required thereby cannot be delivered to the Exchange Agent or the procedure for book-entry transfer cannot be completed, prior to 5:00 P.M., New York City time, on the Expiration Date (as defined in the Prospectus). Such form may be delivered by hand or transmitted by facsimile transmission, overnight courier or mail to the Exchange Agent. Capitalized terms used but not defined herein have the meaning given to them in the Prospectus. TO: U.S. TRUST COMPANY OF NEW YORK, THE EXCHANGE AGENT By Registered or Certified Mail: By Overnight Courier and By Hand after 4:30 p.m.: United States Trust Company of New York United States Trust Company of New York P.O. Box 843 Cooper Station 770 Broadway, 13th Floor New York, New York 10276 New York, New York 10003 Attention: Corporate Trust Services By Hand before 4:30 p.m.: By Facsimile: United States Trust Company of New York (212) 780-0592 111 Broadway Attention: Customer Service New York, New York 10006 Attention: Lower Level Confirm by telephone: Corporate Trust Window (800) 548-6565
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE, OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on the Letter of Transmittal to be used to tender Notes is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the Letter of Transmittal. LADIES AND GENTLEMEN: The undersigned hereby tenders to Hudson Respiratory Care Inc., a California corporation (the "Company"), upon the terms and subject to the conditions set forth in the Prospectus and the Letter of Transmittal (which together constitute the "Exchange Offer"), receipt of which is hereby acknowledged, __________________________ Notes pursuant to the guaranteed (principal amount of Notes) delivery procedures set forth in Instruction 1 of the Letter of Transmittal. NOTE: SIGNATURES MUST BE PROVIDED WHERE INDICATED BELOW. Principal Amount(s) of Notes Name(s) of Record Holder(s) .................................... .................................. .................................... .................................. PLEASE PRINT OR TYPE Address .......................... .................................. ZIP CODE Area Code and Tel. No. ........... Signature(s) ..................... .................................. Dated: ........................... If Notes will be delivered by book-entry transfer at The Depository Trust Company ("DTC"), Depository Account No: ........... This Notice of Guaranteed Delivery must be signed by the registered Holder(s) of Notes exactly as its (their) name(s) appear on certificates for Notes or on a security position listing as the owner of Notes, or by person(s) authorized to become registered Holder(s) by endorsements and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must provide the following information. Please print name(s) and address(es) Name(s): ............................................................... ............................................................... Capacity: ............................................................... Address(es): ............................................................... ............................................................... 2 GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States or a commercial bank or trust company having an office or correspondent in the United States or an "Eligible Guarantor Institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), hereby (a) represents that the above named person(s) "own(s)" the Notes tendered hereby within the meaning of Rule 10b-4 under the Exchange Act, (b) represents that such tender of Notes complies with Rule 10b-4 and (c) guarantees that delivery to the Exchange Agent of certificates for the Notes tendered hereby, in proper form for transfer (or confirmation of the book-entry transfer of such Notes into the Exchange Agent's Account at DTC, pursuant to the procedures for book-entry transfer set forth in the Prospectus), with delivery of a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof) with any required signature and any other required documents, will be received by the Exchange Agent at one of its addresses set forth above within three New York Stock Exchange trading days after the Expiration Date. THE UNDERSIGNED ACKNOWLEDGES THAT IT MUST DELIVER THE LETTER OF TRANSMITTAL AND NOTES TENDERED HEREBY TO THE EXCHANGE AGENT WITHIN THE TIME PERIOD SET FORTH ABOVE AND THAT FAILURE TO DO SO COULD RESULT IN FINANCIAL LOSS TO THE UNDERSIGNED. Name of Firm....................... ...................................... AUTHORIZED SIGNATURE Address............................ Name................................... ................................... PLEASE PRINT OR TYPE ZIP CODE Title................................... Area Code and Tel. No.............. Date.................................... Dated:____________, 1998 NOTE: DO NOT SEND NOTES WITH THIS FORM; NOTES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL SO THAT THEY ARE RECEIVED BY THE EXCHANGE AGENT WITHIN THREE NEW YORK STOCK EXCHANGE TRADING DAYS AFTER THE EXPIRATION DATE. 3 -----END PRIVACY-ENHANCED MESSAGE-----