-----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, RTw5/52V3v9ywC2sOqUY1Ydypl5DhMpLUNEZuURrMht6gP8iqOw7okXWBEDFbhgn uzXi6JitCi7eUOw3gbp4HA== 0000049401-02-000036.txt : 20021114 0000049401-02-000036.hdr.sgml : 20021114 20021114153050 ACCESSION NUMBER: 0000049401-02-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021004 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAUCONY INC CENTRAL INDEX KEY: 0000049401 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 041465840 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-05083 FILM NUMBER: 02824929 BUSINESS ADDRESS: STREET 1: 13 CENTENNIAL DR STREET 2: CENTENNIAL INDUSTRIAL PK CITY: PEABODY STATE: MA ZIP: 01961 BUSINESS PHONE: 5085329000 MAIL ADDRESS: STREET 1: 13 CENTENNIAL DRIVE STREET 2: CENTENNIAL INDUSTRIAL PARK CITY: PEABODY STATE: MA ZIP: 01960 FORMER COMPANY: FORMER CONFORMED NAME: HYDE A R & SONS CO DATE OF NAME CHANGE: 19701030 FORMER COMPANY: FORMER CONFORMED NAME: HYDE ATHLETIC INDUSTRIES INC DATE OF NAME CHANGE: 19920703 10-Q 1 q3q02.txt 10Q FOR THE THIRD QUARTER ENDED OCTOBER 4, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) {X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 4, 2002 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number 000-05083 SAUCONY, INC. (Exact name of registrant as specified in its charter) Massachusetts 04-1465840 (State or other jurisdiction of (I.R.S. employer identification number) incorporation or organization) 13 Centennial Drive, Peabody, MA 01960 (Address of principal executive offices) 978-532-9000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding Class as of November 8, 2002 ----- ---------------------- Class A Common Stock-$.33 1/3 Par Value Per Share 2,566,747 Class B Common Stock-$.33 1/3 Par Value Per Share 3,581,639 --------- 6,148,386 ========= SAUCONY, INC. AND SUBSIDIARIES INDEX Page Part I. FINANCIAL INFORMATION Item 1. Financial Statements - Unaudited Condensed Consolidated Balance Sheets as of October 4, 2002 and January 4, 2002...................................................3 Condensed Consolidated Statements of Income for the thirteen and thirty-nine weeks ended October 4, 2002 and October 5, 2001...........4 Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 4, 2002 and October 5, 2001.......................5 Notes to Condensed Consolidated Financial Statements -- October 4, 2002....................................................6-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................12-22 Item 3. Quantitative and Qualitative Disclosures about Market Risk...........22 Item 4. Controls and Procedures..............................................22 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.....................................23 Signature.....................................................................24 Certifications...........................................................25 - 26 Exhibit Index.................................................................27 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - UNAUDITED SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share amounts) ASSETS October 4, January 4, 2002 2002 ---- ---- Current assets: Cash and cash equivalents....................................................$ 30,482 $ 22,227 Accounts receivable.......................................................... 20,538 14,742 Inventories.................................................................. 22,675 28,404 Prepaid expenses and other current assets.................................... 3,024 4,165 ----- ----- Total current assets....................................................... 76,719 69,538 ====== ====== Property, plant and equipment, net.............................................. 5,686 6,989 ----- ----- Other assets.................................................................... 1,376 1,573 ----- ----- Total assets....................................................................$ 83,781 $ 78,100 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt......................................... -- 88 Accounts payable............................................................. 4,960 6,635 Accrued expenses and other current liabilities............................... 7,221 5,602 ----- ----- Total current liabilities.................................................. 12,181 12,325 ------ ------ Long-term obligations: Deferred income taxes........................................................ 2,024 1,949 Other long-term obligations.................................................. 218 204 --- --- Total long-term obligations................................................ 2,242 2,153 ----- ----- Minority interest in consolidated subsidiaries.................................. 636 460 --- --- Stockholders' equity: Preferred stock, $1.00 par; authorized 500,000 shares; none issued........... -- -- Common stock: Class A, $.333 par; authorized 20,000,000 shares (issued 2002, 2,711,127 and 2001, 2,711,127)............................. 904 904 Class B, $.333 par; authorized 20,000,000 shares (issued 2002, 4,103,235 and 2001, 4,037,399)............................. 1,367 1,346 Additional paid in capital................................................... 17,703 17,398 Retained earnings............................................................ 55,139 50,702 Accumulated other comprehensive loss......................................... (839) (1,301) Common stock held in treasury, at cost (2002, Class A, 144,380, Class B, 521,596; 2001, Class A, 144,380, Class B, 521,596)............................. (5,417) (5,417) Notes receivable............................................................. -- (303) Unearned compensation........................................................ (135) (167) ---- ---- Total stockholders' equity............................................... 68,722 63,162 ------ ------ Total liabilities and stockholders' equity......................................$ 83,781 $ 78,100 ========= ========== The accompanying notes are an integral part of these condensed consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THIRTEEN WEEKS AND THIRTY-NINE WEEKS ENDED OCTOBER 4, 2002 AND OCTOBER 5, 2001 (Unaudited) (In thousands, except per share amounts) Thirteen Thirteen Thirty-Nine Thirty-Nine Weeks Weeks Weeks Weeks Ended Ended Ended Ended October 4, October 5, October 4, October 5, 2002 2001 2002 2001 ---- ---- ---- ---- Net sales....................................................$ 33,745 $ 31,488 $ 104,985 $110,672 Other revenue ............................................... 105 1 202 68 --- - --- -- Total revenue ............................................... 33,850 31,489 105,187 110,740 ------ ------ ------- ------- Costs and expenses Cost of sales............................................. 21,683 21,181 68,617 74,813 Selling expenses.......................................... 4,520 5,208 14,587 18,216 General and administrative expenses....................... 4,900 4,357 14,293 14,134 Plant closing credit and other non-recurring charges...... -- -- (59) -- ------ ----- ---- ------- Total costs and expenses................................ 31,103 30,746 97,438 107,163 ------ ------ ------ ------- Operating income............................................. 2,747 743 7,749 3,577 Non-operating income (expense) Interest, net............................................. 13 (14) 49 (118) Foreign currency.......................................... (18) (8) (62) 188 Other..................................................... 2 (16) 162 (34) - --- --- --- Income before income taxes and minority interest............. 2,744 705 7,898 3,613 Provision for income taxes................................... 1,099 301 3,282 1,628 Minority interest in income of consolidated subsidiaries..... 58 42 179 101 -- -- --- --- Net income...................................................$ 1,587 $ 362 $ 4,437 $ 1,884 ========= ========= ========= ======== Per share amounts: Earnings per common share: Basic.....................................................$ 0.26 $ 0.06 $ 0.73 $ 0.31 ======== ========= ========= ======== Diluted...................................................$ 0.26 $ 0.06 $ 0.72 $ 0.30 ======== ========= ========= ======== Weighted average common shares outstanding and equivalents outstanding: Basic EPS............................................... 6,121 6,083 6,102 6,079 ===== ===== ===== ===== Diluted EPS............................................. 6,160 6,107 6,173 6,188 ===== ===== ===== ===== Cash dividends per share of common stock..................... -- -- -- -- ===== ===== ===== ===== The accompanying notes are an integral part of these condensed consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 4, 2002 AND OCTOBER 5, 2001 (Unaudited) (In thousands) October 4, October 5, 2002 2001 ---- ---- Cash flows from operating activities: Net income.................................................................$ 4,437 $ 1,884 -------- --------- Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization.............................................. 1,146 1,456 Provision for bad debts and discounts...................................... 4,044 4,776 Deferred income tax expense (benefit)...................................... 99 (689) Gain on sale of equipment.................................................. (75) -- Other...................................................................... 132 133 Changes in operating assets and liabilities, net of effect of acquisitions, dispositions and foreign currency adjustments: Decrease (increase) in assets: Accounts receivable.................................................... (9,850) (402) Inventories............................................................ 6,162 10,573 Prepaid expenses and other current assets.............................. 655 183 Increase (decrease) in liabilities: Accounts payable....................................................... (1,706) (3,039) Accrued expenses....................................................... 2,695 (860) ----- ---- Total adjustments............................................................ 3,302 12,131 ----- ------ Net cash provided (used) by operating activities................................ 7,739 14,015 ----- ------ Cash flows from investing activities: Purchases of property, plant and equipment................................... (300) (1,042) Proceeds from the sale of equipment.......................................... 83 -- Change in deferred charges, deposits and other............................... 23 43 Marketable securities - realized and unrealized losses....................... 110 93 --- -- Net cash used by investing activities........................................... (84) (906) --- ---- Cash flows from financing activities: Net short-term borrowings.................................................... -- (159) Repayment of long-term debt and capital lease obligations.................... (79) (212) Common stock repurchased..................................................... -- (133) Receipt of payment on notes receivable....................................... 312 -- Tax benefit on option exercise............................................... 16 9 Issuances of common stock, including options................................. 310 84 --- -- Net cash provided (used) by financing activities................................ 559 (411) Effect of exchange rate changes on cash and cash equivalents.................... 41 (419) -- ---- Net increase (decrease) in cash and cash equivalents............................ 8,255 12,279 Cash and equivalents at beginning of period..................................... 22,227 4,738 ------ ----- Cash and equivalents at end of period...........................................$ 30,482 $ 17,017 ======== ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes, net of refunds...............................................$ 1,106 $ 854 ======== ========= Interest...................................................................$ 1 $ 172 ======== ========= Non-cash investing and financing activities: Property purchased under capital leases......................................$ -- $ 102 ======== ========= The accompanying notes are an integral part of these condensed consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES (the "Company") NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 4, 2002 (Unaudited) (In thousands, except per share amounts) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation have been included. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, for the year ended January 4, 2002. Operating results for the thirteen and thirty-nine weeks ended October 4, 2002, are not necessarily indicative of the results for the entire year. NOTE 2 - INVENTORIES Inventories at October 4, 2002 and January 4, 2002 consisted of the following: October 4, January 4, 2002 2002 ---- ---- Finished goods.........................$ 21,419 $ 25,466 Work in progress....................... 100 1,501 Raw materials.......................... 1,156 1,437 ----- ----- $ 22,675 $ 28,404 =========== =========== NOTE 3 - EARNINGS PER COMMON SHARE
Earnings per Common Share ------------------------- Thirteen Weeks Ended Thirteen Weeks Ended October 4, 2002 October 5, 2001 --------------- --------------- Basic Diluted Basic Diluted ----- ------- ----- ------- Consolidated income Net income available for common shares and assumed conversions.....................$ 1,587 $ 1,587 $ 362 $ 362 ======== ======= ======== ======== Weighted-average common shares and equivalents outstanding: Weighted-average shares outstanding................ 6,121 6,121 6,083 6,083 Effect of dilutive securities: Employee stock options........................... -- 39 -- 24 ------- -- ------- -- 6,121 6,160 6,083 6,107 ===== ===== ===== ===== Earnings per share: Net income.........................................$ 0.26 $ 0.26 $ 0.06 $ 0.06 ======== ======= ======= ======== Earnings per Common Share ------------------------- Thirty-Nine Weeks Ended Thirty-Nine Weeks Ended October 4, 2002 October 5, 2001 --------------- --------------- Basic Diluted Basic Diluted ----- ------- ----- ------- Consolidated income Net income available for common shares and assumed conversions.....................$ 4,437 $ 4,437 $ 1,884 $ 1,884 ======== ======= ======== ======== Weighted-average common shares and equivalents outstanding: Weighted-average shares outstanding................ 6,102 6,102 6,079 6,079 Effect of dilutive securities: Employee stock options........................... -- 71 -- 109 ----- -- ----- --- 6,102 6,173 6,079 6,188 ===== ===== ===== ===== Earnings per share: Net income.........................................$ 0.73 $ 0.72 $ 0.31 $ 0.30 ======== ======= ======= ========
Options to purchase 554 and 724 shares of common stock, outstanding at October 4, 2002 and October 5, 2001, respectively, were not included in the computations of diluted earnings per share, for the thirteen weeks ended October 4, 2002 and October 5, 2001, since the options were anti-dilutive. Options to purchase 513 and 561 shares of common stock, outstanding at October 4, 2002 and October 5, 2001, respectively, were not included in the computations of diluted earnings per share, for the thirty-nine weeks ended October 4, 2002 and October 5, 2001, since the options were anti-dilutive. NOTE 4 - STATEMENT OF COMPREHENSIVE INCOME
Thirteen Thirteen Thirty-Nine Thirty-Nine Weeks Weeks Weeks Weeks Ended Ended Ended Ended October 4, October 5, October 4, October 5, 2002 2001 2002 2001 ---- ---- ---- ---- Net income................................................$ 1,587 $ 362 $ 4,437 $ 1,884 Other comprehensive income: Foreign currency translation adjustments, net of tax........................................... 46 (192) 462 (745) -- ---- --- ---- Comprehensive income......................................$ 1,633 $ 170 $ 4,899 $ 1,139 ======= ======== ======== =======
NOTE 5 - OPERATING SEGMENT DATA The Company's operating segments are organized based on the nature of products and consist of the Saucony segment and Other Products segment. The determination of the reportable segments for the thirteen and thirty-nine weeks ended October 4, 2002 and October 5, 2001, as well as the basis of measurement of segment profit or loss, is consistent with the segment reporting disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended January 4, 2002.
Thirteen Thirteen Thirty-Nine Thirty-Nine Weeks Weeks Weeks Weeks Ended Ended Ended Ended October 4, October 5, October 4, October 5, 2002 2001 2002 2001 ---- ---- ---- ---- Revenues: Saucony...........................................$ 27,419 $ 24,563 $ 88,469 $ 94,448 Other Products.................................... 6,431 6,926 16,718 16,292 ----- ----- ------ ------ Total revenue..................................$ 33,850 $ 31,489 $ 105,187 $ 110,740 ========= ========= ========== ========== Income (loss) before income taxes and minority interest: Saucony...........................................$ 2,724 $ 295 $ 8,571 $ 3,482 Other Products.................................... 20 410 (673) 131 -- --- ---- --- Total ........................................$ 2,744 $ 705 $ 7,898 $ 3,613 ========= ========= ========== ==========
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS SFAS 142 In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", (SFAS 142). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets acquired individually or with a group of other assets (excluding those acquired in a business combination) at acquisition. The statement also addresses financial accounting and reporting for goodwill and other intangibles subsequent to their acquisition. SFAS 142 supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets" (APB 17). The Company adopted SFAS 142 on January 5, 2002. In applying SFAS 142 the Company performed the transitional reassessment and impairment test required as of January 4, 2002 and determined that there was no impairment of goodwill. The Company discontinued amortizing goodwill on January 4, 2002. At January 4, 2002 and October 4, 2002 the carrying value of goodwill was $912, and is included in "Other Assets" on the balance sheet. The transitional disclosure of reported net earnings for the thirteen and thirty-nine weeks ended October 4, 2002 and October 5, 2001, as adjusted, is presented below:
Thirteen Thirteen Thirty-Nine Thirty-Nine Weeks Weeks Weeks Weeks Ended Ended Ended Ended October 4, October 5, October 4, October 5, 2002 2001 2002 2001 ---- ---- ---- ---- Reported net income $ 1,587 $ 362 $ 4,437 $ 1,884 Addback amortization of goodwill, net of tax benefit -- 21 -- 64 ---- -- ---- -- Adjusted net income $ 1,587 $ 383 $ 4,437 $ 1,948 ========= ======== ========= ========= Basic earnings per share: As reported $ 0.26 $ 0.06 $ 0.73 $ 0.31 Addback goodwill -- -- -- .01 ---- ---- ---- --- Adjusted net income $ 0.26 $ 0.06 $ 0.73 $ 0.32 ========= ======== ======== ========= Diluted earnings per share: As reported $ 0.26 $ 0.06 $ 0.72 $ 0.30 Addback goodwill -- -- -- .01 ---- ---- ---- --- Adjusted net income $ 0.26 $ 0.06 $ 0.72 $ 0.31 ========= ======== ======== =========
SFAS 143 In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations", (SFAS 143). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. SFAS 143 applies to all companies that incur legal obligations to retire tangible long-lived assets that result from the acquisition, construction, development or normal operation of a long-lived asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Company has not determined the impact of adopting SFAS 143 on its results of operations or financial position. SFAS 144 In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets", (SFAS 144). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets, and supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", (APB 30) for the disposal of a segment of a business as previously defined in APB 30. SFAS 144 also amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements", (ARB 51) to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The provisions of SFAS 144 are to be applied to all long-lived assets, with the exception of goodwill. SFAS 144 retains the requirements of SFAS 121 to recognize an impairment loss only if the carry amount of the long-lived asset is not recoverable from its undiscounted cash flows and measure an impairment loss as the difference the carrying amount and the fair value of the asset. SFAS 144 expands upon the criteria, beyond that previously specified in SFAS 121 to determine when a long-lived asset is held for sale and provides guidance on the accounting for long-lived assets classified as held for sale if the asset is being reclassified as held and used. The Company adopted SFAS 144 in the first quarter of fiscal 2002 and the adoption did not have a material impact on the Company's earnings or financial position. SFAS 146 In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, "Accounting for Cost Associated with Exit or Disposal Activities", (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company believes that the adoption of SFAS No. 146 will not have a material impact on earnings or on the Company's financial position. NOTE 7 - PLANT CLOSING AND OTHER NON-RECURRING CHARGE ACCRUALS Included in accrued expenses at October 4, 2002 are $182 of costs primarily associated with the Bangor, Maine plant closing recorded in the fourth quarter of fiscal 2001. The Company expects that a majority of these costs will be paid by the end of fiscal 2002. The following table summarizes the activity in the plant closing and other non-recurring charge accruals for the thirty-nine weeks ended October 4, 2002. Balance at January 4, 2002..................$ 1,461 Payments.................................... (1,078) Expenses reversed........................... (201) ---- Balance at October 4, 2002..................$ 182 ========= NOTE 8 - ASSETS HELD FOR SALE The Company commenced marketing its Bangor, Maine real property, which had been previously used for the assembly of our domestic Saucony footwear, in February 2002. The property is available for immediate sale in its current condition and the Company expects that the property will be sold during fiscal 2002. The property is being actively marketed for sale at a price that management believes is reasonable in relation to its current fair value. As of October 4, 2002, the fair value of the property, based upon an independent appraisal, exceeds the net book value of the property, which was $357 as of October 4, 2002. As a result of the Company's decision to sell the property, the Bangor, Maine real property has been reclassified to current assets as "Held For Sale" and is included on the balance sheet at October 4, 2002 under the caption "Prepaid Expenses and Other Current Assets". ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion together with the condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This Item contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. When used in this report, the words "will", "believes", "anticipates", "intends", "estimates", "expects", "projects" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Actual results may differ materially from those included in such forward-looking statements. Important factors which could cause actual results to differ materially include those set forth in our Annual Report on Form 10-K for the fiscal year ended January 4, 2002 under "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Other Factors That May Affect Future Results" ("Certain Factors") filed by us with the Securities and Exchange Commission on April 3, 2002, which Certain Factors discussion is filed as Exhibit 99.1 to this Quarterly Report on Form 10-Q and incorporated herein by this reference. The forward-looking statements provided by us in this Quarterly Report on Form 10-Q represent our estimates as of the date this report is filed with the Securities and Exchange Commission. We anticipate that subsequent events and developments will cause these estimates to change. However, while we may elect to update our forward-looking statements in the future, we specifically disclaim any obligation to do so. The forward-looking statements contained in this report should not be relied upon as representing our estimates as of any date subsequent to the date this report is filed with the Securities and Exchange Commission. Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, except as permitted by the Securities and Exchange Commission with respect to the preparation of interim financial statements for inclusion in Quarterly Reports on Form 10-Q. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Areas where significant judgments are made include, but are not limited to: reserves for defective products returns and other allowances, accounts receivable - allowances for doubtful accounts, inventories and income taxes. Actual results could differ materially from these estimates. For a more detailed explanation of the judgments made in these areas, refer to our Annual Report on Form 10-K for the year ended January 4, 2002, as filed with the Securities and Exchange Commission on April 3, 2002. Highlights - ---------- Dollar amounts throughout this Item 2 are in thousands, except per share amounts.
Thirteen Weeks and Thirty-Nine Weeks Ended October 4, 2002 Compared to Thirteen Weeks and Thirty-Nine Weeks Ended October 5, 2001 --------------------------------------- Increase (Decrease) ------------------- Thirteen Weeks Thirty-Nine Weeks -------------- ----------------- Net sales............................................ $2,257 7.2% ($5,687) (5.1%) Gross profit......................................... 1,755 17.0% 509 1.4% Selling, general and administrative expenses......... (145) (1.5%) (3,470) (10.7%)
$ Change -------- Thirteen Weeks Thirty-Nine Weeks -------------- ----------------- Operating income......................................... $2,004 $4,172 Income before income taxes and minority interest......... 2,039 4,285 Net income............................................... 1,225 2,553
Percent of Net Sales -------------------- Thirteen Weeks Thirty-Nine Weeks 2002 2001 2002 2001 ---- ---- ---- ---- Gross profit......................................... 35.7% 32.7% 34.6% 32.4% Selling, general and administrative expenses......... 27.9 30.4 27.5 29.2 Operating income..................................... 8.1 2.4 7.4 3.2 Income before income taxes........................... 8.1 2.2 7.5 3.3 Net income........................................... 4.7 1.1 4.2 1.7
The following table sets forth the approximate contribution to net sales (in dollars and as a percentage of consolidated net sales) attributable to our Saucony segment and our Other Products segment for the thirteen and thirty-nine weeks ended October 4, 2002 and October 5, 2001:
Thirteen Weeks Ended October 4, 2002 October 5, 2001 --------------- --------------- Saucony........................$ 27,366 81.1% $ 24,560 78.0% Other Products................. 6,379 18.9% 6,928 22.0% ----- ---- ----- ---- Total..........................$ 33,745 100.0% $ 31,488 100.0% =========== ===== =========== ===== Thirty-Nine Weeks Ended October 4, 2002 October 5, 2001 --------------- --------------- Saucony........................$ 88,348 84.2% $ 94,383 85.3% Other Products................. 16,637 15.8% 16,289 14.7% ------ ---- ------ ---- Total..........................$ 104,985 100.0% $ 110,672 100.0% =========== ===== =========== =====
Thirteen Weeks Ended October 4, 2002 Compared to Thirteen Weeks Ended October 5, 2001 Consolidated Net Sales Net sales increased $2,257 or 7%, to $33,745 in the thirteen weeks ended October 4, 2002 from $31,488 in the thirteen weeks ended October 5, 2001. On a geographic basis, domestic sales increased $1,747, or 7%, to $26,171 in the thirteen weeks ended October 4, 2002 from $24,424 in the thirteen weeks ended October 5, 2001. International sales increased $510, or 7%, to $7,574 in the thirteen weeks ended October 4, 2002 from $7,064 in the thirteen weeks ended October 5, 2001. Saucony Brand Segment Worldwide net sales of Saucony branded footwear and apparel increased $2,806, or 11%, to $27,366 in the thirteen weeks ended October 4, 2002 from $24,560 in the thirteen weeks ended October 5, 2001, due primarily to higher domestic footwear unit volumes and higher average domestic wholesale per pair selling prices. Worldwide footwear unit volumes increased 4% in the thirteen weeks ended October 4, 2002 compared to the thirteen weeks ended October 5, 2001. The overall average domestic wholesale selling price per pair of domestic footwear increased 5% in the thirteen weeks ended October 4, 2002 compared to the thirteen weeks ended October 5, 2001, due to an increase in first quality technical unit volumes and decreased Originals footwear and closeout footwear, all of which are sold at prices below our first quality technical footwear. Domestic net sales increased $2,353, or 13%, to $20,590 in the thirteen weeks ended October 4, 2002 from $18,237 in the thirteen weeks ended October 5, 2001, due primarily to higher average wholesale per pair selling prices and an 8% increase in footwear unit volumes. The footwear unit volume increase in the thirteen weeks ended October 4, 2002 was due primarily to a 44% increase in first quality technical footwear unit volumes and, to a lesser extent, a 26% increase in special makeup footwear unit volumes. These increases were partially offset by a 41% decrease in Originals footwear unit volumes and, to a lesser extent, a 40% decrease in closeout footwear unit volumes. The average wholesale per pair selling prices for domestic footwear increased due to a change in the product mix to increased technical footwear unit volumes and decreased Originals and closeout footwear. Sales of closeout footwear accounted for approximately 4% of domestic Saucony net sales in the thirteen weeks ended October 4, 2002 compared to 11% in the thirteen weeks ended October 5, 2001. The Originals footwear accounted for 14% of domestic footwear unit volume in the thirteen weeks ended October 4, 2002 compared to 25% in the thirteen weeks ended October 5, 2001. International net sales increased $453, or 7%, to $6,776 in the thirteen weeks ended October 4, 2002 from $6,323 in the thirteen weeks ended October 5, 2001, due primarily to higher average wholesale per pair selling prices, partially offset by a 7% decrease in footwear unit volumes. The footwear average wholesale per pair selling price increased due to increased unit volumes of higher priced technical footwear sold at our international subsidiaries and decreased international distributor unit volumes which products are sold a lower unit prices. Footwear unit volumes at our European and Canadian subsidiaries, increased 16% in the thirteen weeks ended October 4, 2002 compared to the thirteen weeks ended October 5, 2001. International distributor footwear unit volumes decreased 44% due to decreased European distributor unit volumes and a 62% decrease in Originals footwear unit volumes sold in Japan. Distributor sales into the Japanese footwear market accounted for 5% of international sales in the thirteen weeks ended October 4, 2002, compared to 10% in the thirteen weeks ended October 5, 2001. Other Products Segment Worldwide sales of Other Products decreased $549, or 8%, to $6,379 in the thirteen weeks ended October 4, 2002 from $6,928 in the thirteen weeks ended October 5, 2001 due primarily to a decrease in sales of our Hyde Authentics footwear products, which line has been phased out, and a decrease in sales of our Hind brand apparel. Domestic net sales of Other Products decreased $606, or 10%, to $5,581 in the thirteen weeks ended October 4, 2002 from $6,187 in the thirteen weeks ended October 5, 2001, due primarily to an 80% decrease in sales of our Hyde Authentics footwear products, due to lower unit volumes and lower average wholesale per pair selling prices and an 8% decrease in sales of our Hind brand apparel due primarily to a 9% decrease in Hind apparel unit volumes, partially offset by a 2% increase in average wholesale unit selling prices in the thirteen weeks ended October 4, 2002. The increase in the average unit wholesale unit selling prices for our Hind apparel brand is due to new product introductions, which carry higher selling prices. Sales at our factory outlet stores increased 2% in the thirteen weeks ended October 4, 2002 compared to the thirteen weeks ended October 5, 2001 due primarily to the opening of a factory outlet store in the thirteen weeks ended October 4, 2002, offset partially by lower closeout sales volume. International net sales of Other Products increased $57, or 8%, to $798 in the thirteen weeks ended October 4, 2002 from $741 in the thirteen weeks ended October 5, 2001, due primarily to increased Hind apparel sales at our Europe subsidiaries. Costs and Expenses Our gross margin in the thirteen weeks ended October 4, 2002 increased 3.0% to 35.7% from 32.7% in the thirteen weeks ended October 5, 2001, due primarily to increased Saucony domestic sales of first quality footwear products at full margin. Other factors contributing to the margin increase were proportionately lower sales of closeout footwear and improved margins on certain domestic footwear products, partially offset by increased inventory provisions for Hind apparel obsolete raw material. Selling, general and administrative expenses expressed as a percentage of net sales decreased 2.5% to 27.9% of net sales in the thirteen weeks ended October 4, 2002 from 30.4% in the thirteen weeks ended October 5, 2001. In absolute dollars, selling, general and administrative expenses decreased $145, or 2%, to $9,420 in the thirteen weeks ended October 4, 2002 from $9,565 in the thirteen weeks ended October 5, 2001. Decreased spending in the thirteen weeks ended October 4, 2002 was due primarily to decreased print advertising and, to a lesser extent, decreased promotional spending, partially offset by increased variable selling expenses, increased administrative payroll and increased incentive compensation. Net interest expense decreased $27, to interest income of $13 in the thirteen weeks ended October 4, 2002 from interest expense of $14 in the thirteen weeks ended October 5, 2001, due primarily to the absence of borrowings against our domestic and foreign credit facilities and, to a lesser extent, increased interest income. Income Before Tax and Minority Interest Thirteen Weeks Ended October 4, October 5, 2002 2001 ---- ---- Segment Saucony........................$ 2,724 $ 295 Other Products................. 20 410 -- --- Total..........................$ 2,744 $ 705 ========= ======== Income before tax increased $2,039 in the thirteen weeks ended October 4, 2002 to $2,744 compared to $705 in the thirteen weeks ended October 5, 2001, due primarily to higher pre-tax income realized by the domestic Saucony segment due to improved gross margins and lower operating spending and improved profitability in our Saucony international business, due primarily to increased sales at our Canadian subsidiary. Income before tax in our Other Products segment decreased due to lower gross margins realized by our Hind apparel brand due to increased provisions for obsolete raw material inventory, offset partially by increased profitability at our factory outlet store due to higher gross margins and lower operating expenses, due principally to the closing of underperforming retail stores in fiscal 2002. Income Taxes The provision for income taxes increased to $1,099 in the thirteen weeks ended October 4, 2002 from $301 in the thirteen weeks ended October 5, 2001, due primarily to higher pre-tax income realized by the domestic Saucony segment and increased pre-tax income realized by our Canadian subsidiary. The effective tax rate decreased 2.6% to 40.1% in the thirteen weeks ended October 4, 2002 from 42.7% in the thirteen weeks ended October 5, 2001 due to a shift in the composition of domestic and foreign pre-tax earnings. Net Income Net income for thirteen weeks ended October 4, 2002 increased to $1,587, or $0.26 per fully diluted share, compared to $362 or $0.06 per fully diluted share, in the thirteen weeks ended October 5, 2001. Weighted average common shares and equivalent shares used to calculate fully diluted earnings per share were 6,160 and 6,107, respectively, in the thirteen weeks ended October 4, 2002 and October 5, 2001. Thirty-Nine Weeks Ended October 4, 2002 Compared to Thirty-Nine Weeks Ended October 5, 2001 Consolidated Net Sales Net sales decreased $5,687, or 5%, to $104,985 in the thirty-nine weeks ended October 4, 2002 from $110,672 in the thirty-nine weeks ended October 5, 2001. Domestic sales decreased $8,133, or 9%, to $81,531 in the thirty-nine weeks ended October 4, 2002 from $89,664 in the thirty-nine weeks ended October 5, 2001. International sales increased $2,446, or 12%, to $23,454 in the thirty-nine weeks ended October 4, 2002 from $21,008 in the thirty-nine weeks ended October 5, 2001. Saucony Brand Segment Worldwide net sales of Saucony branded footwear and apparel decreased $6,035 or 6%, to $88,348 in the thirty-nine weeks ended October 4, 2002 from $94,383 in the thirty-nine weeks ended October 5, 2001, due primarily to a decrease in domestic footwear unit volume, partially offset by higher international footwear unit volumes and higher average domestic wholesale per pair selling prices. Worldwide footwear unit volumes decreased 16% in the thirty-nine weeks ended October 4, 2002 compared to the thirty-nine weeks ended October 5, 2001. The overall average domestic wholesale selling price per pair of domestic footwear increased 12% in the thirty-nine weeks ended October 4, 2002 compared to the thirty-nine weeks ended October 5, 2001, due to an increase in first quality technical unit volumes and decreased Originals footwear, closeout footwear and special makeup footwear unit volumes, all of which are sold at prices below our first quality technical footwear. Domestic net sales decreased $8,337, or 11%, to $66,551 in the thirty-nine weeks ended October 4, 2002 from $74,888 in the thirty-nine weeks ended October 5, 2001, due primarily to a 21% decrease in footwear unit volumes, partially offset by higher average wholesale per pair selling prices. The footwear unit volume decrease in the thirty-nine weeks ended October 4, 2002 was due primarily to a 50% decrease in Originals footwear unit volumes and, to a lesser extent, a 45% decrease in closeout footwear unit volumes and a 14% decrease in special makeup footwear unit volumes. The average wholesale per pair selling prices for domestic footwear increased due to a change in the product mix to increased technical footwear unit volumes and decreased Originals, closeout footwear and special makeup footwear unit volumes. Sales of closeout footwear accounted for approximately 6% of domestic Saucony net sales in the thirty-nine weeks ended October 4, 2002 compared to 11% in the thirty-nine weeks ended October 5, 2001. The Originals footwear accounted for 19% of domestic footwear unit volume in the thirty-nine weeks ended October 4, 2002 compared to 31% in the thirty-nine weeks ended October 5, 2001. The unit volume decrease in Originals footwear was primarily due to a shift in consumer preference to other product categories, primarily basketball footwear, which we do not sell. International net sales increased $2,302, or 12%, to $21,797 in the thirty-nine weeks ended October 4, 2002 from $19,495 in the thirty-nine weeks ended October 5, 2001, due primarily to a 6% increase in footwear unit volumes and higher average wholesale per pair selling prices. The footwear average wholesale per pair selling price increased primarily due to increased technical footwear unit volume sold at our international subsidiaries, which products carry higher average wholesale per pair selling prices and decreased Originals footwear unit volumes sold by our international distributor business. Footwear unit volumes at our European and Canadian subsidiaries, increased 30% in the thirty-nine weeks ended October 4, 2002 versus the thirty-nine weeks ended October 5, 2001. International distributor footwear unit volumes decreased 23%, due to decreased European distributor unit volumes and a 32% decrease in Originals footwear unit volumes sold in Japan. Distributor sales into the Japanese footwear market accounted for 9% of international sales in the thirty-nine weeks ended October 4, 2002, compared to 14% in the thirty-nine weeks ended October 5, 2001. Other Products Segment Worldwide sales of Other Products increased $348, or 2%, to $16,637 in the thirty-nine weeks ended October 4, 2002 from $16,289 in the thirty-nine weeks ended October 5, 2001 due primarily to increased domestic sales of our Hind brand apparel, offset partially by lower sales of Hyde Authentics footwear products, which line has been phased out, and lower sales at our factory outlet stores. Domestic net sales of Other Products increased $204, or 1%, to $14,980 in the thirty-nine weeks ended October 4, 2002 from $14,776 in the thirty-nine weeks ended October 5, 2001, due primarily to a 13% increase in domestic sales of our Hind brand apparel, offset partially due to a 64% decrease in sales of our Hyde Authentics footwear products, due to lower unit volume and lower average per pair wholesale selling prices. Hind brand apparel sales increased due primarily to an 11% increase in the average wholesale unit selling prices for our Hind apparel brand and, to a lesser extent, a 2% increase in Hind apparel unit volume. The increase in the average wholesale unit selling price for our Hind apparel brand is due to new product introductions, which carry higher selling prices. Sales at our factory outlet stores decreased 1% due to lower closeout sales volume in the thirty-nine weeks ended October 4, 2002. Closeout volume accounted for approximately 4% of factory outlet sales in the thirty-nine weeks ended October 4, 2002 compared to 11% of factory outlet sales in the thirty-nine weeks ended October 5, 2001. International net sales of Other Products increased $144, or 10%, to $1,657 in the thirty-nine weeks ended October 4, 2002 from $1,513 in the thirty-nine weeks ended October 5, 2001, due primarily to increased Hind apparel sales at our European and Canadian subsidiaries. Costs and Expenses Our gross margin in the thirty-nine weeks ended October 4, 2002 increased 2.2% to 34.6% from 32.4% in the thirty-nine weeks ended October 5, 2001, due primarily to increased Saucony domestic sales of first quality footwear products at full margin. Other factors contributing to the margin increase were proportionately lower sales of closeout footwear, reduced expenses resulting from the closure of our Bangor, Maine production facility and decreased sales of special makeup footwear, which carry lower gross margins, partially offset by increased inventory provisions for Hind apparel for obsolete raw material. Selling, general and administrative expenses expressed as a percentage of net sales decreased 1.7% to 27.5% of net sales in the thirty-nine weeks ended October 4, 2002 from 29.2% in the thirty-nine weeks ended October 5, 2001. In absolute dollars, selling, general and administrative expenses decreased $3,470, or 11%, to $28,880 in the thirty-nine weeks ended October 4, 2002 from $32,350 in the thirty-nine weeks ended October 5, 2001. Decreased spending in the thirty-nine weeks ended October 4, 2002 was due primarily to decreased print advertising and, to a lesser extent, lower provisions for doubtful accounts, decreased account-specific advertising and promotional spending, reduced variable selling expenses, partially offset by increased administrative payroll, increased incentive compensation and increased business insurance costs. In the thirty-nine weeks ended October 4, 2002 we recorded a pre-tax non-recurring credit of $59, $28 after-tax, or $0.00 per fully diluted share. The net non-recurring credit consists of a pre-tax credit of $201, $121 after-tax, or $0.02 per fully diluted share, to reduce expenses accrued in the fourth quarter of fiscal 2001 associated with the closing of our Bangor, Maine manufacturing facility, primarily employee termination benefits and facility and lease exit costs, partially offset by a non-recurring pre-tax charge of $142, $93 after tax, or $0.02 per fully diluted share, incurred to close an underperforming retail store and to close and relocate a second retail store. Expenses associated with the store closings included lease termination and other contractual costs of $47 and $95 to writeoff leasehold improvements. Net interest expense decreased $167, to interest income of $49 in the thirty-nine weeks ended October 4, 2002 from interest expense of $118 in the thirty-nine weeks ended October 5, 2001, due primarily to the absence of borrowings against our domestic and foreign credit facilities and, to a lesser extent, increased interest income. Income Before Tax and Minority Interest Thirty-Nine Weeks Ended October 4, October 5, 2002 2001 ---- ---- Segment Saucony..........................$ 8,571 $ 3,482 Other Products................... (673) 131 ---- --- Total............................$ 7,898 $ 3,613 ========= ======== Income before tax increased to $7,898 in the thirty-nine weeks ended October 4, 2002 compared to $3,613 in the thirty-nine weeks ended October 5, 2001, due primarily to higher pre-tax income realized by the domestic Saucony segment, due to improved gross margins and lower operating expenses and improved profitability in our Saucony international business, due to increased sales at our Canadian and European subsidiaries. The decrease in our Other Products segment income before tax is due primarily to lower gross margins realized by our Hind apparel brand due to increased provisions for obsolete raw material inventory and increased operating expenses, partially offset by increased profitability at our factory outlets due to higher gross margins and lower operating expenses, due principally to the closing of underperforming retail stores in fiscal 2002. Income Taxes The provision for income taxes increased to $3,282 in the thirty-nine weeks ended October 4, 2002 from $1,628 in the thirty-nine weeks ended October 5, 2001, due primarily to higher pre-tax income realized by the domestic Saucony segment and increased pre-tax income realized by our Canadian subsidiary. The effective tax rate decreased 3.5% to 41.6% in the thirty-nine weeks ended October 4, 2002 from 45.1% in the thirty-nine weeks ended October 5, 2001 due to a shift in the composition of domestic and foreign pre-tax earnings and the impact of increased deferred tax valuation allowances recorded in the thirty-nine weeks ended October 5, 2001. Net Income Net income for thirty-nine weeks ended October 4, 2002 increased to $4,437, or $0.72 per fully diluted share, compared to $1,884 or $0.30 per fully diluted share, in the thirty-nine weeks ended October 5, 2001. Weighted average common shares and equivalent shares used to calculate fully diluted earnings per share were 6,173 and 6,188, respectively, in the thirty-nine weeks ended October 4, 2002 and October 5, 2001. Liquidity and Capital Resources As of October 4, 2002, our cash and cash equivalents totaled $30,482, an increase of $8,255 from January 4, 2002. The increase is due primarily to the generation of $7,739 in cash from operations and, to a lesser extent, the receipt of payment on notes receivable of $312, the receipt of $310 from the issuance of shares of our common stock and the receipt of $83 from the sale of capital assets, partially offset by cash outlays for capital assets of $300 and the repayment of long-term debt of $79. Our accounts receivable increased $5,806 net of the provision for bad debts and discounts, due to increased sales of our Saucony footwear products in the thirty-nine weeks ended October 4, 2002, compared to our sales for the thirty-nine weeks ended January 4, 2002. Our days sales outstanding for accounts receivable decreased to 53 days in the thirty-nine weeks ended October 4, 2002 from 55 days in the thirty-nine weeks ended October 5, 2001. Days sales outstanding is defined as the number of average daily sales days in our accounts receivables as of the period end date. The provision for bad debts and discounts decreased to $4,044 in the thirty-nine weeks ended October 4, 2002 from $4,776 in the thirty-nine weeks ended October 5, 2001, due to a decrease in the provision for doubtful accounts. Inventories decreased $6,162 in the thirty-nine weeks ended October 4, 2002 from January 4, 2002, due to seasonal inventory requirements. The number of day's sales in inventory decreased to 90 days in the thirty-nine weeks ended October 4, 2002 from 100 days in the thirty-nine weeks ended October 5, 2001. Days sales in inventory is defined as the number of average daily cost of sales days in our inventory as of the period end date. Principal factors (other than net income, accounts receivable, provision for bad debts and discounts and inventory) affecting our operating cash flows in the thirty-nine weeks ended October 4, 2002 included a decrease of $1,706 in accounts payable (due to lower inventories), an increase of $2,695 in accrued expenses (due primarily to increased accruals for sales commissions, incentive compensation and inventory procurement costs and the receipt of $653 in income tax refunds) and a decrease in prepaid expenses of $655 (due to the timing of business insurance prepayments). On August 30, 2002, we entered into a revolving credit agreement with a bank under the terms of which the bank committed to a maximum of $15,000,000 to us for cash borrowings and letters of credit. The credit facility which terminates on August 30, 2004, amends and restates, in its entirety, the revolving credit agreement which terminated on August 30, 2002. Maximum borrowings under the credit facility are limited to the lesser of $15,000,000 or, the sum of 65% of eligible receivables plus 20% of eligible finished goods inventory, each as defined in the credit agreement. At October 4, 2002, there were no borrowings outstanding under the facility. We had open commitments under letters of credit in the amount of $172,000 at October 4, 2002. Borrowings under the credit facility are made at our election at either (1) the bank's prime rate of interest, less 1.0%, or (2) at the LIBOR rate, plus 1.5%. The credit facility contains various covenants including; restrictions on our ability to incur additional indebtedness, limitations on the annual amount of capital expenditures and limits repurchases of our common stock to $3,000,000 over the term of the facility. Our liquidity is contingent upon a number of factors, principally our future operating results. Management believes that our current cash and cash equivalents, credit facilities and internally generated funds are adequate to meet our working capital requirements and to fund our capital investment needs and debt service payments. During the thirty-nine weeks ended October 4, 2002, we generated $7,739 in cash from operations, due primarily to a decrease in inventories. In the thirty-nine weeks ended October 5, 2001, we generated $14,015 in cash from operations due primarily to a decrease in inventories. At October 4, 2002, we had no borrowings outstanding under our credit facilities, compared to $2,307 at October 5, 2001. INFLATION AND CURRENCY RISK The effect of inflation on our results of operations over the past three years has been minimal. The impact of currency fluctuation on our purchase of inventory from foreign suppliers has been minimal as the transactions were denominated in U.S. dollars. We are, however, subject to currency fluctuation risk with respect to the operating results of our foreign subsidiaries and certain foreign currency denominated payables. We have entered into forward foreign exchange contracts to minimize certain transaction currency risks. We believe that our forward foreign currency contracts function as economic hedges of our cash flows and that our foreign exchange management program effectively minimizes certain transaction currency risks. RECENT ACCOUNTING PRONOUNCEMENTS SFAS 142 In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", (SFAS 142). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets acquired individually or with a group of other assets (excluding those acquired in a business combination) at acquisition. The statement also addresses financial accounting and reporting for goodwill and other intangibles subsequent to their acquisition. SFAS 142 supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets" (APB 17). We adopted SFAS 142 on January 5, 2002. In applying SFAS 142 we performed the transitional reassessment and impairment test required as of January 4, 2002 and determined that there was no impairment of goodwill. We discontinued amortizing goodwill on January 4, 2002. At January 4, 2002 and October 4, 2002, the carrying value of goodwill was $912. SFAS 143 In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations", (SFAS 143). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. SFAS 143 applies to all companies that incur legal obligations to retire tangible long-lived assets that result from the acquisition, construction, development or normal operation of a long-lived asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. We have not determined the impact of our adoption of SFAS 143 on our results of operations or financial position. SFAS 144 In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets", (SFAS 144). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets, and supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", (SFAS 121), and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", (APB 30) for the disposal of a segment of a business as previously defined in APB 30. SFAS 144 also amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements", (ARB 51) to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The provisions of SFAS 144 are to be applied to all long-lived assets, with the exception of goodwill. SFAS 144 retains the requirements of SFAS 121 to recognize an impairment loss only if the carry amount of the long-lived asset is not recoverable from its undiscounted cash flows and measure an impairment loss as the difference between the carrying amount and the fair value of the asset. SFAS 144 expands upon the criteria, beyond that previously specified in SFAS 121 to determine when a long-lived asset is held for sale and provides guidance on the accounting for long-lived assets classified as held for sale if the asset is being reclassified as held and used. We adopted SFAS 144 in the first quarter of fiscal 2002 and the adoption did not have a material impact on our earnings or on our financial position. SFAS 146 In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, "Accounting for Cost Associated with Exit or Disposal Activities", (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. We believe that the adoption of SFAS No. 146 will not have a material impact on our earnings or on our financial position. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have performed an analysis to assess the potential effect of reasonably possible near-term changes in inflation and foreign currency exchange rates. The effect of inflation on our results of operations over the past three years has been minimal. The impact of currency fluctuation on the purchase of inventory by us from foreign suppliers has been non-existent as all the transactions were denominated in U.S. dollars. However, we are subject to currency fluctuation risk with respect to the operating results of our foreign subsidiaries and certain foreign currency denominated payables. We have entered into certain forward foreign exchange contracts to minimize the transaction currency risk. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner. (b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits The Exhibits filed as part of this Quarterly Report on Form 10-Q are listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is incorporated herein by reference. b. Reports on Form 8-K Saucony did not file any Current Reports on Form 8-K during the fiscal quarter ended October 4, 2002. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Saucony, Inc. Date: November 14, 2002 By: /s/ Michael Umana - ----- ----------------- --------------------- Michael Umana Senior Vice President, Finance Chief Financial Officer (Duly authorized officer and principal financial officer) CERTIFICATIONS I, John H. Fisher, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Saucony, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 /s/ John H. Fisher - ------------------------ ------------------ Name: John H. Fisher Title: President and Chief Executive Officer I, Michael Umana, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Saucony, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 /s/ Michael Umana - ------------------------ ----------------- Name: Michael Umana Title: Senior Vice President, Finance Chief Financial Officer EXHIBIT INDEX Exhibit No. Description - ------- ----------- 10.1 Amended and Restated Credit Agreement, dated August 30, 2002, between Saucony, Inc. and State Street Bank and Trust Company. 99.1 "Certain Factors That May Affect Future Results", as set forth within "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation" of the Registrant's Annual Report on Form 10-K for the fiscal year ended January 4, 2002 filed with the Securities and Exchange Commission on April 3, 2002. 99.2 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-10 4 ex101.txt EXHIBIT 10.1 EXHIBIT 10.1 AMENDED AND RESTATED CREDIT AGREEMENT Dated as of August 30, 2002 Among SAUCONY, INC., as Borrower, THE LENDERS PARTY HERETO, as Lenders and STATE STREET BANK AND TRUST COMPANY, as Agent for the Lenders (iv) LIBC/1546305.8 TABLE OF CONTENTS Page ARTICLE 1 - DEFINITIONS AND ACCOUNTING TERMS............................1 Section 1.1. Definitions..................................1 Section 1.2. Accounting Terms............................11 ARTICLE 2 - THE REVOLVING CREDITS......................................11 Section 2.1. The Revolving Credit........................11 Section 2.2. Making of Advances..........................12 Section 2.3. Interest on Advances........................13 Section 2.4. Election of LIBOR Pricing Options...........13 Section 2.5. Additional Payments.........................14 Section 2.6. Computation of Interest, Etc................14 Section 2.7. Fees........................................14 Section 2.8. Set-Off.....................................15 Section 2.9. Sharing of Payments.........................15 Section 2.10. Increased Costs, Etc........................16 Section 2.11. Changed Circumstances.......................17 Section 2.12. Use of Proceeds.............................18 Section 2.13. Letters of Credit...........................18 ARTICLE 3 - CONDITIONS TO LOANS AND ADVANCES...........................22 Section 3.1. Conditions to First Advance.................22 Section 3.2. Conditions to All Advances..................24 ARTICLE 4 - PAYMENT AND REPAYMENT......................................25 Section 4.1. Mandatory Prepayment........................25 Section 4.2. Voluntary Prepayments.......................25 Section 4.3. Payment and Interest Cutoff.................25 Section 4.4. Payment or Other Actions on Non-Business Days.....25 Section 4.5. Method and Timing of Payments.....................26 Section 4.6. Payments Not at End of Interest Period............26 Section 4.7. Currency..........................................27 ARTICLE 5 - REPRESENTATIONS AND WARRANTIES...................................27 Section 5.1. Corporate Existence, Charter Documents, Etc.......27 Section 5.2. Principal Place of Business; Location of Records..27 Section 5.3. Qualification.....................................27 Section 5.4. Subsidiaries......................................27 Section 5.5. Corporate Power...................................27 Section 5.6. Valid and Binding Obligations.....................28 Section 5.7. Other Agreements..................................28 Section 5.8. Payment of Taxes..................................28 Section 5.9. Financial Statements..............................29 Section 5.10. Other Materials Furnished.........................29 Section 5.11. Stock .........................................29 Section 5.12. Changes in Condition..............................29 Section 5.13. Assets, Licenses, Patents, Trademarks, Etc........29 Section 5.14. Litigation........................................30 Section 5.15. Pension Plans.....................................30 Section 5.16. Outstanding Indebtedness..........................30 Section 5.17. Environmental Matters.............................31 Section 5.18. Foreign Trade Regulations.........................32 Section 5.19. Governmental Regulations..........................32 Section 5.20. Margin Stock......................................32 ARTICLE 6 - REPORTS AND INFORMATION..........................................32 Section 6.1. Quarterly Financial Statements and Reports........32 Section 6.2. Annual Financial Statements.......................33 Section 6.3. Monthly Reports...................................33 Section 6.4. Notice of Defaults................................33 Section 6.5. Additional Quarterly Reports......................33 Section 6.6. Notice of Litigation..............................33 Section 6.7. Communications with Others........................34 Section 6.8. Reportable Events.................................34 Section 6.9. Annual Pension Reports............................34 Section 6.10. Reports to other Creditors........................34 Section 6.11. Communications with Independent Public Accountants.34 Section 6.12. Environmental Reports..............................35 Section 6.13. Projections........................................35 Section 6.14. Inspection of Premises.............................35 Section 6.15. Miscellaneous......................................36 ARTICLE 7 - FINANCIAL COVENANTS...............................................36 ARTICLE 8 - AFFIRMATIVE COVENANTS.............................................36 Section 8.1. Existence and Business.............................36 Section 8.2. Taxes and Other Obligations........................36 Section 8.3. Maintenance of Properties and Leases...............36 Section 8.4. Insurance..........................................37 Section 8.5. Records, Accounts and Places of Business...........37 Section 8.6. Maintenance of Accounts............................37 Section 8.7. Consolidated Pre-Tax Net Income....................37 Section 8.8. Dissolution........................................37 ARTICLE 9 - NEGATIVE COVENANTS................................................37 Section 9.1. Restrictions on Indebtedness.......................38 Section 9.2. Restriction on Liens...............................38 Section 9.3. Investments........................................39 Section 9.4. Dispositions of Assets.............................40 Section 9.5. Assumptions, Guaranties, Etc. of Indebtedness of Other Persons......................................40 Section 9.6. Mergers, Etc.......................................40 Section 9.7. ERISA..............................................40 Section 9.8. Distributions......................................41 Section 9.9. Sale and Leaseback.................................41 Section 9.10. Transactions with Affiliates.......................41 Section 9.11. Creation of Subsidiaries...........................41 Section 9.12. Voluntary Payment..................................41 Section 9.13. Hyde International Services, Ltd. and Saucony SP Pty, Ltd...........................................41 ARTICLE 10 - EVENTS OF DEFAULT AND REMEDIES...................................41 Section 10.1. Events of Default..................................41 Section 10.2. Remedies 43 Section 10.3. Distribution of Proceeds...........................43 ARTICLE 11 - CONSENTS; AMENDMENTS; WAIVERS; REMEDIES..........................44 Section 11.1. Actions by Lenders.................................44 Section 11.2. Actions by Borrower................................45 ARTICLE 12 - SUCCESSORS AND ASSIGNS...........................................45 Section 12.1. General 45 Section 12.2. Assignments........................................45 Section 12.3. Participations.....................................46 ARTICLE 13 - THE AGENT........................................................47 Section 13.1. Authorization and Action...........................47 Section 13.2. Agent's Reliance, Etc..............................48 Section 13.3. Agent as a Lender..................................48 Section 13.4. Lender Credit Decision.............................48 Section 13.5. Indemnification of Agent...........................48 Section 13.6. Successor Agent....................................49 Section 13.7. Amendment of Article 13............................49 ARTICLE 14 - MISCELLANEOUS....................................................49 Section 14.1. Notices 49 Section 14.2. Merger ..........................................50 Section 14.3. Governing Law; Consent to Jurisdiction.............50 Section 14.4. Counterparts.......................................50 Section 14.5. Expenses and Indemnification.......................51 Section 14.6. Confidentiality....................................52 Section 14.7. WAIVER OF JURY TRIAL...............................52 LIST OF EXHIBITS AND SCHEDULES Exhibit A Form of Revolving Credit Note Exhibit B Form of Notice of Borrowing Exhibit C Form of Certificate of Permitted Acquisition Exhibit D Form of Compliance Certificate Exhibit E Form of LIBOR Pricing Notice Exhibit F Form of Opinion of Borrower's Counsel Exhibit G Form of Opinion of Domestic Guarantors' Counsel Exhibit H Form of Assignment and Acceptance Agreement Exhibit I Form of Letter of Credit Request Exhibit J Form of Borrowing Base Certificate Schedule 1 Schedule of Commitment Percentages Schedule 5.2 Schedule of Locations Schedule 5.4 Schedule of Subsidiaries Schedule 5.7 Schedule of Agreements Schedule 5.8 Schedule of Unaudited Tax Returns Schedule 5.9 Schedule of Financial Statements Schedule 5.11 Schedule of Issued and Outstanding Stock Schedule 5.13 Schedule of Licenses, Patents, Copyrights and Trademarks Schedule 5.15 Schedule of Pension Plans Schedule 5.16 Schedule of Indebtedness, Liens, Charges and Encumbrances Schedule 5.17 Environmental Matters Schedule 8.4 Schedule of Insurance 55 LIBC/1546305.8 LIBC/1546305.8 AMENDED AND RESTATED CREDIT AGREEMENT This AMENDED AND RESTATED CREDIT AGREEMENT is entered into as of August 30, 2002 by and among SAUCONY, INC. ("Borrower"), a Massachusetts corporation, the lenders from time to time party hereto, and STATE STREET BANK AND TRUST COMPANY (the "Agent"), as agent for the lenders from time to time party hereto. RECITALS WHEREAS, pursuant to a Revolving Credit Agreement dated as of August 31, 1998 (the "Original Credit Agreement") between the Borrower and the Agent, the Agent, as lender, made loans to the Borrower for the purposes described therein;......... WHEREAS, the Borrower has requested to amend and restate the Original Credit Agreement. WHEREAS, on the basis of the terms and conditions specified in this Agreement, the Agent and the Lenders are willing to amend and restate the Original Credit Agreement and make the loan arrangements described herein. NOW, THEREFORE, the Borrower, the Lenders and the Agent hereby agree that the Original Credit Agreement is hereby amended and restated in its entirety and shall remain in full force and effect only as expressly set forth herein. ARTICLE 1 - DEFINITIONS AND ACCOUNTING TERMS Section 1.1. Definitions. In addition to the terms defined elsewhere in this Agreement, unless otherwise specifically provided herein, the following terms shall have the following meanings for all purposes when used in this Agreement, and, unless otherwise specified therein, when used in any note, agreement, certificate, report or other document made or delivered in connection with this Agreement: "Advance or Advances" shall mean any loan or advance, including Letter of Credit Outstandings, from any Lender to the Borrower under the Revolving Credit Facility pursuant to Section 2.1 of this Agreement. "Additional Guarantor" shall have the meaning set forth in Section 9.11 hereof. "Affiliate" shall mean (a) any director or officer of the Borrower and (b) any Person that controls, is controlled by or is under common control with the Borrower. For purposes of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise. "Agent" shall mean State Street Bank and Trust Company, in its capacity as agent for the Lenders, and its successors in that capacity. "Agreement" shall mean this Amended and Restated Credit Agreement, as amended or supplemented from time to time. References to Articles, Sections, Exhibits, Schedules and the like refer to the Articles, Sections, Exhibits, Schedules and the like of this Agreement unless otherwise indicated, as amended and supplemented from time to time. "Applicable Prime Rate" shall mean the Prime Rate as is in effect from time to time less the Prime Rate Margin. "Applicable LIBOR Rate" shall mean the sum of (i) the LIBOR Rate plus (ii) the LIBOR Rate Margin. "Assignment and Acceptance Agreement" shall have the meaning set forth in Section 12.2(a) hereof. "Borrower" shall mean Saucony, Inc., a Massachusetts corporation. "Borrowing Base Certificate" shall mean a certificate in the form of Exhibit J hereto and executed by the chief executive officer or chief financial officer of the Borrower. "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day other than a Saturday, Sunday or legal holiday on which banks in Boston, Massachusetts are open for the conduct of a substantial part of their commercial banking business, and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, LIBOR Rate Loans any day that is a Business Day described in clause (i) and that is also a day for trading by and between banks in U.S. Dollar deposits in the London interbank Eurodollar market. "Capitalized Lease" shall mean any lease which is or should be capitalized on the balance sheet of the lessee in accordance with generally accepted accounting principles and Statement of Financial Accounting Standards No. 13. "Capitalized Lease Obligations" shall mean the amount of the liability reflecting the aggregate discounted amount of future payments under all Capitalized Leases calculated in accordance with generally accepted accounting principles and Statement of Financial Accounting Standards No. 13. "Closing Date" shall mean the date on which all of the conditions set forth in Section 3.1 have been satisfied. "Commitment Amount" shall mean each Lender's Commitment Percentage multiplied by the Maximum Credit Amount. "Commitment Percentage" shall mean as to each Lender its percentage interest in the Maximum Credit Amount as set forth on Schedule 1 hereto. "Compliance Certificate" shall mean a certificate in the form of Exhibit D hereto and executed by the chief executive officer or chief financial officer of the Borrower. "Consolidated" and "Consolidating," and "consolidated" and "consolidating" when used with reference to any term, mean that term (or the terms "combined" and "combining", as the case may be, in the case of partnerships, joint ventures and Affiliates that are not Subsidiaries) as applied to the accounts of the Borrower (or other specified Person) and all of its Subsidiaries (or other specified Persons), or such of its Subsidiaries as may be specified, consolidated (or combined) in accordance with generally accepted accounting principles and with appropriate deductions for minority interests in Subsidiaries, as required by generally accepted accounting principles. "Consolidated Current Liabilities" shall mean, at any date as of which the amount thereof shall be determined, all liabilities of the Borrower and its Subsidiaries which should properly be classified as current in accordance with generally accepted accounting principles consistently applied, including, without limitation, all fixed prepayments of, and sinking fund payments with respect to, Indebtedness and all estimated taxes of the Borrower and its Subsidiaries required to be made within one year from the date of determination, including all Indebtedness of the Borrower hereunder required to be paid within one year from the date of determination. "Consolidated Pre-Tax Net Income" shall mean the net income (or deficit) from operations of the Borrower and its Subsidiaries, before taxes, determined in accordance with generally accepted accounting principles consistently applied. "Credit Termination Date" shall mean August __, 2004. "Credit Participants" shall have the meaning set forth in Section 12.3 hereof. "Default" shall mean an Event of Default or an event or condition which with the passage of time or giving of notice, or both, would become such an Event of Default. "Default Rate" shall mean the interest rate otherwise in effect plus four percent (4%) effective immediately in the event of an Event of Default. "Distribution" shall mean as to any Person: (a) the declaration or payment of any dividend on or in respect of any shares of any class of capital stock of such Person, other than dividends payable solely in shares of common stock of such Person, (b) the purchase, redemption, or other acquisition or retirement of any shares of any class of capital stock of such Person directly or indirectly, (c) any other distribution on or in respect of any shares of any class of capital stock of such Person, (d) any setting apart or allocating any sum for the payment of any dividend or distribution, or for the purchase, redemption or retirement of any shares of capital stock of such Person and (e) any payment of, principal of, interest on, or fees or any other amounts with respect to Subordinated Indebtedness. "Eligible Assignee" shall mean any entity which has a Fitch IBCA long-term rating of not less than BBB+ and is (i) a commercial bank or finance company organized under the laws of the United States, or any State thereof or the District of Columbia, (ii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, provided that such bank is acting through a branch or agency located in the United States, or (iii) the central bank of any country which is a member of the OECD. "Eligible Receivables" shall mean and include, each Receivable of Borrower arising in the ordinary course of Borrower's business and which Agent, in its sole credit judgment, shall deem to be an Eligible Receivable, based on such considerations as Agent may from time to time deem appropriate. A Receivable shall not be deemed eligible unless such Receivable is not subject to any lien or encumbrance (other than liens in favor of the Agent for the benefit of the Lenders), and is evidenced by an invoice or other documentary evidence satisfactory to Agent. In addition, no Receivable shall be an Eligible Receivable if: (a) it arises out of a sale made by any Borrower to an Affiliate of the Borrower or to a Person controlled by an Affiliate of the Borrower; (b) it is due or unpaid more than sixty-one (61) days after the original due date; (c) seventy-five percent (75%) or more of the Receivables from such Customer are not deemed Eligible Receivables hereunder. Such percentage may, in Agent's sole discretion, be increased or decreased from time to time; (d) any covenant, representation or warranty contained in this Agreement or any other Lender Agreement with respect to such Receivable has been breached; (e) the Customer shall (i) apply for, suffer, or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property or call a meeting of its creditors, (ii) admit in writing its inability, or be generally unable, to pay its debts as they become due or cease operations of its present business or related businesses, (iii) make a general assignment for the benefit of creditors, (iv) commence a voluntary case under any state or federal bankruptcy laws (as now or hereafter in effect), (v) be adjudicated a bankrupt or insolvent, (vi) file a petition seeking to take advantage of any other law providing for the relief of debtors, (vii) acquiesce to, or fail to have dismissed any petition which is filed against it in any involuntary case under such bankruptcy laws, or (viii) take any action for the purpose of effecting any of the foregoing; (f) the sale is to a Customer outside the continental United States of America, unless the sale is on letter of credit, guaranty or acceptance terms, in each case acceptable to Agent in its sole discretion; (g) the sale to the Customer is on a bill-and-hold, guaranteed sale, sale-and-return, sale on approval, consignment or any other similar repurchase or return basis or is evidenced by chattel paper; (h) Agent believes, in its sole judgment, that collection of such Receivable is insecure or that such Receivable may not be paid by reason of the Customer's financial inability to pay; (i) Such Receivables are from any Customer which is the United States of America, any state within the United States of America or any department, agency or instrumentality of any of them (collectively, the "Government Customers"), where the aggregate of otherwise Eligible Receivables from all such Government Customers is greater than ten percent (10%) of all Eligible Receivables (including such otherwise Eligible Receivables from such Government Customers) at any one time, but only to the extent in excess of ten percent (10%) of such Receivables, unless Borrower assigns its right to payment of such Receivables to Agent pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C. Sub-Section 3727 et seq. and 41 U.S.C. Sub-Section 15 et seq.) or has otherwise complied with other applicable statutes or ordinances; (j) the goods giving rise to such Receivable have not been shipped to the Customer or the services giving rise to such Receivable have not been performed by Borrower or the Receivable otherwise does not represent a final sale; (k) if the Receivable is owing from a Customer that is also a creditor or supplier of the Borrower, the portion of such Receivable equal to the amount of any offset, deduction, defense, dispute, or counterclaim, or the Receivable is contingent in any respect or for any reason; (l) the Borrower has made any agreement with any Customer for any deduction therefrom, except for discounts or allowances made in the ordinary course of business for prompt payment, all of which discounts or allowances are (i) cooperative advertising discounts not reflected on the face value of each respective invoice or (ii) discounts and allowances reflected in the calculation of the face value of each respective invoice related thereto; (m) any return, rejection or repossession of the merchandise has occurred or the rendition of services has been disputed, but only to the extent of such return, rejection or repossession or disputed amount; (n) such Receivable is not payable to Borrower; (o) all Receivables from any Customer where the aggregate of otherwise Eligible Receivables from such Customer is greater than twenty percent (20%) of all Eligible Receivables (including such otherwise Eligible Receivables from such Customer) at any one time, but only to the extent in excess of twenty percent (20%) of such Receivables; (p) such Receivable originates from Hind and Spot-Bilt accounts/customers; or (q) such Receivable is not otherwise satisfactory to Agent as determined in good faith by Agent in the exercise of its discretion in a reasonable manner. "Eligible Finished Goods Inventory" means inventory consisting of finished products owned by the Borrower held for the purpose of sale by the Borrower in the ordinary course of business, valued on a first in, first out basis and located at the domestic facilities of the Borrower, excluding samples, international inventory, in-transit inventory and retail or consigned inventory. "Environmental Law" means any applicable judgment, decree, order, law, license, rule or regulation pertaining to environmental matters, or any federal, state, county or local statute, regulation, ordinance, order or decree relating to public health, welfare, the environment, or to the storage, handling, use or generation of hazardous substances in or at the workplace, worker health or safety, whether now existing or hereafter enacted. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "Event of Default" shall have the meaning set forth in Section 10.1 hereof. "Facility Fee" shall have the meaning set forth in Section 2.7(a) hereof. "Generally accepted accounting principles" shall mean generally accepted accounting principles as defined by controlling pronouncements of the Financial Accounting Standards Board, as from time to time supplemented and amended. "Guarantor" and "Guarantors" shall mean (a) Saucony UK, Inc., (b) Saucony Sports BV, (c) Saucony Factory Outlet Stores of Florida, Inc., (d) Saucony Deutschland Vcrtribs GmbH, (e) Hyde, Inc., (f) Saucony Asia Pacific, Ltd. and (g) any other entity that guaranties all of the Lender Obligations. "Guaranty Agreements" shall mean collectively the Guaranty (Unlimited) from each Guarantor in favor of Agent and the Lenders dated as of even date herewith, in form and substance satisfactory to Agent and the Lenders. "Guaranty" or "Guarantee" or "Guaranties" shall include any arrangement whereby a Person is or becomes liable in respect of any Indebtedness or other obligation of another and any other arrangement whereby credit is extended to another obligor on the basis of any promise of a guarantor, whether that promise is expressed in terms of an obligation to pay the Indebtedness of such obligor, or to purchase or lease assets under circumstances that would enable such obligor to discharge one or more of its obligations, or to maintain the capital, the working capital, solvency or general financial condition of such obligor, whether or not such arrangement is listed in the balance sheet of the guarantor or referred to in a footnote thereto. "Indebtedness" shall mean, as to any Person, all obligations, contingent and otherwise, which in accordance with generally accepted accounting principles consistently applied should be classified upon such Person's balance sheet as liabilities, but in any event including liabilities secured by any mortgage, pledge, security interest, lien, charge or other encumbrance existing on property owned or acquired by such Person whether or not the liability secured thereby shall have been assumed, letters of credit open for account, obligations under acceptance facilities, Capitalized Lease Obligations and all obligations on account of Guaranties, endorsements and any other contingent obligations in respect of the Indebtedness of others whether or not reflected on such balance sheet or in a footnote thereto. "Interest Period" shall mean with respect to each LIBOR Rate Loan, the period commencing on the date of such LIBOR Rate Loan and ending one, two, three, four or six months or one year (if available) thereafter, as the Borrower may request as provided in Section 2.4 hereof, provided, that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (c) below) that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day; (b) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Business Day of a calendar month; (c) any Interest Period in connection with an Advance that would otherwise end after the Credit Termination Date shall end on the Credit Termination Date; and (d) notwithstanding clause (c) above, no Interest Period shall have a duration of less than one month, and if any Interest Period applicable to any LIBOR Rate Loan would be for a shorter period, such Interest Period shall not be available hereunder. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986 as amended from time to time. "Investment" shall mean (a) any stock, evidence of Indebtedness or other security of another Person, (b) any loan, advance, contribution to capital, extension of credit (except for current trade and customer accounts receivable for inventory sold or services rendered in the ordinary course of business and payable in accordance with customary trade terms) to another Person, and (c) any purchase of (i) stock or other securities of another Person or (ii) any business or undertaking of another Person (whether by purchase of assets or securities), any commitment or option to make any such purchase if, in the case of an option, the aggregate consideration paid for such option was in excess of $100, or (d) any other investment, in all cases whether existing on the date of this Agreement or thereafter made. "Issuing Lender" shall mean a Lender issuing to Borrower a letter of credit pursuant to Section 2.14 hereof. "L/C Supportable Obligations" shall have the meaning set forth in Section 2.14 hereof. "Lender Agreements" shall mean this Agreement, the LMCS Agreement, the Notes, the Guaranty Agreements, the Open Account Trader Agreement and any other present or future agreement from time to time entered into between the Borrower or any Subsidiary and the Agent or the Lenders, each as from time to time amended or supplemented, and all statements, reports and certificates delivered by the Borrower to the Agent or the Lenders in connection therewith. "Lender Obligations" shall mean all present and future obligations and Indebtedness of the Borrower or any Subsidiary owing to the Agent or the Lenders under this Agreement or any other Lender Agreement, including, without limitation, the obligations to pay the Indebtedness from time to time evidenced by the Notes, and obligations to pay interest, commitment fees, balance deficiency fees, charges, expenses and indemnification from time to time owed under any Lender Agreement. "Lenders" shall mean (i) initially, each Lender listed on the signature pages hereof, (ii) any other Person who becomes a Successor Lender hereunder in accordance with the terms of Section 12.2 hereof, and (iii) their respective successors and their assigns. "Letter of Credit Limit" shall mean $5,000,000. "Letter of Credit Outstandings" shall mean, at any time, the sum of, without duplication, (i) the aggregate Stated Amount of all Letter of Credit Outstandings and (ii) the aggregate amount of all Unpaid Drawings in respect of all Letters of Credit. "Letter of Credit Request" shall mean a request by Borrower to an Issuing Lender substantially in the form of Exhibit H hereto. "LIBOR Pricing Option" shall mean the option granted to the Borrower pursuant to Section 2.4 hereof to have interest on all or a portion of the Loans computed on the basis of the Applicable LIBOR Rate for an applicable Interest Period. "LIBOR Rate" shall mean for any Interest Period for any LIBOR Rate Loan, the quotient of (i) the rate of interest determined by the Agent, at about 10:00 a.m. (Boston time) on the LIBOR Rate Fixing Day as being the rate at which deposits in U.S. dollars are offered to it by first-class banks in the London interbank market for deposit for such Interest Period in amounts comparable to the aggregate principal amount of LIBOR Rate Loans to which such Interest Period relates, divided by (ii) the difference between one (1) minus the Reserve Requirement (expressed as a decimal) applicable to that Interest Period. The LIBOR Rate shall be adjusted automatically as of the effective date of any change in the Reserve Requirement. "LIBOR Rate Fixing Day" shall mean, in the case of any LIBOR Rate Loan, the second Business Day preceding the Business Day on which an Interest Period begins. "LIBOR Rate Loan" shall mean any Loan hereunder upon which interest will accrue on the basis of a formula including as a component thereof the LIBOR Rate. The expiration date of any LIBOR Rate Loan shall be the last day of the Interest Period applicable to such LIBOR Rate Loan. "LIBOR Rate Margin" shall mean a rate per annum equal to one and one half percent (1 1/2%). "LMCSAgreement" shall mean an agreement entered into between the Agent and the Borrower governing the cash management of the Borrower on terms satisfactory to the Agent and Borrower. "Loan" shall mean all or a portion of the Advances outstanding hereunder or made to the Borrower by the Lenders pursuant to Article 2 of this Agreement, and "Loans" means all of such loans, collectively. "Material Adverse Effect" shall mean a material adverse effect on the business, properties, prospects, assets or condition, financial or otherwise, of the Borrower and its Subsidiaries on a consolidated basis. "Maximum Credit Amount" shall mean as of any date of determination, the lesser of (a) $15,000,000 or (b) the amount to which the Maximum Credit Amount may have been reduced pursuant to Section 2.1(c) hereof; provided that if the obligations of the Lenders to make further Advances is terminated upon the occurrence of a Default, the Maximum Credit Amount as of any date of determination thereafter shall be deemed to be $0. "2001Financial Statements" shall mean the audited financial statements of the Borrower and its Subsidiaries as of January 4, 2002. "Noteor Notes" shall mean the Note or Notes issued by the Borrower to each Lender in accordance with the provisions of Section 2.1(a) hereof. "Notice of Borrowing" shall have the meaning set forth in Section 2.2(a). "OpenAccount Trader Agreement" means the documentary purchase order agreement dated on or about the date hereof between State Street Bank and Trust Company and the Borrower. "Pension Plan" shall mean an employee benefit plan or other plan maintained for the employees of the Borrower or any Subsidiary as described in Section 4021(a) of ERISA. "Permitted Acquisition Advance or Advances" shall mean any loan or advance from any Lender to the Borrower for Permitted Acquisitions. "Permitted Acquisitions" shall mean the acquisition of all or substantially all of the assets, shares, partnership or other ownership interests of a Person by the Borrower, provided that (a) any such Person must be in a substantially similar or related line of business as the Borrower, (b) the ratio of total consideration paid for such property to the fair market value of such property must be comparable to recent industry transactions, (c) immediately subsequent to the acquisition, the Borrower must be in compliance with all terms of the Lender Agreements, (d) the aggregate purchase price of all Permitted Acquisitions shall not exceed $5,000,000, (e) the Borrower shall not assume any Indebtedness in connection with such acquisition other than Capitalized Leases of such Person entered into prior to the date of acquisition, and (f) the Person to be acquired shall be free from all liens and encumbrances as of the date of such acquisition other than liens permitted under Section 9.2(b) hereof. "Person" shall mean an individual, corporation, partnership, joint venture, association, estate, joint stock company, trust, organization, business, or a government or agency or political subdivision thereof. "Pricing Notice" shall have the meaning set forth in Section 2.4 hereof. "Prime Rate" shall mean the greater of (i) the rate of interest announced from time to time by the Agent at its head office located at 225 Franklin Street, Boston, Massachusetts as its "Prime Rate" and (ii) the Federal Funds Effective Rate plus 1/2 of 1% per annum (rounded upwards, if necessary, to the next 1/8 of 1%). "Prime Rate Loan" shall mean any Advance on the Loan bearing interest at a fluctuating rate determined by reference to the Applicable Prime Rate. "Prime Rate Margin" shall mean a rate per annum equal to one percent (1%). "Receivable" shall have the meaning set forth in Article 9 of the UCC. "Reportable Event" shall mean an event reportable to the Pension Benefit Guaranty Corporation under Section 4043 of Title IV of ERISA. "Required Lenders" shall mean, at any time, the Lenders having made not less than 66.7% of the outstanding principal amount of the Loans and the unused Commitment Amounts of the Lenders hereunder. "Reserve Requirement" shall mean the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on the Lenders against "Euro-currency Liabilities" as defined in said Regulation D. "Revolving Credit Facility" shall have the meaning set forth in Section 2.1. "Solvent" shall mean, as to any Person, such Person (i) owns property whose fair saleable value is greater than the amount required to pay all of such Person's Indebtedness (including contingent debts, which will be computed at the amount which, 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) and (iii) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage. "Stated Amount" of each Letter of Credit shall mean the maximum available to be drawn thereunder (regardless of whether any conditions for drawing could then be met). "Subordinated Indebtedness" shall mean Indebtedness of the Borrower which is subordinated to (i) the Indebtedness of the Borrower hereunder, (ii) the Notes and (iii) to all other Lender Obligations, on terms and conditions approved in writing by the Agent. "Subsidiary" shall mean any Person of which the Borrower or other specified parent shall now or hereafter at the time own, directly or indirectly through one or more Subsidiaries or otherwise, sufficient voting stock (or other beneficial interest) to entitle it to elect at least a majority of the board of directors or trustees or similar managing body. "Subsidiary Guarantor" shall mean any Subsidiary that is also a Guarantor. "UCC"shall mean the Massachusetts Uniform Commercial Code, Massachusetts General Laws c. 106, as amended from time to time. "Unpaid Drawings" shall have the meaning set forth in Section 2.14(d). Section 1.2. Accounting Terms. All accounting terms used and not defined in this Agreement shall be construed in accordance with generally accepted accounting principles consistently applied, and all financial data required to be delivered hereunder shall be prepared in accordance with such principles. ARTICLE 2 - THE REVOLVING CREDITS Section 2.1. The Revolving Credit. (a) Subject to the terms and conditions of this Agreement and so long as there exists no Default, at any time prior to the Credit Termination Date, each Lender, severally and not jointly, shall make such Advances to the Borrower as the Borrower may from time to time request, by notice to the Agent in accordance with Section 2.2(a), in an aggregate amount (i) if all outstanding Advances (excluding Letter of Credit Outstandings) is less than $1,500,000, (A) as to each Lender, not to exceed at any time such Lender's Commitment Percentage of the Maximum Credit Amount, and (B) as to all Lenders, not to exceed the Maximum Credit Amount or (ii) if all outstanding Advances (excluding Letter of Credit Outstandings) equal or exceed $1,500,000, (A) as to each Lender, not to exceed at any time such Lender's Commitment Percentage of the lesser of (1) the Maximum Credit Amount and (2) 65% of Eligible Receivables, plus 20% of Eligible Finished Goods Inventory and (B) as to all Lenders, not to exceed the lesser of (1) the Maximum Credit Amount, and (2) 65% of Eligible Receivables plus 20% of Eligible Finished Goods Inventory (the "Revolving Credit Facility"). The outstanding principal amount of the Advances, together with all accrued interest and other fees and charges related thereto, shall be repaid in full on the Credit Termination Date. On the Closing Date the Borrower shall execute and deliver to each Lender a Note to evidence the Advances from time to time made by such Lender to the Borrower hereunder. Upon receipt of an affidavit of an officer of any Lender as to the loss, theft, destruction or mutilation of a Note and, in the case of any such loss, theft, destruction or mutilation, upon execution by such Lender and the Borrower of an agreement upon terms reasonably satisfactory to such Lender and the Borrower indemnifying the Borrower against any loss incurred by the Borrower in connection with such loss, theft, destruction or mutilation and upon cancellation of such Note, Borrower will issue, in lieu thereof, a replacement Note in the same principal amount thereof and otherwise of like tenor. (b) Subject to the foregoing limitations and the provisions of Section 4.2, the Borrower shall have the right to make prepayments reducing the outstanding balance of Advances and to request further Advances, all in accordance with Section 2.2, without other restrictions hereunder; provided that the Lenders shall have the absolute right to refuse to make any Advances for so long as there exists any Default or any other condition which would constitute a Default upon the making of such an Advance. (c) The Borrower may at any time and from time to time, upon not less than ten (10) Business Days' written notice to the Agent, elect to permanently reduce the Maximum Credit Amount without premium or penalty in whole or in part, provided that any partial reductions shall be in a minimum amount of $500,000 and in integral multiples thereof, and provided, further, that any amounts so terminated may not be reinstated. In connection with any such reduction, the Borrower shall pay to the Agent, for the ratable accounts of the Lenders, the principal amount of any outstanding Advances to the extent required to reduce the aggregate outstanding principal balance thereof to no more than (i) the Maximum Credit Amount as so reduced, if all outstanding Advances (excluding Letter of Credit Outstandings) are less than $1,500,000 or (ii) the lesser of (a) the Maximum Credit Amount as so reduced and (b) 65% of Eligible Receivables plus 20% of Eligible Finished Goods Inventory, if all outstanding Advances (excluding Letter of Credit Outstandings) equal or exceed $1,500,000, together with all accrued but unpaid interest on such prepaid amounts to the date of prepayment, and all other amounts payable with respect to such prepaid amounts, if any. Section 2.2. Making of Advances. (a) Except as otherwise provided for in the LMCS Agreement, each Advance other than a Letter of Credit Request which shall be submitted in accordance with the provisions of Section 2.14 hereof, shall be made on notice given by the Borrower to the Agent not later than 12:00 noon (Boston time) one Business Day prior to the date of the proposed Borrowing (a "Notice of Borrowing") substantially in the form of Exhibit B hereto; provided, however, that (i) if the Borrower elects a LIBOR Rate Pricing Option with respect to any Advance in accordance with Section 2.4 hereof, such Notice of Borrowing shall be given by the Borrower contemporaneously with a Pricing Notice in the manner and within the time specified in Section 2.4, and (ii) if such Advance is a Permitted Acquisition Advance, such Notice of Borrowing shall be given by the Borrower contemporaneously with a Certificate of Permitted Acquisition substantially in the form of Exhibit C hereto. The Agent shall give the Lenders notice of each Notice of Borrowing in accordance with the Agent's customary practice. Each such Notice of Borrowing shall be by telephone or telecopy, in each case confirmed immediately in writing by the Borrower in substantially the form of Exhibit B hereto, specifying therein (i) the requested date of such Advance, and (ii) the amount of such Advance (which must be a minimum of $50,000). The Borrower agrees to indemnify and hold the Lenders harmless for any action, including the making of any Advances hereunder, or loss or expense, taken or incurred by the Agent and the Lenders in good faith reliance upon such telephone request. At the time of the initial request for an Advance made under this Section 2.2(a), the Borrower shall have provided the Agent with a Compliance Certificate. The Borrower hereby agrees (i) that the Lenders shall be entitled to rely upon the Compliance Certificate most recently delivered to the Agent until it is superseded by a more recent Compliance Certificate, and (ii) that each request for an Advance, whether by telephone or in writing or otherwise, shall constitute a confirmation of the representations and warranties (except as to representations and warranties made as of a certain date, which shall be true and correct only as of such date) contained in the most recent Compliance Certificate then in the Agent's possession. (b) Subject to the terms and conditions of this Agreement, each Lender shall make available on or before 2:00 p.m. on the date of each proposed Advance, to the Agent at the Agent's address and in immediately available funds, such Lender's Commitment Percentage of such Advance. After the Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article 3, the Agent will credit such funds to the Borrower's account on the date of the proposed Advance. (c) Unless the Agent shall have received notice from a Lender prior to the date of any Advance that such Lender will not make available to the Agent such Lender's Commitment Percentage of such Advance, the Agent may assume that such Lender has made such amount available to the Agent on the date of such Advance in accordance with and as provided in this Section 2.2 and the Agent may, in reliance upon such assumption, make available on such date a corresponding amount to the Borrower. If and to the extent such Lender shall not have so made its Commitment Percentage of such Advance available to the Agent and the Agent shall have made available such corresponding amount to the Borrower, such Lender agrees to pay to the Agent forthwith on demand, and the Borrower agrees to repay to the Agent within two Business Days after demand (but only after demand for payment has first been made to such Lender and such Lender has failed to make such payment), an amount equal to such corresponding amount together with interest thereon for each day from the date the Agent shall make such amount available to the Borrower until the date such amount is paid or repaid to the Agent, at an interest rate equal to the interest rate applicable at the time to such Advances. If such Lender shall pay to the Agent such corresponding amount, such amount so paid shall constitute such Lender's Advance for purposes of this Agreement. If the Borrower makes a repayment required by the foregoing provisions of this Section 2.2(c) and thereafter the applicable Lender or Lenders make the payments to the Agent required by this Section 2.2(c), the Agent shall promptly refund the amount of the Borrower's payment. (d) The failure of any Lender to make the Advance to be made by it on any date shall not relieve any other Lender of its obligation, if any, hereunder to make its Advance on such date, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender. Section 2.3. Interest on Advances. (a) Subject to the terms of Section 2.4 relating to LIBOR Pricing Options, the Borrower shall pay interest on the unpaid balance of the Advances from time to time outstanding at a per annum rate equal to the Applicable Prime Rate. Interest on the Advances shall be payable monthly in arrears on the first day of the month commencing September 1, 2002, and continuing until all of the Indebtedness of the Borrower to the Lenders under the Notes shall have been paid in full. Section 2.4. Election of LIBOR Pricing Options. (a) Subject to all the terms and conditions hereof and so long as there exists no Default, the Borrower may, by delivering a pricing notice (the "Pricing Notice") to the Agent received at or before 10:00 a.m. Boston time on the date two Business Days prior to the commencement of the Interest Period selected in such Pricing Notice, elect to have all or a portion of the outstanding Advances, as the Borrower may specify in such Pricing Notice, accrue and bear daily interest during the Interest Period so selected at a per annum rate equal to the Applicable LIBOR Rate for such Interest Period; provided, however, that any such election made with respect to the Advances shall be in an amount not less than $500,000 and in increments of $500,000; and provided further that no such election will be made if it would result in there being more than four (4) LIBOR Pricing Options in the aggregate outstanding at any one time. Interest on Loans bearing interest at the Applicable LIBOR Rate shall be paid for the applicable Interest Period on the last day thereof and when such Loan is due (whether at maturity, by reason of acceleration or otherwise). (b) Each Pricing Notice shall be substantially in the form of Exhibit E attached hereto and shall specify: (i) the selection of a LIBOR Pricing Option; (ii) the effective date and amount of Advances or a portion thereof subject to such LIBOR Pricing Option, subject to the limitations set forth herein; and (iii) the duration of the applicable Interest Period. Each Pricing Notice shall be irrevocable. (c) The Agent will promptly inform each Lender of a Pricing Notice and the Interest Period specified by the Borrower therein. Upon determination by the Agent of the Applicable LIBOR Rate for any Interest Period selected by the Borrower, the Agent will promptly inform the Borrower and each Lender of such Applicable LIBOR Rate so determined or, if applicable, the reason why the Borrower's election will not become effective. Section 2.5. Additional Payments. (a) During the continuance of any Default, the Borrower shall, on demand, pay to the Agent for the account of the Lenders interest on the unpaid principal balance of the Advances and, to the extent permitted by law, on any overdue installments of interest, at a rate per annum equal to the lesser of (i) the stated interest rate(s) applicable thereto plus 4% per annum, and (ii) the maximum rate of interest permitted to be charged under applicable law. (b) In addition to any amounts payable under Section 2.5(a) above, if any payment of principal or interest due hereunder is not made within the later of (i) ten (10) days of its due date and (ii) five (5) days after notice thereof has been given to the Borrower by the Agent, the Borrower will pay to the Agent, for the ratable account of the Lenders, a late payment charge equal to 5% of the amount of such payment; provided, however, that the provisions of this Section 2.5(b) shall not limit the Agent's and the Lenders' rights to exercise any of their rights or remedies, including those provided in Section 10.2, if an Event of Default has occurred. Section 2.6. Computation of Interest, Etc. Interest hereunder and under the Advances shall be computed on the basis of a 360-day year for the number of days actually elapsed. Any increase or decrease in the interest rate on the Advances resulting from a change in the Prime Rate shall be effective immediately from the date of such change. No interest payment or interest rate charged hereunder shall exceed the maximum rate authorized from time to time by applicable law. The outstanding balance of the Notes as reflected on the Agent's records from time to time shall be considered correct and binding on the Borrower and the Lenders (absent manifest error) unless within thirty (30) days after receipt of any notice by the Agent or any Lender of such outstanding amount, the Borrower or a Lender notifies the Agent to the contrary. Section 2.7. Fees. (a) The Borrower shall pay to the Agent, for the accounts of the Lenders in accordance with their respective Commitment Percentages, a facility fee (the "Facility Fee") computed at a rate of one quarter percent (1/4%) per annum on the average daily unused amount of the Maximum Credit Amount from time to time in effect from the date hereof to and including the Credit Termination Date. The Facility Fee shall be payable quarterly in arrears on the first day of each of the quarter, e.g. July 1, October 1, January 1 and April 1, commencing October 1, 2002. (b) The Borrower agrees to pay in connection with each documentary Letter of Credit issued hereto to the Agent (i) on behalf of each Lender, pro rata in accordance with each Lender's Commitment Percentage, a negotiation fee of the greater of (A) $60 or (B) 1/8% of the face amount of each drawing thereunder and (ii) on behalf of the Issuing Lender all customary fees and out of pocket expenses incurred by the Issuing Lender in issuing, amending, processing or enforcing such Letter of Credit, including telex and courier charges. As of the date hereof, the Agent's issuance and amendment fees with respect to documentary Letters of Credit are $30. (c) The Borrower agrees to pay in connection with each Stand-by Letter of Credit issued hereto to the Agent (i) on behalf of each Lender, pro rata in accordance with each Lender's Commitment Percentage, the then applicable LIBOR Rate Margin and (ii) on behalf of the Issuing Lender all customary fees and out of pocket expenses incurred by the Issuing Lender in issuing, amending, processing or enforcing such Stand-by Letter of Credit, including telex and courier charges. As of the date hereof, the Agent's issuance fee with respect to Standby Letters of credit is $250. Section 2.8. Set-Off. Notwithstanding the right to set-off under Section 10.2 and to the extent not prohibited by applicable law, the Borrower hereby authorizes the Agent and each Lender, upon notice to the Borrower, if and to the extent payment is not promptly made when due pursuant to the Notes or pursuant to any provision hereof or of any other Lender Agreement, to charge against any account of the Borrower with the Agent or such Lender, an amount equal to the accrued interest and principal and other amounts from time to time then due and payable to the Agent and the Lenders hereunder and under all other Lender Agreements. If an Event of Default has occurred and is continuing no notice to Borrower is required to make a charge under this Section 2.8. Section 2.9. Sharing of Payments. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Loans made by it in excess of its ratable share (according to the then outstanding principal amount of the Loans) of payments on account of the Loans obtained by all the Lenders, such Lender shall purchase from the other Lenders such participations in the Loans held by such other Lenders as shall cause such purchasing Lender to share such payment ratably according to the then outstanding principal amount of the Loans with each of such other Lenders; provided, however, that if all or any portion of such payment is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery, with interest at an interest rate per annum equal to the Applicable Prime Rate. The Borrower agrees that any Lender so purchasing a participation in the Loans from another Lender pursuant to this Section 2.9 may, to the fullest extent permitted by law, exercise all its rights of payment with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. Section 2.10. Increased Costs, Etc. (a) Anything herein to the contrary notwithstanding, if any changes in present or future applicable law (which term "applicable law", as used in this Agreement, includes statutes and rules and regulations thereunder and interpretations thereof by any competent court or by any governmental or other regulatory body or official charged with the administration or the interpretation thereof and requests, directives, instructions and notices at any time or from time to time heretofore or hereafter made upon or otherwise issued to any Lender by any central bank or other fiscal, monetary or other authority, whether or not having the force of law), including without limitation any change according to a prescribed schedule of increasing requirements, whether or not known or in effect as of the date hereof, shall (i) subject such Lender to any tax, levy, impost, duty, charge, fee, deduction or withholding of any nature with respect to this Agreement or the payment to such Lender of any amounts due to it hereunder, or (ii) materially change the basis of taxation of payments to such Lender of the principal of or the interest on the Advances or any other amounts payable to such Lender hereunder, or (iii) impose or increase or render applicable any special or supplemental deposit or reserve or similar requirements or assessment against assets held by, or deposits in or for the account of, or any liabilities of, or loans by an office of such Lender in respect of the transactions contemplated herein, or (iv) impose on such Lender any other condition or requirement with respect to this Agreement or any Advance, and the result of any of the foregoing is (A) to increase the cost to such Lender of making, funding or maintaining all or any part of the Advances or its commitment hereunder, or (B) to reduce the amount of principal, interest or other amount payable to such Lender hereunder, or (C) to require such Lender to make any payment or to forego any interest or other sum payable hereunder, the amount of which payment or foregone interest or other sum is calculated by reference to the gross amount of any sum receivable or deemed received by such Lender from the Borrower hereunder, then, and in each such case not otherwise provided for hereunder, the Borrower will upon demand made by such Lender promptly following such Lender's receipt of notice pertaining to such matters accompanied by calculations thereof in reasonable detail, pay to such Lender such additional amounts as will be sufficient to compensate such Lender for such additional cost, reduction, payment or foregone interest or other sum; provided that the foregoing provisions of this sentence shall not apply in the case of any additional cost, reduction, payment or foregone interest or other sum resulting from any taxes charged upon or by reference to the overall net income, profits or gains of any Lender. In determining the additional amounts payable hereunder, the Lenders may use any reasonable method of averaging, allocating or attributing such additional costs, reductions, payments, foregone interest or other sums among their respective customers. (b) Anything herein to the contrary notwithstanding, if, after the date hereof, any Lender shall have determined that any present or future applicable law, rule, regulation, guideline, directive or request (whether or not having force of law), including without limitation any change according to a prescribed schedule of increasing requirements, whether or not known or in effect as of the date hereof, regarding capital requirements for banks or bank holding companies generally, or any change therein or in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Lender with any of the foregoing, either imposes a requirement upon such Lender to allocate additional capital resources or increases such Lender's requirement to allocate capital resources or such Lender's commitment to make, or to such Lender's maintenance of, the Advances hereunder, which has or would have the effect of reducing the return on such Lender's capital to a level below that which such Lender could have achieved (taking into consideration such Lender's then existing policies with respect to capital adequacy and assuming full utilization of such Lender's capital) but for such applicability, change, interpretation, administration or compliance, by any amount deemed by such Lender to be material, such Lender shall promptly after its determination of such occurrence give notice thereof to the Borrower. In such event, commencing on the date of such notice (but not earlier than the effective date of any such applicability, change, interpretation, administration or compliance), the fees payable hereunder shall increase by an amount which will, in such Lender's reasonable determination, evidenced by calculations in reasonable detail furnished to the Borrower, compensate such Lender for such reduction, such Lender's determination of such amount to be conclusive and binding upon the Borrower, absent manifest error. In determining such amount, such Lender may use any reasonable methods of averaging, allocating or attributing such reduction among its customers. Section 2.11. Changed Circumstances. In the event that: (a) on any date on which the Applicable LIBOR Rate would otherwise be set the Agent shall have determined in good faith (which determination shall be final and conclusive) that adequate and fair means do not exist for ascertaining the LIBOR Rate, as applicable; or (b) at any time the Agent shall have determined in good faith (which determination shall be final and conclusive) that (i) the implementation of LIBOR Pricing Option has been made impracticable or unlawful by (A) the occurrence of a contingency that materially and adversely affects the London interbank market, or (B) compliance by any Lender in good faith with any applicable law or governmental regulation, guideline or order or interpretation or change thereof by any governmental authority charged with the interpretation or administration thereof or with any request or directive of any such governmental authority (whether or not having the force of law); or (ii) the LIBOR Rate shall no longer represent the effective cost to the Lenders for U.S. dollar deposits in the London interbank market, as applicable for deposits in which they regularly participate; then, and in such event, the Agent shall forthwith so notify the Borrower thereof. Until the Agent notifies the Borrower that the circumstances giving rise to such notice no longer apply, the obligation of the Lenders and the Agent to allow election by the Borrower of a LIBOR Pricing Option shall be suspended. If at the time the Agent so notifies the Borrower, the Borrower has previously given the Agent a Pricing Notice with respect to a LIBOR Pricing Option, but the LIBOR Pricing Option requested therein has not yet gone into effect, such Pricing Notice shall automatically be deemed to be withdrawn and be of no force or effect. Upon such date as shall be specified in such notice given by the Agent (which shall not be earlier than the date such notice is given), the LIBOR Pricing Option with respect to all LIBOR Rate Loans shall be terminated and the Borrower shall pay all interest due on such LIBOR Rate Loans and any amounts required to be paid pursuant to Section 4.6. Section 2.12. Use of Proceeds. The proceeds of all Advances shall be used by the Borrower for corporate and general working capital purposes, repurchases or redemptions by Borrower of Borrower's capital stock in an aggregate amount not to exceed $3,000,000 per annum and for Permitted Acquisitions. The Borrower will not, directly or indirectly, use any part of such proceeds for the purpose of purchasing or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System or to extend credit to any Person for the purpose of purchasing or carrying any such margin stock. Section 2.13. Letters of Credit. (a) Letters of Credit. (i) Subject to and upon the terms and conditions herein set forth, the Borrower may request that any Issuing Lender issue, at any time and from time to time on and after the Closing Date and prior to the Credit Termination Date, for the account of the Borrower an irrevocable standby letter of credit, in a form customarily used by such Issuing Lender or in such other form as has been approved by such Issuing Lender, such approval not to be unreasonably withheld or delayed (each such standby letter of credit, a "Letter of Credit") in support of standby obligations of the Borrower incurred in the ordinary course of business and acceptable to the Agent (the "L/C Supportable Obligations"). (ii) Subject to the terms and conditions contained herein, the Agent hereby agrees that it will (and at the Borrower's request each other Issuing Lender may, at its option, agree that it will), at any time and from time to time on or after the Closing Date and prior to the Credit Termination Date, following its receipt of the respective Letter of Credit Request, issue for the account of the Borrower one or more Letters of Credit in support of such L/C Supportable Obligations of the Borrower or any of its Subsidiaries as is permitted to remain outstanding without giving rise to a Default or Event of Default hereunder, provided that the respective Issuing Lender shall be under no obligation to issue any Letter of Credit if at the time of such issuance: (A) any order, judgment or decree of any governmental authority or arbitrator shall purport by its terms to enjoin or restrain such Issuing Lender from issuing such Letter of Credit or any requirement of law applicable to such Issuing Lender or any request or directive (whether or not having the force of law) from any governmental authority with jurisdiction over such Issuing Lender shall prohibit, or request that such Issuing Lender refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon such Issuing Lender with respect to such Letter of Credit any restriction or reserve or capital requirement (for which such Issuing Lender is not otherwise compensated) not in effect on the date hereof, or any unreimbursed loss, cost or expense which was not applicable, in effect or known to such Issuing Lender as of the date hereof and which such Issuing Lender in good faith deems material to it; or (B) such Issuing Lender shall have received notice from any Lender prior to the issuance of such Letter of Credit of the type described in Section 2.13(a)(i), i.e. that another Lender has issued a Letter of Credit based on the same Letter of Credit Request. (iii)Notwithstanding the foregoing, (A) no Letter of Credit shall be issued the Stated Amount of which, when added to the Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid on the date of, and prior to the issuance of, the respective Letter of Credit) and the aggregate principal amount of all Advances made by the Lenders and then outstanding, would exceed the Maximum Credit Amount at such time, (B) each Letter of Credit shall be denominated in Dollars, (C) each Letter of Credit shall by its terms terminate on or before the earlier of (x) the date which occurs 12 months after the date of the issuance thereof (although any such Letter of Credit may be automatically extendable for successive periods of up to 12 months, but not beyond the tenth Business Day prior to the Credit Termination Date (except as otherwise expressly permitted below), on terms acceptable to the Issuing Lender thereof) and (y) the tenth Business Day prior to the Credit Termination Date, provided that such Letter of Credit may remain outstanding until the Credit Termination Date in the event that it is cash collateralized in an amount equal to 110% of the Stated Amount of such Letter of Credit, (D) the Stated Amount of each Letter of Credit upon issuance shall be not less than $20,000 or such lesser amount as is acceptable to the respective Issuing Lender and (E) no Letter of Credit shall be issued the Stated Amount of which, when added to the Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid on the date of, and prior to the issuance of, the respective Letter of Credit) would exceed the Letter of Credit Limit. (b) Letter of Credit Requests. (i) Whenever the Borrower desires that a Letter of Credit be issued for its account, the Borrower shall give the Agent and the respective Issuing Lender at least three Business Days' (or such shorter period as is acceptable to the respective Issuing Lender) written notice thereof. Each notice shall be in the form of Exhibit I (each a "Letter of Credit Request"). (ii) The making of each Letter of Credit Request shall be deemed to be a representation and warranty by the Borrower that such Letter of Credit may be issued in accordance with, and will not violate the requirements of, Section 2.13(a)(iii). Upon the issuance of any Letter of Credit, such Issuing Lender shall promptly notify each Lender of such issuance and such notice shall be accompanied by a copy of the issued Letter of Credit. (c) Letter of Credit Participations. (i) Immediately upon the issuance by any Issuing Lender of any Letter of Credit, such Issuing Lender shall be deemed to have sold and transferred to each Lender, other than such Issuing Lender (each such Lender, in its capacity under this Section 2.13(c), a "Participant"), and each such Participant shall be deemed irrevocably and unconditionally to have purchased and received from such Issuing Lender, without recourse or warranty, an undivided interest and participation, to the extent of such Participant's Commitment Percentage, in such Letter of Credit, each drawing made thereunder and the obligations of the Borrower under this Agreement with respect thereto and any security therefor or guaranty pertaining thereto. Upon any change in the Commitment Percentages of the Lenders pursuant hereto, it is hereby agreed that, with respect to all Letter of Credit Outstandings and Unpaid Drawings, there shall be an automatic adjustment to the participations pursuant to this Section 2.13(c) to reflect the new Commitment Percentages of the assignor and assignee Lender or of all Lenders, as the case may be. (ii) In determining whether to pay under any Letter of Credit, the respective Issuing Lender shall have no obligation relative to the other Lenders other than to confirm that any documents required to be delivered under such Letter of Credit appear to have been delivered and that they appear to comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by any Issuing Lender under or in connection with any Letter of Credit, if taken or omitted in the absence of gross negligence or willful misconduct, shall not create for such Issuing Lender any resulting liability to the Borrower or any Lender. (iii)In the event that any Issuing Lender makes any payment under any Letter of Credit and the Borrower shall not have reimbursed such amount in full to such Issuing Lender pursuant to Section 2.13(d)(i), such Issuing Lender shall promptly notify the Agent, which shall promptly notify each Participant, of such failure, and each Participant shall promptly and unconditionally pay to such Issuing Lender the amount of such Participant's Commitment Percentage of such unreimbursed payment in Dollars and same day funds. If the Agent so notifies any Participant prior to 11:00 A.M. (Boston time) on any Business Day, such Participant shall make available such funds to such Issuing Lender on such Business Day. If and to the extent such Participant shall not have so made its Commitment Percentage of the amount of such payment available to such Issuing Lender, such Participant agrees to pay to such Issuing Lender, forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to such Issuing Lender at the overnight federal funds rate. The failure of any Participant to make available to such Issuing Lender its Commitment Percentage of any payment under any Letter of Credit shall not relieve any other Participant of its obligation hereunder to make available to such Issuing Lender its Commitment Percentage of any payment under any Letter of Credit on the date required, as specified above, but no Participant shall be responsible for the failure of any other Participant to make available to such Issuing Lender such other Participant's Commitment Percentage of any such payment. (iv) Whenever any Issuing Lender receives a payment of a reimbursement obligation as to which it has received any payments from the Participants pursuant to clause (c) above, such Issuing Lender shall forward such payment to the Agent, which in turn shall distribute to each Participant which has paid its Commitment Percentage thereof, in United States dollars and in same day funds, an amount equal to such Participant's share (based upon the proportionate aggregate amount originally funded by such Participant to the aggregate amount funded by all Participants) of the principal amount of such reimbursement obligation and interest thereon accruing after the purchase of the respective participations. (v) Upon the request of any Participant, each Issuing Lender shall furnish to such Participant copies of any Letter of Credit issued by it and such other documentation as may reasonably be requested by such Participant. (vi) The obligations of the Participants to make payments to each Issuing Lender with respect to Letters of Credit issued by it shall be irrevocable and, except as provided in Section 2.13(c)(ii), not subject to any qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including, without limitation, any of the following circumstances: (A) any lack of validity or enforceability of this Agreement or any of the other Lender Agreement; (B) the existence of any claim, setoff, defense or other right which the Borrower or any of its Subsidiaries may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Agent, any Issuing Lender, any Participant, or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between the Borrower and the beneficiary named in any such Letter of Credit); (C) any draft, certificate or any other document presented under any 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; (D) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Lender Agreements; or (E) the occurrence of any Default or Event of Default. (d) Agreement to Repay Letter of Credit Drawings. (i) The Borrower hereby agrees to reimburse the respective Issuing Lender, by making payment to the Agent in immediately available funds, for any drawing (each, a "Drawing") made under any Letter of Credit (each such Drawing until reimbursed, an "Unpaid Drawing"), no later than four Business Days after the date of such Drawing, with interest on the amount of such Drawing, to the extent not reimbursed prior to 12:00 Noon (Boston time) on the date of such Drawing, from and including the date of such Drawing to but excluding the date such Issuing Lender was reimbursed by the Borrower therefor at a rate per annum which shall be the Applicable Prime Rate; provided, however, to the extent such amounts are not reimbursed prior to 12:00 Noon (Boston time) on the seventh Business Day following such Drawing, interest shall thereafter accrue on the amount (and until reimbursed by the Borrower) at a rate per annum which shall be the Prime Rate in effect from time to time plus 4%, in each such case, with interest to be payable on demand. The respective Issuing Lender shall give the Borrower prompt written notice of each Drawing under any Letter of Credit, provided that the failure to give any such notice shall in no way affect, impair or diminish the Borrower's obligations hereunder. (ii) The obligations of the Borrower under this Section 2.13(d) to reimburse the respective Issuing Lender with respect to Drawings (including interest thereon) shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against any Lender (including in its capacity as an Issuing Lender or as a Participant), or any nonapplication or misapplication by the beneficiary of the proceeds of such Drawing, the respective Issuing Lender's only obligation to the Borrower being to confirm that any documents required to be delivered under such Letter of Credit appear to have been delivered and that they appear to comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by any Issuing Lender under or in connection with any Letter of Credit if taken or omitted in the absence of gross negligence or willful misconduct, shall not create for such Issuing Lender any resulting liability to the Borrower. ARTICLE 3 - CONDITIONS TO LOANS AND ADVANCES Section 3.1. Conditions to First Advance. The Lenders' obligations to make the first Advance shall be subject to compliance by the Borrower with its agreements contained in this Agreement, and to the condition precedent that the Agent shall have received each of the following, in form and substance satisfactory to the Agent, Lenders and their counsel or in the form attached hereto as an Exhibit, as the case may be: (a) The Lender Agreements, including but not limited to the Guaranty Agreements and the Notes, duly executed by the Borrower and the Guarantors. (b) Copies of the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Agreement, the Notes and the other Lender Agreements to which the Borrower is a party, certified by the Secretary or an Assistant Secretary (or Clerk or Assistant Clerk) of the Borrower (which certificate shall state that such resolutions are in full force and effect). (c) A certificate of the Secretary or an Assistant Secretary (or Clerk or Assistant Clerk) of the Borrower certifying the name and signatures of the officers of the Borrower authorized to sign this Agreement, the Notes, the other Lender Agreements to which the Borrower is a party and the other documents to be delivered by the Borrower hereunder. (d) Certificates of legal existence and corporate good standing for the Borrower of recent date issued by the appropriate governmental authorities. (e) Evidence that a certificate of tax good standing for the Borrower has been requested from the appropriate governmental authorities. (f) Certificates of foreign qualification for the Borrower of recent date issued by the appropriate governmental authorities in the states of New Jersey, Minnesota and West Virginia. (g) Certified copies of the Certificate of Incorporation of Borrower. (h) Copies of By-laws of the Borrower certified by the Secretary or Assistant Secretary (or Clerk or Assistant Clerk) to be a true and correct copy thereof. (i) The opinions of counsel to the Borrower, dated the date of execution of this Agreement, in substantially the form of Exhibit F hereto. (j) A certificate of a duly authorized officer of the Borrower, dated the date of the first Advance, to the effect that (i) all conditions precedent on the part of the Borrower to the execution and delivery hereof and the making of the first Advance has been satisfied, (ii) the representations and warranties of the Borrower herein and in all other Lender Agreements are true and correct as of the date hereof, (iii) the Borrower has received all necessary governmental and third party approvals and is, and will be after giving effect to the transactions contemplated by this Agreement, in compliance with all applicable laws, except for any immaterial violations, and (iv) upon execution and delivery of this Agreement and all other Lender Agreements no Default will exist hereunder and thereunder. (k) A Compliance Certificate dated the date of the first Advance if requested by Agent. (l) A Certificate of the Chief Financial Officer of Borrower, in form satisfactory to Agent, dated the date of the first Advance, certifying (i) as to the payment of all taxes by Borrower, (ii) as to the filing of all required tax returns, and (iii) that the Borrower is Solvent. (m) If requested by the Agent, certificates of insurance issued to the Agent from an independent insurance broker dated the Closing Date, in form and substance satisfactory to the Agent, certifying as to the insurance on the assets of the Borrower and its Subsidiaries as required by the Agent. (n) Copies of the resolutions of the Board of Directors of each of the Guarantors authorizing the execution, delivery and performance of the Lender Agreements to which such Guarantor is a party, certified by the Secretary or an Assistant Secretary (or Clerk or Assistant Clerk) of the Guarantor (which certificate shall state that such resolutions are in full force and effect). (o) A certificate of the Secretary or an Assistant Secretary (or Clerk or Assistant Clerk) of each of the Guarantors certifying the name and signatures of the officers of such Guarantor authorized to sign the Lender Agreements to which such Guarantor is a party and the other documents to be delivered by such Guarantor hereunder. (p) Certificates of legal existence and corporate good standing for each of the domestic Guarantors of recent date issued by the appropriate governmental authorities. (q) Certificates of tax good standing for each of the domestic Guarantors of recent date issued by the appropriate governmental authorities. (r) Certified copies of the Certificates of Incorporation of each of the Guarantors. (s) Copies of By-laws of each of the Guarantors certified by the Secretary or Assistant Secretary (or Clerk or Assistant Clerk) to be a true and correct copy thereof. (t) The opinions of counsel to each domestic Guarantor in substantially the form of Exhibit G hereto. (u) A certificate of a duly authorized officer of each of the Guarantors, dated the date of the first Advance, to the effect that (i) the representations and warranties of the Borrower and such Guarantor as they relate to such Guarantor herein and in all other Lender Agreements are true and correct as of the date hereof, (ii) such Guarantor has received all necessary governmental and third party approvals in connection with its Guaranty Agreement and all other Lender Agreements to which it is a party and is, and will be after giving effect to the transactions contemplated by its Guaranty Agreement and all other Lender Agreements to which it is a party, in compliance with all applicable laws, except for any immaterial violations, and (iii) upon execution and delivery by such Guarantor of its Guaranty Agreement and all other Lender Agreements to which it is a party, no Default will exist thereunder. (v) A Certificate of the Chief Financial Officer of each of the Guarantors, in form satisfactory to Agent, dated the date of the first Advance, certifying (i) as to the payment of all taxes by such Guarantor, (ii) as to the filing of all required tax returns by such Guarantor, and (iii) that such Guarantor is Solvent. (w) Such other documents, certificates and opinions as the Agent or the Lenders may reasonably request. Section 3.2. Conditions to All Advances. The Lenders' obligations to make any Advances pursuant to this Agreement shall be subject to compliance by the Borrower with its agreements contained in this Agreement and each other Lender Agreement, and to the satisfaction, at or before the making of each Advance, of all of the following conditions precedent: (a) The representations and warranties herein and those made by or on behalf of the Borrower in any other Lender Agreement shall be true and correct as of the date on which any Advance is made, with the same effect as if made at and as of such time (except for representations and warranties made as of a certain date, which shall be true and correct only as of such date). (b) On the date of any Advances hereunder, there shall exist no Default. (c) The making of the requested Advances shall not be prohibited by any law or governmental order or regulation applicable to the Lenders or to the Borrower, and all necessary consents, approvals and authorizations of any Person for any such Advances shall have been obtained. ARTICLE 4 - PAYMENT AND REPAYMENT Section 4.1. Mandatory Prepayment. If at any time the aggregate outstanding principal balance of all Advances made hereunder exceeds (i) the Maximum Credit Amount, if all outstanding Advances (excluding Letter of Credit Outstandings) are less than $1,500,000 or (ii) the lesser of (a) the Maximum Credit Amount and (b) 65% of Eligible Receivables plus 20% of Eligible Finished Goods Inventory, if all outstanding Advances (excluding Letter of Credit Outstandings) equal or exceed $1,500,000, the Borrower shall immediately repay to the Agent for the ratable accounts of the Lenders an amount equal to such excess. Section 4.2. Voluntary Prepayments. (a) The Borrower may make prepayments to the Agent for the ratable accounts of the Lenders of any outstanding principal amount of the Advances which are Prime Rate Loans in amounts equal to or exceeding $500,000 in accordance with Section 4.3 at any time prior to 2:00 p.m. (Boston time) on any Business Day without premium or penalty. (b) The Borrower may make prepayments to the Agent for the ratable accounts of the Lenders of any Advances which are LIBOR Rate Loans in amounts equal to or exceeding $500,000 in accordance with Section 4.3 at any time prior to 2:00 p.m. (Boston time) on any Business Day subject, however, to the premiums and penalties set forth in Section 4.6. Section 4.3. Payment and Interest Cutoff. Notice of each prepayment pursuant to Section 4.2 shall be given to the Agent (a) in the case of prepayment of Prime Rate Loans, not later than 2:00 p.m. (Boston time) on the date of payment, and (b) in the case of prepayment of LIBOR Rate Loans on any day other than the last day of the Interest Period applicable thereto, not later than 2:00 p.m. (Boston time) two (2) Business Days prior to the proposed date of payment, and, in each case, shall specify the total principal amount of the Advances to be paid on such date. Notice of prepayment having been given in compliance with this Section 4.3, the amount specified to be prepaid shall become due and payable on the date specified for prepayment and from and after said date (unless the Borrower shall default in the payment thereof) interest thereon shall cease to accrue. Unpaid interest on the principal amount of any Advances so prepaid accrued to the date of prepayment shall be due on the date of prepayment. Section 4.4. Payment or Other Actions on Non-Business Days. Whenever any payment to be made hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be. In the case of any other action the last day for performance of which shall be a day other than a Business Day, the date for performance shall be extended to the next succeeding Business Day. Section 4.5. Method and Timing of Payments. (a) All payments required to be made pursuant to the provisions of this Agreement and any other Lender Agreement, and all prepayments pursuant to Section 4.1, may be charged by the Agent against the Borrower's accounts with the Agent. The Borrower hereby authorizes the Agent and the Lenders, without notice to the Borrower, to charge against any account of the Borrower with the Agent or such Lender an amount equal to the accrued interest, principal and other amounts from time to time due and payable to the Agent and the Lenders hereunder and under all other Lender Agreements. (b) The Borrower shall make each payment to be made by it hereunder not later than 12:00 noon (Boston time) on the day when due in lawful money of the United States to the Agent at its address set forth in Section 14.1 in immediately available funds. The Agent will, after its receipt thereof, distribute like funds relating to the payment of principal, interest or any other amounts payable hereunder ratably to the Lenders in accordance with their respective Commitment Percentages. Any payment made by the Borrower to the Agent under this Agreement or under the Notes in the manner provided in this Agreement shall be deemed to be a payment to each of the respective Lenders, unless the provisions of this Agreement expressly provide that any such payment shall be solely for the account of the Agent or any specific Lender. Section 4.6. Payments Not at End of Interest Period. If the Borrower for any reason makes any payment of principal with respect to any LIBOR Rate Loan on any day other than the last day of the Interest Period applicable to such LIBOR Rate Loan, including without limitation by reason of acceleration, or fails to borrow a LIBOR Rate Loan after electing a LIBOR Pricing Option with respect thereto pursuant to Section 2.4, the Borrower shall pay to the Agent, for the ratable account of the Lenders, any amounts required to compensate the Lenders for any reasonable losses, costs or expenses which they may reasonably incur as a result of such payment or failure to borrow, including without limitation, any loss, including lost profits, costs or expenses incurred by reason of the liquidation, reutilization or reemployment of deposits or other funds acquired by the Lenders to fund or maintain such Advances, provided, however, that the Lenders shall not be entitled to compensation for lost profits in connection with any such payment or failure to borrow resulting from the occurrence of any event described in Section 2.11 hereof. Such compensation may include, without limitation, an amount equal to (a) the amount of interest which would have accrued on the amount so paid or not borrowed, for the period from the date of such payment or failure to borrow, to the last day of the then current Interest Period for such Advance (or, in the case of a failure to borrow, to the last day of the Interest Period for the Advance which would have commenced on the date of such failure to borrow), at the applicable rate of interest for such Advance provided for herein minus (b) the amount of interest (as reasonably determined by the Agent), which would accrue and become payable to the Lenders during such period on the principal repaid or not borrowed if the Lenders, following such repayment or failure to borrow, were to reinvest such principal in U.S. Treasury securities selected by the Agent in an amount equal (as nearly as may be) to the principal so repaid or not borrowed and having a term equal (as near as may be) to such period. The Borrower shall pay such amount upon presentation by the Agent of a statement setting forth the amount and the Agent's calculation thereof pursuant hereto, which statement shall be deemed true and correct absent manifest error. Section 4.7. Currency. All payments and prepayments provided for under this Agreement shall be made in lawful currency of the United States of America in immediately available funds. ARTICLE 5 - REPRESENTATIONS AND WARRANTIES In order to induce the Agent and the Lenders to enter into this Agreement and to induce the Lenders to make the Advances as contemplated hereby, the Borrower hereby makes the following representations and warranties: Section 5.1. Corporate Existence, Charter Documents, Etc. The Borrower and each Subsidiary is a corporation or limited liability company validly organized, legally existing and in good standing under the laws of the jurisdiction in which it is organized and has corporate or limited liability company power, as applicable, to own its properties and conduct its business as now conducted and as proposed to be conducted by it. Certified copies of the charter documents, By-Laws and limited liability company agreements, and other organizational documents of similar nature, as applicable, of the Borrower and each Subsidiary have been delivered to the Lenders and are true, accurate and complete as of the date hereof. Section 5.2. Principal Place of Business; Location of Records. Except as described on Schedule 5.2 attached hereto, the Borrower's and each Subsidiary's principal place of business is located at 13 Centennial Drive, Peabody, MA and the Borrower and each Subsidiary has had no other principal place of business during the last six months except as listed on Schedule 5.2 hereto. All of the books and records or true and complete copies thereof relating to the accounts and contracts of the Borrower and each Subsidiary are and will be kept at such location except as listed on Schedule 5.2 hereto. Section 5.3. Qualification. The Borrower and each Subsidiary is duly qualified, licensed and authorized to do business and is in good standing as a foreign corporation in each jurisdiction where a failure to do so could be reasonably likely to have a Material Adverse Effect. Section 5.4. Subsidiaries. The Borrower has no Subsidiaries except for those listed in Schedule 5.4. Except as described on Schedule 5.4 attached hereto, all of the issued and outstanding capital stock of each Subsidiary listed on Schedule 5.4 is owned of record and beneficially by the Borrower or by one of the Subsidiaries. Section 5.5. Corporate Power. The execution, delivery and performance of this Agreement, the Notes and all other Lender Agreements and other documents delivered or to be delivered by the Borrower or any Subsidiary to the Agent or the Lenders, and the incurrence of Indebtedness to the Lenders hereunder or thereunder, now or hereafter owing: (a) are within the corporate or limited liability company powers, as applicable, of the Borrower and each Subsidiary, as the case may be, having been duly authorized by its Board of Directors or other similar governing body, and, if required by law, by its charter documents or by its By-Laws, by its stockholders; (b) do not require any approval or consent of, or filing with, any governmental agency or other Person (or such approvals and consents have been obtained and delivered to the Lenders) and are not in contravention of law or the terms of the charter documents or By-Laws of the Borrower and each Subsidiary or any amendment thereof; (c) do not and will not (i) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower or any Subsidiary is a party or by which the Borrower, any Subsidiary or any of their respective properties are bound or affected, (ii) result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature on any property now owned or hereafter acquired by the Borrower or any Subsidiary, except as provided in the Lender Agreements, or (iii)result in a violation of or default under any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award having applicability to the Borrower or any Subsidiary, or to any of their respective properties. Section 5.6. Valid and Binding Obligations. This Agreement, the Notes and all the other Lender Agreements executed in connection herewith and therewith constitute, or will constitute when delivered, the valid and binding obligations of the Borrower and its Subsidiaries, as the case may be, enforceable in accordance with their respective terms, except as the enforceability thereof may be subject to bankruptcy, insolvency, moratorium and other laws affecting the rights and remedies of creditors and secured parties and to the exercise of judicial discretion in accordance with general equitable principles. Section 5.7. Other Agreements. Except as set forth in Schedule 5.7 hereto, neither the Borrower nor any Subsidiary is a party to any indenture, loan or credit agreement, or any lease or other agreement or instrument, or subject to any charter or corporate restriction, which is likely to have a Material Adverse Effect, or which restricts the ability of the Borrower or any Subsidiary to carry out any of the provisions of this Agreement, the Notes or any of the Lender Agreements executed in connection herewith and therewith. Section 5.8. Payment of Taxes. The Borrower and its Subsidiaries have filed all tax returns which are required to be filed by them and have paid, or made adequate provision for the payment of, all taxes which have or may become due pursuant to said returns or to assessments received. Except as set forth on Schedule 5.8 hereto, all federal tax returns of the Borrower and its Subsidiaries through their fiscal year ended in 2001 have been audited by the Internal Revenue Service or are not subject to such audit by virtue of the expiration of the applicable statute of limitation, and the results of such audits are fully reflected in the balance sheet contained in the 2001 Financial Statements. The Borrower knows of no material additional assessments since such date for which adequate reserves appearing in the balance sheet contained in the 2001 Financial Statements have not been established. The Borrower and its Subsidiaries have made adequate provision for all current taxes, and to the best of the Borrower's knowledge there will not be any additional assessments for any fiscal periods prior to and including that which ended on the date of said balance sheet in excess of the amounts reserved therefor. Section 5.9. Financial Statements. All balance sheets, statements and other financial information furnished to the Lenders in connection with this Agreement and the transactions contemplated hereby (each of which is listed on Schedule 5.9), including, without limitation, the 2001 Financial Statements, have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved (except for normal year-end adjustments and for the absence of footnotes with interim statements) and present fairly the consolidated financial condition of the Borrower and its Subsidiaries as of the dates and for the periods described therein, and all such information so furnished was true, correct and complete in all material respects as of the date thereof. Section 5.10. Other Materials Furnished. No written information, exhibits, memoranda or reports furnished to the Lenders by or on behalf of the Borrower or any Subsidiary in connection with the negotiation of this Agreement contains any material misstatement of fact or omits to state a material fact necessary to make the statements contained therein not misleading. Section 5.11. Stock. There are presently issued by the Borrower and its Subsidiaries and outstanding the shares of capital stock indicated on Schedule 5.11. The Borrower and its Subsidiaries have received the consideration for such stock, have authorized such stock to be issued and have otherwise complied with all legal requirements relating to the authorization and issuance of shares of stock and all such shares are validly issued, fully paid and non-assessable except for when a failure to do so could not reasonably be expected to have a Material Adverse Effect. Except as set forth on Schedule 5.11, the Borrower and its Subsidiaries have no other capital stock or other equity interest of any class outstanding. Section 5.12. Changes in Condition. Since the date of the balance sheet contained in the 2001 Financial Statements, there has been no material adverse change in the business or assets or in the condition, financial or otherwise, of the Borrower and its Subsidiaries on a consolidated basis, and neither the Borrower nor any Subsidiary has entered into any transaction outside of the ordinary course of business which is material to the Borrower and its Subsidiaries on a consolidated basis. Neither the Borrower nor any Subsidiary has any contingent liabilities of any material amount which are not referred to in the 2001 Financial Statements (including the footnotes thereto). Section 5.13. Assets, Licenses, Patents, Trademarks, Etc. (a) The Borrower and its Subsidiaries have good and marketable title to, or valid leasehold interests in, all of their assets, real and personal, including the assets carried on their books and reflected in the 2001 Financial Statements, subject to no liens, charges or encumbrances, except for (i) liens, charges and encumbrances described in Schedule 5.16 and permitted by Section 9.2 hereof, and (ii) assets sold, abandoned or otherwise disposed of in the ordinary course of business. (b) The Borrower and its Subsidiaries own or license all material licenses, patents, patent applications, registered copyrights, registered service marks, registered trademarks, trademark applications, and trade names necessary to continue to conduct their business as heretofore conducted by them, now conducted by them and proposed to be conducted by them, each of which is listed, together with Patent and Trademark Office application or registration numbers, where applicable, on Schedule 5.13 hereto. The Borrower and its Subsidiaries conduct their respective businesses without infringement or pending or threatened claim of infringement of any license, patent, copyright, service mark, trademark, trade name, trade secret or other intellectual property right of others, except where such claim or infringement would have no Material Adverse Effect. To the best knowledge of the Borrower, there is no infringement or pending or threatened claim of infringement by others of any material license, patent, copyright, service mark, trademark, trade name, trade secret or other intellectual property right of Borrower and its Subsidiaries. Section 5.14. Litigation. There is no litigation, at law or in equity, or any proceeding before any federal, state, provincial or municipal board or other governmental or administrative agency pending or, to the knowledge of the Borrower, threatened, which involves a material risk of any judgment or liability which could result in any material adverse change in the business or assets or in the condition, financial or otherwise, of the Borrower and its Subsidiaries on a consolidated basis, and no judgment, decree, or order of any federal, state, provincial or municipal court, board or other governmental or administrative agency has been issued against the Borrower or any Subsidiary which has or may have a Material Adverse Effect. Section 5.15. Pension Plans. No employee benefit plan established or maintained by the Borrower or any Subsidiary or any other Person a member of the same "control group," as the Borrower (a "Pension Affiliate"), within the meaning of Section 302(f)(6)(b) of ERISA, (including any multi-employer plan to which the Borrower or any Subsidiary contributes) which is subject to Part 3 of Subtitle B of Title I of the ERISA, had a material accumulated funding deficiency (as such term is defined in Section 302 of ERISA) as of the last day of the most recent fiscal year of such plan ended prior to the date hereof, or would have had an accumulated funding deficiency (as so defined) on such day if such year were the first year of such plan to which Part 3 of Subtitle B of Title I of ERISA applied, and no material liability under Title IV of ERISA has been, or is expected by the Borrower or any Subsidiary to be, incurred with respect to any such plan by the Borrower or any Subsidiary or any Pension Affiliate. The execution, delivery and performance by the Borrower of this Agreement and the other Lender Agreements executed on the date hereof will not involve any prohibited transaction within the meaning of ERISA or Section 4975 of the Internal Revenue Code. The Borrower and its Subsidiaries have no Pension Plan other than those described on Schedule 5.15. Section 5.16. Outstanding Indebtedness. The outstanding amount of Indebtedness for borrowed money, including Capitalized Lease Obligations and Guaranties of borrowed money, of the Borrower and its Subsidiaries as of the date hereof, in excess of $250,000 is correctly set forth in Schedule 5.16 hereto, and said schedule sets forth the credit agreements, guaranties, leases and other instruments pursuant to which such Indebtedness has been incurred and all liens, charges and encumbrances securing such Indebtedness. Said schedule also describes all agreements and other arrangements pursuant to which the Borrower or any Subsidiary may borrow any money. Section 5.17. Environmental Matters. Except as set forth in Schedule 5.17: (a) None of the Borrower, any Subsidiary or, to the Borrower's knowledge, any operator of any of their respective properties is in violation, or to the Borrower's knowledge is in alleged violation, of any Environmental Law, which violation would have a Material Adverse Effect. (b) None of the Borrower, any Subsidiary or any operator of any of their respective properties has received written notice from any third party, including without limitation any federal, state, county, or local governmental authority, (i) that it has been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended ("CERCLA") or any equivalent state law, with respect to any site or location; (ii) that any hazardous waste, as defined in 42 U.S.C. ss. 6903(5), any hazardous substances, as defined in 42 U.S.C. ss. 9601(14), any pollutant or contaminant, as defined in 42 U.S.C. ss. 9601(33), or any toxic substance, oil or hazardous materials or other chemicals or substances regulated by any Environmental Laws ("Hazardous Substances") which it has generated, transported or disposed of, has been found at any site at which a federal, state, county, or local agency or other third party has conducted or has ordered the Borrower, any Subsidiary or another third party or parties (e.g. a committee of potentially responsible parties) to conduct a remedial investigation, removal or other response action pursuant to any Environmental Law; or (iii) that it is or shall be a named party to any claim, action, cause of action, complaint (contingent or otherwise) or legal or administrative proceeding arising out of any actual or alleged release or threatened release of Hazardous Substances, in each case which could have a Material Adverse Effect. For purposes of this Agreement, "release" means any past or present releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, disposing or dumping of Hazardous Substances into the environment. (c) (i) The Borrower, each Subsidiary and each operator of any real property owned or operated by the Borrower is in compliance, in all material respects, with all provisions of the Environmental Laws relating to the handling, manufacturing, processing, generation, storage or disposal of any Hazardous Substances; (ii) to the best of the Borrower's knowledge, no portion of property owned, operated or controlled by the Borrower or any Subsidiary has been used for the handling, manufacturing, processing, generation, storage or disposal of Hazardous Substances except in material compliance with applicable Environmental Laws; (iii) to the best of the Borrower's knowledge, there have been no releases or threatened releases of Hazardous Substances on, upon, into or from any property owned, operated or controlled by the Borrower or any Subsidiary, which releases could have a Material Adverse Effect; (iv) to the best of the Borrower's knowledge, there have been no releases of Hazardous Substances on, upon, from or into any real property in the vicinity of the real properties owned, operated or controlled by the Borrower or any Subsidiary which, through soil or groundwater contamination, may have come to be located on the properties of the Borrower or any Subsidiary which releases could have a Material Adverse Effect; (v) to the best of the Borrower's knowledge, there have been no releases of Hazardous Substances on, upon, from or into any real property formerly but no longer owned, operated or controlled by the Borrower or any Subsidiary during the period of such former ownership or operation, which release could have a Material Adverse Effect. (d) None of the properties of the Borrower or any Subsidiary is or, to their knowledge, shall be subject to any applicable environmental cleanup responsibility law or environmental restrictive transfer law or regulation by virtue of the transactions set forth herein and contemplated hereby. Section 5.18. Foreign Trade Regulations. Neither the Borrower nor any Subsidiary is (a) a person included within the definition of "designated foreign country" or "national" of a "designated foreign country" in Executive Order No. 8389, as amended, in Executive Order No. 9193, as amended, in the Foreign Assets Control Regulations (31 C.F.R., Chapter V, Part 500, as amended), in the Cuban Assets Control Regulations of the United States Treasury Department (31 C.F.R., Chapter V, Part 515, as amended) or in the Regulations of the Office of Alien Property, Department of Justice (8 C.F.R., Chapter II, Part 507, as amended) or within the meanings of any of the said Orders or Regulations, or of any regulations, interpretations, or rulings issued thereunder, or in violation of said Orders or Regulations or of any regulations, interpretations or rulings issued thereunder; or (b) an entity listed in Section 520.101 of the Foreign Funds Control Regulations (31 C.F.R., Chapter V, Part 520, as amended). Section 5.19. Governmental Regulations. None of the Borrower, any Subsidiary or any Affiliate of the Borrower is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Investment Company Act of 1940, or is engaged in a business or activity subject to any statute or regulation which regulates the incurring by the Borrower of Indebtedness for borrowed money, including statutes or regulations relating to common or contract carriers or to the sale of electricity, gas, steam, water, telephone or telegraph or other public utility services. Section 5.20. Margin Stock. Neither the Borrower nor any Subsidiary owns any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, or any regulations, interpretations or rulings thereunder, nor is the Borrower or any Subsidiary engaged principally or as one of its important activities in extending credit which is used for the purpose of purchasing or carrying margin stock. ARTICLE 6 - REPORTS AND INFORMATION Section 6.1. Quarterly Financial Statements and Reports. As soon as available and in any event within forty-five (45) days after the end each of the first three quarters of each fiscal year of the Borrower, the Borrower shall furnish to the Agent a copy of the Borrower's 10-Q report as filed with the Securities and Exchange Commission, or if the Borrower ceases to be a reporting company under the Securities and Exchange Act of 1934, consolidated and consolidating balance sheets of the Borrower and its Subsidiaries, including, without limitation, Saucony Canada, Inc., as of the end of such quarter, and consolidated and consolidating statements of income and consolidated statements of cash flow of the Borrower and its Subsidiaries, including, without limitation, Saucony Canada, Inc., for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and stating in comparative form the respective figures for the corresponding date and period in the previous fiscal year and all prepared in accordance with GAAP consistently applied and certified by the chief financial officer of the Borrower (subject to year-end adjustments and the absence of footnotes). Section 6.2. Annual Financial Statements. As soon as available and in any event within one hundred and twenty (120) days after the end of each fiscal year of the Borrower, the Borrower shall furnish to the Agent a copy of the Borrower's 10-K report as filed with the SEC, provided that the Borrower is at such time a reporting company under the Securities and Exchange Act of 1934, and, either as part of the 10-K or otherwise, the consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as of the end of such fiscal year, and consolidated and consolidating statements of income and consolidated statements of cash flow of the Borrower and its Subsidiaries for the period commencing at the end of the previous fiscal year, which, in the case of such consolidated statements, shall be audited and certified by accountants of recognized national standing, such certificate to be in such form as generally recognized as unqualified, together with an opinion of such certified public accountants that, to their knowledge, there has occurred no Default or Event of Default, or, if the contrary has appeared from their examination, to state the facts found by them. Section 6.3. Monthly Reports. In the event that Advances (excluding Letter of Credit Outstandings) exceed $1,500,000 at any time during any month, the Borrower shall furnish to the Agent a Borrowing Base Certificate within fifteen (15) days after the end of such month, certified as correct in all material respects by the chief executive officer, chief operating officer or the chief financial officer of the Borrower. Section 6.4. Notice of Defaults. As soon as possible, and in any event within ten (10) days after the occurrence of each Default, the Borrower shall furnish to the Agent and each Lender the statement of its chief executive officer or chief financial officer setting forth details of such Default and the action which the Borrower has taken or proposes to take with respect thereto. Section 6.5. Additional Quarterly Reports. Within forty-five days after the end of each fiscal quarter of the Borrower, the Borrower shall furnish to the Agent (i) a duly completed Compliance Certificate, (ii) detailed accounts receivable reports of the Borrower with respect to the Borrower's ten largest customers and accounts payable aging reports of the Borrower with respect to the Borrower's ten largest suppliers/vendors as of the fiscal quarter then ended, (iii) an updated budget for the Borrower and its Subsidiaries through the remainder of the Borrower's fiscal year, all certified as correct in all material respects by the chief executive officer, chief operating officer or the chief financial officer of the Borrower. Section 6.6. Notice of Litigation. Promptly after the commencement thereof, the Borrower shall furnish to the Agent and each Lender written notice of all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting the Borrower or any Subsidiary, which, if adversely determined, would have a Material Adverse Effect. Section 6.7. Communications with Others. Promptly after the sending or filing thereof, copies of all proxy statements, financial statements, and reports which the Borrower or any Subsidiary sends to its stockholders, and copies of all regular, periodic, and special reports, and all registration statements which the Borrower or any Subsidiary files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange, the Borrower shall furnish the same to the Agent. Section 6.8. Reportable Events. At any time that the Borrower or any Subsidiary has a Pension Plan, the Borrower shall furnish to the Agent and each Lender, as soon as possible, but in any event within thirty (30) days after the Borrower knows or has reason to know that any Reportable Event with respect to any Pension Plan has occurred, the statement of its chief executive officer or chief financial officer setting forth the details of such Reportable Event and the action which the Borrower or any Subsidiary has taken or proposes to take with respect thereto, together with a copy of the notice of such Reportable Event to the Pension Benefit Guaranty Corporation. Section 6.9. Annual Pension Reports. At any time that the Borrower or any Subsidiary has a Pension Plan, the Borrower shall furnish to the Agent and each Lender, promptly after the filing thereof with the Secretary of Labor or the Pension Benefit Guaranty Corporation, copies of each annual report which is filed with respect to each Pension Plan for each plan year, including: (a) a statement of assets and liabilities of such Pension Plan as of the end of such plan year and statements of changes in fund balance and in financial position, or a statement of changes in net assets available for plan benefits, for such plan year; (b) an opinion of Deloitte & Touche (or other independent certified public accountants of recognized standing reasonably acceptable to the Agent) relating to such Pension Plan to the extent that any such opinion for the Pension Plan is required by law; and (c) an actuarial statement of such Pension Plan applicable to such plan year, together with an opinion of an enrolled actuary of recognized standing acceptable to the Lenders, to the extent that any such statement and/or opinion for the Pension Plan is required by law. Section 6.10. Reports to other Creditors. Promptly after filing the same, the Borrower shall furnish to the Agent and each Lender copies of any compliance certificate and other information furnished to any other holder of the securities (including debt obligations) of the Borrower or any Subsidiary pursuant to the terms of any indenture, loan or credit or similar agreement and not otherwise required to be furnished to the Agent or the Lenders pursuant to any other provision of this Agreement. Section 6.11. Communications with Independent Public Accountants. At any reasonable time and from time to time and upon notice to the Borrower, the Borrower shall provide the Agent and the Lenders and any agents or representatives of the Lenders access to the independent public accountants of the Borrower to discuss the Borrower's and its Subsidiaries' financial condition, including, without limitation any recommendations of such independent public accountants concerning the management, finances, financial controls or operations of the Borrower and its Subsidiaries, and the Borrower shall have the opportunity to be a party to any such discussion. Promptly after the receipt thereof, the Borrower shall furnish to the Agent and each Lender copies of any written recommendations concerning the management, finances, financial controls, or operations of the Borrower or any Subsidiary received from the Borrower's independent public accountants. Section 6.12. Environmental Reports. The Borrower shall furnish to the Agent and each Lender: (a) not later than seven (7) days after notice thereof, notice of any enforcement actions, or, to the knowledge of the Borrower, threatened enforcement actions by any Governmental Agency related to Environmental Laws which to Borrower's knowledge affects the Borrower, any Subsidiary or their properties; (b) copies, promptly after they are received, of all orders, notices of responsibility, notices of violation, notices of enforcement actions, and assessments, and other written communications pertaining to any such orders, notices, claims and assessments received by the Borrower or any Subsidiary from any Governmental Agency; (c) not later than seven (7) days after notice thereof, notice of any civil claims or threatened civil claims affecting the Borrower or any Subsidiary by any third party alleging any violation of Environmental Laws or harm to human health or the environment; (d) copies of all cleanup plans, site assessment reports, response plans, remedial proposals, or other submissions of the Borrower or any Subsidiary, other third party (e.g., committee of potentially responsible parties at a Superfund site), or any combination of same, submitted by the Borrower or any Subsidiary to a Governmental Agency in response to any communication referenced in subsections (a) and (b) herein simultaneously with their submission to such Governmental Agency or promptly upon receipt by the Borrower or any Subsidiary of any such plans, reports or proposals submitted by a third party to such Governmental Agency; and (e) from time to time, on request of the Agent, evidence reasonably satisfactory to the Agent of the Borrower's and its Subsidiaries' insurance coverage, if any, for any environmental liabilities. Section 6.13. Projections. The Borrower shall furnish to the Agent no later than January 30th of each year commencing with January 30, 2003, one year projections including a quarter by quarter projected operating budget and cash flow of the Borrower and each of its Subsidiaries for such fiscal year (including a consolidated and consolidating income statement for each fiscal quarter, a balance sheet as at the end of the last fiscal month and cash flow projections in each fiscal quarter), such projections to be accompanied by a certificate signed by the President, Chief Financial Officer or Controller of the Borrower to the effect that such projections have been prepared on the basis of sound financial planning practice consistent with past budgets and financial statements and that such officer has no reason to question the reasonableness of any material assumptions on which such projections were prepared. Section 6.14. Inspection of Premises. At any reasonable time and from time to time and upon reasonable notice to the Borrower, Agent and each Lender (a) shall have full access to and the right to audit, check, inspect and make abstracts and copies from the Borrower's and its Subsidiaries' books, records, audits, correspondence and all other papers relating to the Collateral and the operation of the Borrower's or its Subsidiaries' business and (b) may enter upon any of the Borrower's or its Subsidiaries' premises for the purpose of inspecting the premises and any and all records pertaining thereto and the operation of Borrower's or its Subsidiaries' business, provided that, absent the existence of an Event of Default, the Agent and the Lenders may not exercise their rights provided under paragraphs (a) and (b) above more than twice per annum. All costs and expenses of inspections permitted under this Section 6.14 shall be borne by the Borrower. Section 6.15. Miscellaneous. The Borrower shall provide the Agent and the Lenders with such other information as the Agent or the Lenders may from time to time reasonably request respecting the business, properties, prospects, condition or operations, financial or otherwise, of the Borrower and its Subsidiaries. ARTICLE 7 - FINANCIAL COVENANTS [Intentionally omitted.] ARTICLE 8 - AFFIRMATIVE COVENANTS On and after the date hereof, until all of the Lender Obligations shall have been paid in full and the Lenders shall have no commitment hereunder, the Borrower covenants that it will, and will cause each of its Subsidiaries to, comply with the following covenants and provisions: Section 8.1. Existence and Business. The Borrower and each Subsidiary will, except where a failure to do so could not reasonably be expected to have a Material Adverse Effect, (a) subject to Section 9.6, preserve and maintain its corporate or limited liability company existence, as the case may be, in the jurisdiction in which it is currently organized, and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is required, (b) preserve and maintain in full force and effect all material rights, licenses, patents and franchises, (c) comply in all material respects with all valid and applicable statutes, rules and regulations necessary for the conduct of business, and (d) engage only in the businesses which it is conducting on the date of this Agreement and substantially related businesses. Section 8.2. Taxes and Other Obligations. The Borrower and each Subsidiary (a) will duly pay and discharge, or cause to be paid and discharged, before the same shall become in arrears, all material taxes, assessments and other governmental charges, imposed upon it and its properties, sales and activities, or upon the income or profits therefrom, as well as the claims for labor, materials, or supplies which if unpaid might by law result in a lien or charge upon any of its properties, and (b) will promptly pay or cause to be paid when due, or in conformance with customary trade terms (but, unless contested in good faith, not later than 60 days from the due date in the case of trade debt), all lease obligations, trade debt and all other Indebtedness incident to its operations, provided, however, that the Borrower and any Subsidiary may contest any such charges, claims or obligations in good faith so long as (i) an adequate reserve therefor has been established and is maintained if and as required by generally accepted accounting principles and (ii) no action to foreclose any such lien has been commenced. The Borrower and each Subsidiary shall cause all applicable tax returns and all amounts due thereunder to be filed and paid, as the case may be, in order to maintain its good standing with the Internal Revenue Service and state, local and foreign tax authorities. Section 8.3. Maintenance of Properties and Leases. The Borrower and each Subsidiary shall maintain, keep and preserve all of its properties (tangible and intangible) in good repair and working order, except for ordinary wear and tear and obsolete property not used by the Borrower or such Subsidiary in the course of its business. The Borrower and each Subsidiary shall replace and improve its properties as necessary for the conduct of its business. The Borrower and each Subsidiary shall comply in all material respects with all leases naming it as lessee. Section 8.4. Insurance. The Borrower and each Subsidiary (a) will keep its principal assets which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion or hazards, by extended coverage in an amount sufficient to avoid co-insurance liability, and (b) will maintain with financially sound and reputable insurers insurance against other hazards and risks and liability to persons and property to the extent and in a manner satisfactory to the Lenders, and in any event as customary for companies in similar businesses similarly situated; provided, however, that on prior notice to the Agent and the Lenders it may effect workmen's compensation insurance through an insurance fund operated by such state or jurisdiction and may also be a self-insurer with respect to workmen's compensation and with respect to group medical benefits under any medical benefit plan. On request of the Agent from time to time, the Borrower will render to the Agent and the Lenders a statement in reasonable detail as to all insurance coverage required by this Section 8.4. A description of the material elements of insurance coverage of the Borrower and its Subsidiaries as of the date hereof is set forth on Schedule 8.4. Section 8.5. Records, Accounts and Places of Business. The Borrower and each Subsidiary shall maintain comprehensive and accurate records and accounts in accordance with generally accepted accounting principles consistently applied. The Borrower and each Subsidiary shall maintain adequate and proper reserves. Section 8.6. Maintenance of Accounts. The Borrower shall maintain its primary operating, concentration and disbursement accounts with the Agent. Section 8.7. Consolidated Pre-Tax Net Income. (a) For any fiscal quarter, the Borrower and its Subsidiaries shall maintain Consolidated Pre-Tax Net Income of at least ($2,500,000). (b) For any two consecutive fiscal quarters, the Borrower and its Subsidiaries shall maintain the Consolidated Pre-Tax Net Income of at least ($1,000,000). Section 8.8. Dissolution. Borrower shall dissolve Saucony SP Pty, Ltd., Hyde International Services, Ltd. and QR Divestiture, Inc. by March 31, 2003, provided, however, if such Subsidiaries are not dissolved by March 31, 2003, Borrower shall provide Agent with such information as Agent may request in its reasonable discretion and cause such Subsidiaries to become Guarantors and provide all fully executed documentation as Agent may request, including, without limitation, all authority documents, organizational documents, certificates, guaranties and opinions. ARTICLE 9 - NEGATIVE COVENANTS On and after the date hereof, until all of the Lender Obligations shall have been paid in full and the Lenders shall have no commitments to make any loans or advances to the Borrower hereunder, the Borrower covenants that neither the Borrower nor any of its Subsidiaries will: Section 9.1. Restrictions on Indebtedness. Create, incur, suffer or permit to exist, or assume or guarantee, either directly or indirectly, or otherwise become or remain liable with respect to, any Indebtedness, except the following: (a) Indebtedness outstanding at the date of this Agreement as set forth on Schedule 5.16 but no refinancings thereof. (b) Indebtedness on account of Consolidated Current Liabilities (other than for money borrowed) incurred in the normal and ordinary course of business. (c) Indebtedness in respect of (i) taxes, assessments, governmental charges or levies and claims for labor, materials and supplies to the extent that payment thereof shall not at the time be required to be made in accordance with the provisions of Section 8.2 hereof, (ii) judgments or awards for an amount in excess of $250,000 which have been in force for less than the applicable appeal period so long as execution is not levied thereunder and in respect of which the Borrower or any Subsidiary shall at the time in good faith be prosecuting an appeal or proceedings for review in a manner satisfactory to the Lenders and in respect of which a stay of execution shall have been obtained pending such appeal or review and for which adequate reserves have been established in accordance with generally accepted accounting principles, and (iii) endorsements made in connection with the deposit of items for credit or collection in the ordinary course of business. (d) Indebtedness in an amount not to exceed $2,000,000 in the aggregate with respect to equipment financing, Capitalized Leases, and purchase money security interests or as otherwise approved by the Agent. (e) Indebtedness to the Lenders. (f) Guarantees permitted under Section 9.5 hereof. (g) Indebtedness between the Borrower and any Subsidiary Guarantor or between Subsidiary Guarantors. (h) In addition to the Indebtedness described in Section 9.1(a) through (g) above, unsecured Indebtedness not to exceed $5,000,000. Section 9.2. Restriction on Liens. Create or incur or suffer to be created or incurred or to exist any encumbrance, mortgage, pledge, lien, charge or other security interest of any kind upon any of its property or assets of any character, whether now owned or hereafter acquired, or transfer any of such property or assets for the purposes of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to payment of its general creditors, or acquire or agree or have an option to acquire any property or assets upon conditional sale or other title retention agreement, device or arrangement (including Capitalized Leases) or suffer to exist for a period of more than 30 days after the same shall have been incurred any Indebtedness against it which if unpaid might by law or upon bankruptcy or insolvency, or otherwise, be given any priority whatsoever over the claims of its general creditors, or sell, assign, pledge or otherwise transfer for security any of its accounts, contract rights, general intangibles, or chattel paper (as those terms are defined in the UCC) with or without recourse; provided, however, that the Borrower or any Subsidiary may create or incur or suffer to be created or incurred or to exist: (a) Existing liens and security interests described in Schedule 5.16. (b) Purchase money security interests (which term shall include mortgages, conditional sale contracts, Capitalized Leases in accordance with Section 9.1(d) hereof, and all other title retention or deferred purchase devices) to secure the purchase price of property acquired hereafter by the Borrower or a Subsidiary, or to secure Indebtedness incurred solely for the purpose of financing such acquisitions; provided, however, that no such purchase money security interests shall extend to or cover any property other than the property the purchase price of which is secured by it, and that the principal amount of Indebtedness (whether or not assumed) with respect to each item of property subject to such a security interest shall not exceed the fair value of such item on the date of its acquisition. (c) Deposits or pledges made in connection with, or to secure payment of, workmen's compensation, unemployment insurance, old age pensions or other social security; liens in respect of judgments or awards to the extent such judgments or awards are permitted as Indebtedness by the provisions of Section 9.1(c); and liens for taxes, assessments or governmental charges or levies and liens to secure claims for labor, material or supplies to the extent that payment thereof shall not at the time be required to be made in accordance with Section 8.2. (d) Encumbrances in the nature of zoning restrictions, easements, and rights or restrictions of record on the use of real property which do not materially detract from the value of such property or materially impair its use in the business of the owner or lessee. (e) Liens (other than judgments and awards) created by or resulting from any litigation or legal proceeding, provided the execution or other enforcement thereof is effectively stayed and the claims secured thereby are being actively contested in good faith by appropriate proceedings satisfactory to the Agent. (f) Liens arising by operation of law to secure landlords, lessors or renters under leases or rental agreements made in the ordinary course of business and confined to the premises or property rented. (g) Liens in favor of the Agent for the benefit of the Lenders. Nothing contained in this Section 9.2 shall permit the Borrower to incur any Indebtedness or take any other action or permit to exist any other condition which would be in contravention of any other provision of this Agreement. Section 9.3. Investments. Have outstanding or hold or acquire or make or commit itself to acquire or make any Investment except the following: (a) Investments having a maturity of less than one year from the date thereof by the Borrower in: (i) obligations of the Agent or any of the Lenders; (ii) obligations of the United States of America or any agency or instrumentality thereof; (iii) repurchase agreements involving securities described in clauses (i) and (ii) with the Agent or any of the Lenders; and (iv) commercial paper which is rated not less than prime-one or A-1 or their equivalents by Moody's Investor Service, Inc. or Standard & Poor's Corporation, respectively, or their successors. (b) Investments resulting from mergers permitted under Section 9.6 hereto. (c) Permitted Acquisitions financed with Permitted Acquisition Advances. (d) Investments in Subsidiary Guarantors. (e) Investments in Subsidiaries described on Schedule 5.4 hereto. (f) Investments in State Street Bank and Trust Company money market accounts. (g) Investments in mutual funds that invest in the Investments described in Section 9.3(a)(ii) and (iv). Section 9.4. Dispositions of Assets. Sell, lease or otherwise dispose of any assets except for (i) the sale, lease or other disposition of inventory or other property (not including receivables) in the ordinary course of business or (ii) the sale or other disposition of obsolete assets no longer used in the business of the Borrower or any Subsidiary. Section 9.5. Assumptions, Guaranties, Etc. of Indebtedness of Other Persons. Assume, guarantee, endorse or otherwise be or become directly or contingently liable (including, without limitation, by way of agreement, contingent or otherwise, to purchase, provide funds for payment, supply funds to or otherwise invest in any Person or otherwise assure the creditors of any such Person against loss) in connection with any Indebtedness of any other Person, except (i) for Guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business and (ii) Guarantees from Borrower to The Bank of Nova Scotia to secure up to Canadian $1,500,000 in principal amount of Indebtedness of Saucony Canada, Inc. Section 9.6. Mergers, Etc. Enter into any merger or consolidation with or acquire all or substantially all of the assets of any Person, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to any Person, except that (a) any Subsidiary may merge into the Borrower or any other Subsidiary, (b) the Borrower and any Subsidiary may enter into a merger with or acquire all or substantially all of the assets of another entity, provided that immediately after and giving effect thereto, no event shall occur and be continuing which constitutes or which, upon the passage of time or giving of notice or both would constitute, a Default (including under Section 8.1 and including under Article 7, assuming that the financial restrictions set forth in Article 7 are applied immediately after and giving effect to such merger or acquisition) and provided further that the Borrower or such Subsidiary is the surviving corporation to any such merger and (c) the Borrower may enter into Permitted Acquisitions. Section 9.7. ERISA. At any time while the Borrower or any Subsidiary has a Pension Plan, permit any accumulated funding deficiency to occur with respect to any Pension Plan or other employee benefit plans established or maintained by the Borrower or any Subsidiary or to which contributions are made by the Borrower or any Subsidiary (the "Plans"), and which are subject to Section 412 of the Internal Revenue Code, and at all times comply in all material respects with the provisions of the Act and Code which are applicable to the Plans. Section 9.8. Distributions. Make any Distribution or make any other payment on account of the purchase, acquisition, redemption, or other retirement of any shares of stock, whether now or hereafter outstanding, other than (i) repurchase or redemption of Borrower's capital stock not to exceed $3,000,000 and (ii) any Subsidiary may make a Distribution to the Borrower. Section 9.9. Sale and Leaseback. Sell or transfer any of its properties with the intention of taking back a lease of the same property for substantially the same use as the property being sold or transferred. Section 9.10. Transactions with Affiliates. Enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate, except that the Borrower and its Subsidiaries (a) may pay salaries, fees and bonuses to its directors, officers and employees as are usual and customary in the Borrower's or its Subsidiaries' business, (b) may enter into transactions permitted under Sections 9.1 and 9.3, and (c) may, in the ordinary course of business, enter into other transactions with Affiliates on terms that are no less favorable to the Borrower or any Subsidiary than those which could be obtained at the time from Persons who are not Affiliates. Section 9.11. Creation of Subsidiaries. Borrower shall not, without prior written consent by Agent, create or cause the creation of any Subsidiary other than those in existence at the Closing, unless such Subsidiary becomes an additional guarantor ("Additional Guarantor") under the Guaranty Agreements immediately upon the creation of such Subsidiary. Section 9.12. Voluntary Payment. While any amount remains outstanding under the Notes, Borrower shall not make any voluntary prepayments on any borrowed money debt or Capitalized Lease, except under a Lender Agreement. Section 9.13. Hyde International Services, Ltd. and Saucony SP Pty, Ltd. On and after the date hereof, no assets or property of any kind or nature shall be transferred from any of the Borrower or any Subsidiary to Hyde International Services, Ltd., Saucony SP Pty, Ltd. or QR Divestiture, Inc. ARTICLE 10 - EVENTS OF DEFAULT AND REMEDIES Section 10.1. Events of Default. Each of the following events shall be deemed to be Events of Default hereunder: (a) The Borrower shall fail to make any payment in respect of (i) the principal of any of the Lender Obligations as the same shall become due, whether at the stated payment dates, required prepayment or by acceleration, demand or otherwise, or (ii) interest or commitment fees on or in respect of any of the Lender Obligations within five (5) days after the same shall become due. (b) The Borrower or any Subsidiary shall fail to perform or observe any of the terms, covenants, conditions or provisions of Articles 6, 7, 8 or 9 hereof. (c) The Borrower or any Subsidiary shall fail to perform or observe any other term, covenant, condition or provision to be performed or observed by the Borrower under this Agreement or any other Lender Agreement, and such failure shall not be rectified or cured to the Agent's satisfaction within thirty (30) days after the occurrence thereof. (d) Any representation or warranty of the Borrower herein or in any other Lender Agreement or any amendment to any thereof shall have been materially false or misleading at the time made or intended to be effective. (e) The Borrower shall fail to make any payment of principal of or interest on Indebtedness for money borrowed by the Borrower or any Guaranty of money borrowed, in either case an outstanding principal amount of not less than $5,000,000, when such payment is due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) or shall fail to perform or observe any provision of any agreement or instrument relating to such Indebtedness, and such failure shall permit the holder thereof to accelerate such Indebtedness. (f) The Borrower or any Subsidiary shall be involved in financial difficulties as evidenced: (i) by its commencement of a voluntary case under Title 11 of the United States Code as from time to time in effect, or by its authorizing, by appropriate proceedings of its board of directors or other governing body, the commencement of such a voluntary case; (ii) by its filing an answer or other pleading admitting or failing to deny the material allegations of a petition filed against it commencing an involuntary case under said Title 11, or seeking, consenting to or acquiescing in the relief therein provided, or by its failing to controvert timely the material allegations of any such petition; (iii)by the entry of an order for relief in any involuntary case commenced under said Title 11; (iv) by its seeking relief as a debtor under any applicable law, other than said Title 11, of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the rights of creditors, or by its consenting to or acquiescing in such relief; (v) by the entry of an order by a court of competent jurisdiction (1) by finding it to be bankrupt or insolvent, (2) ordering or approving its liquidation, reorganization or any modification or alteration of the rights of its creditors, or (3) assuming custody of, or appointing a receiver or other custodian for all or a substantial part of its property and such order shall not be vacated or stayed on appeal or otherwise stayed within 30 days; (vi) by the filing of a petition against the Borrower or any Subsidiary under said Title 11 which shall not be vacated within 30 days; or (vii)by its making an assignment for the benefit of, or entering into a composition with, its creditors, or appointing or consenting to the appointment of a receiver or other custodian for all or a substantial part of its property. (g) There shall have occurred a judgment against the Borrower or any Subsidiary in any court (i) for an amount in excess of $1,000,000, and from which no appeal has been taken or with respect to which all appeal periods have expired, unless such judgment is, to the Agent's satisfaction, insured against in full, or (ii) which shall have a materially adverse effect upon the assets, properties or condition, financial or otherwise, of the Borrower. (h) Any "Event of Default" under any other Lender Agreement shall have occurred. Section 10.2. Remedies. Upon the occurrence of an Event of Default, in each and every case, the Agent may, and upon the request of the Required Lenders, shall proceed to protect and enforce the rights of the Agent and the Lenders by suit in equity, action at law and/or other appropriate proceeding either for specific performance of any covenant or condition contained in this Agreement or any other Lender Agreement or in any instrument delivered to the Agent or the Lenders pursuant hereto or thereto, or in aid of the exercise of any power granted in this Agreement, any Lender Agreement or any such instrument, and (unless there shall have occurred an Event of Default under Section 10.1(f), in which case the unpaid balance of Lender Obligations shall automatically become due and payable without notice or demand) by notice in writing to the Borrower declare (a) the obligations of the Lenders to make Advances to be terminated, whereupon such obligations shall be terminated, and (b) all or any part of the unpaid balance of the Lender Obligations then outstanding to be forthwith due and payable, whereupon such unpaid balance or part thereof shall become so due and payable without presentation, protest or further demand or notice of any kind, all of which are hereby expressly waived, and the Agent may proceed to enforce payment of such balance or part thereof in such manner as the Agent may elect, and the Agent and each Lender may offset and apply toward the payment of such balance or part thereof any Indebtedness of the Agent or any Lender to the Borrower or to any Subsidiary, or to any obligor of the Lender Obligations, including any Indebtedness represented by deposits in any general or (to the extent permitted by applicable law) special account maintained with the Agent or any Lender or with any other Person controlling, controlled by or under common control with the Agent or any Lender. Section 10.3. Distribution of Proceeds. Notwithstanding anything to the contrary contained herein, in the event that following the occurrence or during the continuance of any Event of Default, the Agent or any Lender receives any monies on account of the Lender Obligations from the Borrower or otherwise, such monies shall be distributed for application as follows: (a) First, to the payment of or the reimbursement of, the Agent for or in respect of all reasonable costs, expenses, disbursements and losses which shall have been incurred or sustained by the Agent in connection with the collection of such monies by the Agent, or in connection with the exercise, protection or enforcement by the Agent of all or any of the rights, remedies, powers and privileges of the Agent or the Lenders under this Agreement or any other Lender Agreement; (b) Second, to the payment of all interest, including interest on overdue amounts, and late charges, then due and payable with respect to the Loans, allocated among the Lenders in proportion to their respective Commitment Percentages; (c) Third, to the payment of the outstanding principal balance of the Loans, allocated among the Lenders in proportion to their respective Commitment Percentages; (d) Fourth, to any other outstanding Lender Obligations, allocated among the Lenders in proportion to their respective Commitment Percentages; and (e) Fifth, the excess, if any, shall be returned to the Borrower or to such other Persons as are entitled thereto. ARTICLE 11 - CONSENTS; AMENDMENTS; WAIVERS; REMEDIES Section 11.1. Actions by Lenders. Except as otherwise expressly set forth in any particular provision of this Agreement, any consent or approval required or permitted by this Agreement to be given by the Lenders, including without limitation under Section 11.2, may be given, and any term of this Agreement or of any other instrument related hereto or mentioned herein may be amended, and the performance or observance by the Borrower of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of the Borrower and the Required Lenders; provided, however, that without the written consent of all Lenders: (a) no reduction in the interest rates on or any fees relating to the Advances shall be made; (b) no extension or postponement shall be made of the stated time of payment of the principal amount of, interest on, or fees payable to the Lenders relating to the Advances; (c) no increase in the Maximum Credit Amount, or extension of the Credit Termination Date shall be made; (d) no release of all or substantially all of the collateral security for the Lender Obligations or of the obligations of any Guarantor under the Guaranty Agreements shall be made; (e) no change in the definition of the term "Required Lenders" shall be made; and (f) no change in the provisions of this Section 11.1 shall be made. Section 11.2. Actions by Borrower. No delay or omission on the Agent's or the Lenders' part in exercising their rights and remedies against the Borrower or any other interested party shall constitute a waiver. A breach by the Borrower of its obligations under this Agreement may be waived only by a written waiver executed by the Agent and the Lenders in accordance with Section 11.1. The Agent's and the Lenders' waiver of the Borrower's breach in one or more instances shall not constitute or otherwise be an implicit waiver of subsequent breaches. To the extent permitted by applicable law, the Borrower hereby agrees to waive, and does hereby absolutely and irrevocably waive (a) all presentments, demands for performance, notices of protest and notices of dishonor in connection with any of the Indebtedness evidenced by the Term Notes, (b) any requirement of diligence or promptness on the Agent's or the Lenders' part in the enforcement of its rights under the provisions of this Agreement or any Lender Agreement, and (c) except as otherwise expressly provided herein, any and all notices of every kind and description which may be required to be given by any statute or rule of law with respect to its liability (i) under this Agreement or in respect of the Indebtedness evidenced by the Notes or any other Lender Obligation or (ii) under any other Lender Agreement. No course of dealing between the Borrower and the Agent or the Lenders shall operate as a waiver of any of the Agent's or the Lenders' rights under this Agreement or any Lender Agreement or with respect to any of the Lender Obligations. This Agreement shall be amended only by a written instrument executed by the Borrower, the Agent and the Lenders (or Required Lenders) in accordance with Section 11.1 making explicit reference to this Agreement. The Agent's and the Lenders' rights and remedies under this Agreement and under all subsequent agreements between the Agent, the Lenders and the Borrower shall be cumulative and any rights and remedies expressly set forth herein shall be in addition to, and not in limitation of, any other rights and remedies which may be applicable to the Agent and the Lenders in law or at equity. ARTICLE 12 - SUCCESSORS AND ASSIGNS Section 12.1. General. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors (which shall include in the case of the Agent or any Lender any entity resulting from a merger or consolidation) and assigns, except that (a) the Borrower may not assign its rights or obligations under this Agreement, and (b) each Lender may assign its rights in this Agreement only as set forth below in this Article 12. Section 12.2. Assignments. (a) Assignments. In compliance with applicable laws with respect to such assignment a Lender may assign to one or more financial institutions or Persons (each a "Successor Lender") a proportionate part of its rights and obligations in connection with this Agreement, its Note, and the related Lender Agreements and each such Successor Lender shall assume such rights and obligations pursuant to an Assignment and Acceptance Agreement ("Assignment and Acceptance Agreement") duly executed by such Successor Lender and such assigning Lender and acknowledged and consented to by the Agent, substantially in the form of Exhibit H attached hereto. If no Event of Default has occurred and is continuing any assignment under this Section (a) shall be (i) in a minimum amount of $2,000,000, (ii) upon five (5) days notice to Borrower and (iii) only to an Eligible Assignee. In an Event of Default has occurred and is continuing an assignment may be made to any Eligible Assignee. In connection with any assignment under this Section 12.2(a) there shall be paid to the Agent by the assigning Lender or the Successor Lender an administrative processing fee in the amount of $5,000; provided, however, that no such administrative processing fee shall be paid if the Lender or Successor Lender makes an assignment to an affiliate of such Lender or Successor Lender. (b) Assignment Procedures. In the event of an assignment in accordance with Section 12.2(a), upon execution and delivery of such an assignment at least five (5) Business Days prior to the proposed assignment date, and payment by such Successor Lender to the assigning Lender of an amount equal to the purchase price agreed between such assigning Lender and such Successor Lender, such Successor Lender shall become party to this Agreement as a signatory hereto and shall have all the rights and obligations of a Lender under this Agreement and the other Lender Agreements with an interest therein as set forth in such assignment, and such assignor making such assignment shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any such assignment, notice of such assignment shall be given to the Borrower and the assigning Lender, the Successor Lender and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Successor Lender and a replacement Note is issued to the assigning Lender in principal amounts reflecting their respective revised interests. (c) Register. The Agent shall maintain a register (the "Register") for the recordation of (i) the names and addresses of all Successor Lenders that enter into Assignment and Acceptance Agreements, (ii) the interests of each Lender, and (iii) the amounts of the Advances owing to each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is registered therein for all purposes as a party to this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Further Assurances. The Borrower shall sign such documents and take such other actions from time to time reasonably requested by the Agent or a Lender to enable any Successor Lender to share in the benefits and rights created by the Lender Agreements. (e) Assignments to Federal Reserve Bank. Any Lender at any time may assign all or any portion of its rights under this Agreement and its Notes to a Federal Reserve Bank. No such assignment shall release the transferor Lender from its obligations hereunder. Section 12.3. Participations. Any Lender may at any time grant or offer to grant to one or more financial institutions ("Credit Participants") participating interests in such Lender's rights and obligations in this Agreement, its Notes and the related Lender Agreements, and each such Credit Participant shall acquire such participation subject to the terms set forth below. (a) Amount. Each such participation shall be in a minimum amount of at least $2,000,000. (b) Procedure. Each Lender granting such participation shall comply with all applicable laws with respect to such transfer and shall remain responsible for the performance of its obligations hereunder and under the other Lender Agreements and shall retain the sole right and responsibility to exercise its rights and to enforce the obligations of the Borrower hereunder and under the other Lender Agreements, including the right to consent to any amendment, modification or waiver of any provision of any Lender Agreement, except for those matters referred to in Section 11.1 which require the consent of all Lenders and which may also require the consent of each Credit Participant. (c) Dealing with Lenders. The Borrower shall continue to deal solely and directly with the Lenders in connection with their rights and obligations under this Agreement and the other Lender Agreements. (d) Rights of Credit Participants. The Borrower agrees that each Credit Participant shall, to the extent provided in its participation instrument, be entitled to the benefits of Sections 2.7, 2.8, 2.9, 2.11, 2.12, and 14.5, and the setoff rights in Section 10.2 with respect to its participating interest; provided, however, that no Credit Participant shall be entitled to receive any greater payment under such Sections than the Lender granting such participation would have been entitled to receive with respect to the interests transferred. (e) Notice. At the time of granting any participation, the Lender granting such participation shall notify the Agent and the Borrower. ARTICLE 13 - THE AGENT Section 13.1. Authorization and Action. Each Lender hereby appoints and authorizes the Agent to take such action on its behalf and to exercise such powers under this Agreement and the other Lender Agreements as are delegated to the Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement and the other Lender Agreements (including, without limitation, enforcement or collection of the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders, and such instructions shall be binding upon all Lenders; provided, however, that the Agent shall not be required to take any action which exposes the Agent to liability or which is contrary to this Agreement or the other Lender Agreements or applicable law. Subject to the foregoing provisions and to the other provisions of this Article 13, the Agent shall, on behalf of the Lenders: (a) execute any documents on behalf of the Lenders providing collateral for or guarantees of the Lender Obligations; (b) hold and apply any collateral for the Lender Obligations, and the proceeds thereof, at any time received by it, in accordance with the provisions of this Agreement and the other Lender Agreements; (c) exercise any and all rights, powers and remedies of the Lenders under this Agreement or any of the other Lender Agreements, including the giving of any consent or waiver or the entering into of any amendment, subject to the provisions of Section 11.1; (d) at the direction of the Lenders, execute, deliver and file UCC financing statements, mortgages, deeds of trust, lease assignments and such other agreements in respect of any collateral for the Lender Obligations, and possess instruments included in the collateral on behalf of the Lenders; and (e) in the event of acceleration of the Borrower's Indebtedness hereunder, act at the direction of the Required Lenders to exercise the rights of the Lenders hereunder and under the other Lender Agreements. Section 13.2. Agent's Reliance, Etc. Neither the Agent nor any of its directors, officers, agents or employees shall be liable to the Lenders for any action taken or omitted to be taken by it or them under or in connection with this Agreement or the other Lender Agreements, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent: (a) may treat the payee of any Note as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form required under Article 12 hereof; (b) may consult with legal counsel, independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (c) makes no warranty or representations to any Lender and shall not be responsible to any Lender for any statements, warranties or representations made in or in connection with this Agreement or the other Lender Agreements; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or the other Lender Agreements on the part of the Borrower or any other Person or to inspect the property (including the books and records) of the Borrower or any other Person; (e) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or the other Lender Agreements or any other instrument or document furnished pursuant hereto or thereto; and (f) shall incur no liability under or in respect of this Agreement or the other Lender Agreements by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopy or telegram) believed by the Agent to be genuine and signed or sent by the proper party or parties. Section 13.3. Agent as a Lender. With respect to its interest in the Commitment Percentage of the Advances hereunder, State Street Bank and Trust Company shall have the same rights and powers under this Agreement and the other Lender Agreements as any other Lender and may exercise the same as though it were not the Agent; and the term "Lender" or "Lender(s)" shall, unless otherwise expressly indicated, include State Street Bank and Trust Company in its individual capacity. State Street Bank and Trust Company and its affiliates may lend money to, and generally engage in any kind of business with, the Borrower, any of the Borrower's Affiliates and any Person who may do business with or own securities of the Borrower or any such Affiliate of the Borrower, all as if State Street Bank and Trust Company were not the Agent and without any duty to account therefor to the Lenders. Section 13.4. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on the financial statements referred to in Section 5.9 and such other 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 Agent 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. Section 13.5. Indemnification of Agent. Each Lender agrees to indemnify the Agent and its directors, officers, employees and agents (to the extent that the Agent is not reimbursed by the Borrower), ratably according to each Lender's Commitment Percentage, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent or its directors, officers, employees or agents in any way relating to or arising out of this Agreement or any other Lender Agreement or any action taken or omitted by the Agent in such capacity under this Agreement; provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including counsel fees) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement and each other Lender Agreement, to the extent that the Agent is not reimbursed for such expenses by the Borrower. Section 13.6. Successor Agent. Except as provided below, the Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower. Upon any such resignation, the Lenders shall have the right to appoint a successor Agent (the "Successor Agent") which, absent the existence of a Default, shall be reasonably acceptable to the Borrower. If no Successor Agent shall have been so appointed by the Lenders (other than the resigning Agent), and shall have accepted such appointment, within thirty (30) days after the retiring Agent's giving notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a Successor Agent which, absent the existence of a Default, shall be reasonably acceptable to Borrower, which shall be a commercial bank or financial institution organized under the laws of the United States of America or of any state thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of any appointment as Agent hereunder by a Successor Agent, such Successor Agent shall thereupon 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 under this Agreement and the other Lender Agreements. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article 13 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Lender Agreements. Section 13.7. Amendment of Article 13. The Borrower hereby agrees that the foregoing provisions of this Article 13 constitute an agreement among the Agent and the Lenders (and the Agent and the Lenders acknowledge that except for the provisions of Section 13.6, the Borrower is not a party to or bound by such foregoing provisions) and that any and all of the provisions of this Article 13, with the exception of the reasonable approval of Borrower as may be required under Section 13.6 hereto, may be amended at any time by the Lenders without the consent or approval of, or notice to, the Borrower (other than the requirement of notice to the Borrower of the resignation of the Agent and the appointment of a successor Agent). ARTICLE 14 - MISCELLANEOUS Section 14.1. Notices. All notices and other communications made or required to be given pursuant to this Agreement shall be in writing and shall be mailed by United States mail, postage prepaid, or sent by hand, by telecopy or by nationally-recognized overnight carrier service, addressed as follows: (a) If to the Agent, at 225 Franklin Street, Boston, Massachusetts, Attention: Fred Epstein, with a copy to Goodwin Procter LLP, Exchange Place, Boston, MA 02109, Telecopier No. 617-523-1231, Attention: Steven M. Ellis, P.C. or at such other address(es) or to the attention of such other Person(s) as the Agent shall from time to time designate in writing to the Borrower and the Lenders. (b) If to the Borrower, at 13 Centennial Drive, Peabody, MA 01960, Telecopier No. 978-532-4956, Attention: Chief Financial Officer, with a copy to Hale and Dorr LLP, 60 State Street, Boston, MA 02109, Telecopier No. 617-526-5000, Attn: John Sigel, Esquire, or at such other address(es) or to the attention of such other Person(s) as the Borrower shall from time to time designate in writing to the Agent and the Lenders. (c) If to any Lender, at the address(es) and to the attention of the Person(s) specified below such Lender's name on the execution page of this Agreement (or in the case of a Successor Lender, at the address(es) and to the attention of the Person(s) specified in the Assignment and Acceptance Agreement executed by such Successor Lender), or at such other address(es) and to the attention of such other Person(s) as any Lender shall from time to time designate in writing to the Agent and the Borrower. Any notice so addressed and mailed by registered or certified mail shall be deemed to have been given two (2) days after being deposited in the mail. Any notice so addressed and sent by hand, by telecopy or by overnight carrier service shall be deemed to have been given when received. A notice from the Agent stating that it has been given on behalf of the Lenders shall be relied upon by the Borrower as having been given by the Lenders. Section 14.2. Merger. This Agreement and the other Lender Agreements and documents contemplated hereby constitute the entire agreement of the Borrower and the Agent and the Lenders and express their entire understanding with respect to credit advanced or to be advanced by the Lenders to the Borrower. Section 14.3. Governing Law; Consent to Jurisdiction. This Agreement shall be governed by and construed and enforced under the laws of The Commonwealth of Massachusetts. The Borrower and each Subsidiary hereby irrevocably submits itself to the non-exclusive jurisdiction of the courts of The Commonwealth of Massachusetts and to the non-exclusive jurisdiction of any Federal court of the United States located in the District of Massachusetts for the purpose of any suit, action or other proceeding arising out of this Agreement or any other Lender Agreement or any of the transactions contemplated hereby or thereby. Section 14.4. Counterparts. This Agreement and all amendments to this Agreement may be executed in several counterparts, each of which shall be an original. The several counterparts shall constitute a single Agreement. Section 14.5. Expenses and Indemnification. (a) The Borrower agrees to pay, on demand, all of the Agent's reasonable expenses in preparing, executing, delivering and administering (excluding overhead) this Agreement, the Lender Agreements and all related instruments and documents, including, without limitation, the reasonable fees and out-of-pocket expenses of the Agent's special counsel, Goodwin Procter LLP, and, the Agent's and Lenders' expenses in connection with periodic audits of the Borrower. The Borrower also agrees to pay, on demand, all reasonable out-of-pocket expenses incurred by the Agent and the Lenders, including, without limitation, reasonable legal and accounting fees, in connection with the collection of amounts due hereunder and under all other Lender Agreements upon the occurrence of an Event of Default hereunder, the revision, protection or enforcement of any of the Agent's or the Lenders' rights against the Borrower under this Agreement, the Notes and all other Lender Agreements and the administration of special problems that may arise under this Agreement or any other Lender Agreement. The Borrower also agrees to pay all stamp and other taxes in connection with the execution and delivery of this Agreement and related instruments and documents. (b) Without limitation of any other obligation or liability of the Borrower or right or remedy of the Agent or the Lenders contained herein, the Borrower hereby covenants and agrees to indemnify and hold the Agent, the Lenders, and the directors, officers, subsidiaries, shareholders, agents, affiliates and Persons controlling the Agent and the Lenders, harmless from and against any and all damages, losses, settlement payments, obligations, liabilities, claims, including, without limitation, claims for finder's or broker's fees, actions or causes of action, and reasonable costs and expenses incurred, suffered, sustained or required to be paid by any such indemnified party in each case by reason of or resulting from any claim relating to the transactions contemplated hereby, other than any such claims which are determined by a final, non-appealable judgment or order of a court of competent jurisdiction to be the result of the gross negligence or willful misconduct of such indemnified party. Promptly upon receipt by any indemnified party hereunder of notice of the commencement of any action against such indemnified party for which a claim is to be made against the Borrower hereunder, such indemnified party shall notify the Borrower in writing of the commencement thereof, although the failure to provide such notice shall not affect the indemnification rights of any such indemnified party hereunder. The Borrower shall have the right, at its option upon notice to the indemnified parties, to defend any such matter at its own expense and with its own counsel, except as provided below, which counsel must be reasonably acceptable to the indemnified parties. The indemnified party shall cooperate with the Borrower in the defense of such matter. The indemnified party shall have the right to employ separate counsel and to participate in the defense of such matter at its own expense. In the event that (a) the employment of separate counsel by an indemnified party has been authorized in writing by the Borrower, (b) the Borrower has failed to assume the defense of such matter within thirty (30) days of notice thereof from the indemnified party, or (c) the named parties to any such action (including impleaded parties) include any indemnified party who has been advised by counsel that there may be one or more legal defenses available to it or prospective bases for liability against it, which are different from those available to or against the Borrower, then the Borrower shall not have the right to assume the defense of such matter with respect to such indemnified party. The Borrower shall not compromise or settle any such matter against an indemnified party without the written consent of the indemnified party, which consent may not be unreasonably withheld or delayed. Section 14.6. Confidentiality. The Agent and the Lenders agree to keep in confidence all financial data and other information relative to the affairs of the Borrower and its Subsidiaries heretofore furnished or which may hereafter be furnished to them pursuant to the provisions of this Agreement; provided, however, that this Section 14.6 shall not be applicable to information otherwise disseminated to the public by the Borrower or any of its Affiliates; and provided further, however, that such obligation of the Agent and the Lenders shall be subject to the Agent's or the Lenders', as the case may be, (a) obligation to disclose such information pursuant to a request or order under applicable laws and regulations or pursuant to a subpoena or other legal process, (b) right to disclose any such information to bank examiners, affiliates, auditors, accountants and counsel who agree to keep such information confidential, and (c) right to disclose any such information (i) in connection with the transactions set forth herein including assignments or the sale of participation interests pursuant to Article 12, so long as such potential assignees or participants shall agree in writing to be bound by the terms of this Section 14.6, or (ii) in connection with any litigation or dispute involving the Agent or any transfer or other disposition by the Agent or the Lenders, as the case may be, of any of the Lender Obligations; provided that information disclosed pursuant to this provision shall be so disclosed subject to such procedures as are reasonably calculated to maintain the confidentiality thereof. Section 14.7. WAIVER OF JURY TRIAL. THE AGENT, THE LENDERS AND THE BORROWER AGREE THAT NONE OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASEDUPON OR ARISING OUT OF, THIS AGREEMENT, NOTES, ANY LENDER AGREEMENT, ANY RELATED INSTRUMENTS, ANY COLLATERAL OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY EACH OF THE AGENT, THE LENDERS AND THE BORROWER WITH THEIR RESPECTIVE COUNSEL, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NONE OF THE AGENT, THE LENDERS OR THE BORROWER HAS AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. IN WITNESS WHEREOF, the Borrower, the Agent and the Lenders have caused this Credit Agreement to be executed by their duly authorized officers as of the date set forth above. SAUCONY, INC. By:/s/ Michael Umana --------------------- Name: Michael Umana Title: Chief Operating Officer/Chief Financial Officer STATE STREET BANK AND TRUST COMPANY, as Agent and Lender By:/s/ Fred Epstein ------------------- Name: Fred Epstein Title: Vice President SCHEDULE 1 Commitment Percentages Lender Commitment Percentage Commitment Amount State Street Bank 100.00% $ 15,000,000 and Trust Company TOTALS 100.00% $ 15,000,000 EX-99 5 exh991.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTAIN OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS We face intense competition Competition is intense in the markets in which we sell our products. We compete with a large number of other companies, both domestic and foreign, several of which are large organizations with diversified product lines, well-known brands and financial, distribution and marketing resources substantially greater than ours. The principal competitors for our Saucony products are Nike, New Balance and Asics. The principal competitors of our Hind products are Nike, Pearl Izumi and TYR. We compete based on a variety of factors, including price, product style, durability and quality, product design and technical performance, brand image and awareness, marketing and promotion and the ability to meet delivery commitments to retailers. A technological breakthrough or marketing or promotional success by one of our competitors could adversely affect our competitive position. The intensity of the competition that we face constitutes a significant risk to our business. We depend on foreign suppliers A number of manufacturers located in Asia, primarily in China, supply products to us. During fiscal 2001, one of our suppliers, located in China, accounted for approximately 39% of our total footwear purchases by dollar volume. We are subject to the usual risks of a business involving foreign suppliers, such as currency fluctuations, government regulation of fund transfers, export and import duties, administrative trade cases, trade limitations imposed by the United States or foreign governments and political and labor instability. There are a number of trade-related and other issues creating significant friction between the governments of the United States and China, and the imposition of punitive import duties on certain categories of Chinese products has been threatened in the past and may be implemented in the future. In addition, we have no long-term manufacturing agreements with our foreign suppliers and compete with other athletic shoe and apparel companies, including companies that are much larger than us, for access to production facilities. We need to anticipate and respond to consumer preferences and merchandise trends The footwear and apparel industries are subject to rapid changes in consumer preferences. Demand for our products, particularly our Originals line, may be adversely affected by changing fashion trends and consumer style preferences. We believe that our success depends in substantial part on our ability to anticipate, gauge and respond to changing consumer demands and fashion trends in a timely manner. In addition, our decisions concerning new product designs often need to be made several months before we can determine consumer acceptance. As a result, our failure to anticipate, identify or react appropriately to changes in styles or features could lead to problems such as excess inventories and higher markdowns, lower gross margins due to the necessity of providing discounts to retailers and the inability to sell such products through our own factory outlet stores. Our quarterly results may fluctuate Our revenues and quarterly operating results may vary significantly depending on a number of factors, including: o the timing and shipment of individual orders; o market acceptance of footwear and other products offered by us; o changes in our operating expenses; o personnel changes; o mix of products sold; o changes in product pricing; o general economic conditions; and, o weather. In addition, a substantial portion of our revenue is realized during the last few weeks of each quarter. As a result, any delays in orders or shipments are more likely to result in revenue not being recognized until the following quarter, which could adversely impact our results of operations for a particular quarter. Our current expense levels are based in part on our expectations of future revenue. As a result, net income for a given period could be disproportionately affected by any reduction in revenue. It is possible that in some future quarter our revenue or operating results will be below the expectations of stock market securities analysts and investors. If that were to occur, the market price of our common stock could be materially adversely affected. Our revenues are subject to foreign currency exchange fluctuations We conduct operations in various international countries, and a portion of our sales is transacted in local currencies. As a result, our revenues are subject to foreign exchange rate fluctuations. From time to time, our financial results have been adversely affected by fluctuations in foreign currency exchange rates. We enter into forward currency exchange contracts to protect us from the effect of changes in foreign exchange rates. However, our efforts to reduce currency exchange losses may not be successful, and currency exchange rates may have an adverse impact on our future operating results and financial condition. Our business is affected by seasonal consumer buying patterns The athletic and casual footwear and athletic apparel industries in which we compete are generally characterized by significant seasonality of sales and results of operations. Sales of our Saucony brand products have historically been seasonal in nature, with the strongest sales generally occurring in the first and third quarters. In addition, sales of our Hind brand products are generally strongest in the third and fourth quarters. We believe that sales of our products will continue to follow this seasonal cycle. Therefore, our results of operations for any one quarter may not necessarily be indicative of the results that we may achieve for a full fiscal year or any future quarter. Our operating results may be affected by order cancellations Customers may cancel orders of our products at any time without financial penalty. As a result, our backlog does not necessarily represent actual future shipments. The rate of customer cancellations can vary quarter-to-quarter and year-to-year. If the retail market continues to be weak or weakens again in the future, our customers could cancel further orders of our products, which could have a material adverse effect on our operating results. We are susceptible to financial difficulties of retailers We sell our products primarily to major retailers, some of whom have experienced financial difficulties, including bankruptcy. We cannot predict what effect the future financial condition of such retailers will have on our business. In particular, we cannot guarantee that our bad debt expenses will not be material in future periods. We need effective marketing and advertising programs Because consumer demand for our products is heavily influenced by brand image, our business requires substantial investments in marketing and advertising. Failure of such investments to achieve the desired effect in terms of increased retailer acceptance or consumer purchase of our products could adversely affect our financial results. In addition, we believe that our success depends in part upon our ability to periodically launch new marketing and advertising programs. If we are unable to successfully design or execute new marketing and advertising, or if such programs are ineffective, our business will suffer. We depend on certain key customers Approximately 45% of our gross trade receivables balance was represented by 16 customers at January 4, 2002. We anticipate that our results of operations in any given period will depend to a significant extent upon sales to major customers. The loss of or a reduction in the level of sales to one or more major customers could have a material adverse effect on our business, financial condition and results of operations. Furthermore, if a major customer were unable or unwilling to proceed with a large order or to pay us for a large order on a timely basis, our business, financial condition and results of operations could be materially adversely affected. Changes in general economic conditions may adversely affect our business Our business is sensitive to consumers' spending patterns, which in turn are subject to prevailing regional and national economic conditions, such as interest and taxation rates, employment levels and consumer confidence. Adverse changes in these economic factors may restrict consumer spending, thereby negatively affecting our growth and profitability. EX-99 6 exh992.txt EXHIBIT 99.2 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Saucony, Inc. (the "Company") for the period ended October 4, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned John H. Fisher, Chief Executive Officer of the Company, and Michael Umana, Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2002 /s/ John H. Fisher John H. Fisher Chief Executive Officer Dated: November 14, 2002 /s/ Michael Umana Michael Umana Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----