-----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, Rws34d/aLN8bo6pbZMityWYHwMhCIajH0La1AmQ6nbV+EeSQP8vcAb+d1XjpiQ+I attDEr4DxcNqvjBwlZHmRA== 0000912057-00-013445.txt : 20000327 0000912057-00-013445.hdr.sgml : 20000327 ACCESSION NUMBER: 0000912057-00-013445 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: K2 INC CENTRAL INDEX KEY: 0000006720 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 952077125 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04290 FILM NUMBER: 578356 BUSINESS ADDRESS: STREET 1: 4900 S EASTERN AVE STREET 2: SUITE 200 CITY: LOS ANGELES STATE: CA ZIP: 90040 BUSINESS PHONE: 3237242800 MAIL ADDRESS: STREET 1: 4900 S EASTERN AVE STREET 2: SUITE 200 CITY: LOS ANGELES STATE: CA ZIP: 90040 FORMER COMPANY: FORMER CONFORMED NAME: ANTHONY INDUSTRIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: ANTHONY POOLS INC DATE OF NAME CHANGE: 19720317 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ------------------------ K2 INC. (Exact name of registrant as specified in its charter) DELAWARE 95-2077125 (State of Incorporation) (I.R.S. Employer Identification No.) 4900 SOUTH EASTERN AVENUE 90040 LOS ANGELES, CALIFORNIA (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code (323) 724-2800 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ Common Stock, par value $1 New York Stock Exchange Pacific Exchange Series A Preferred Stock Purchase Rights New York Stock Exchange Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by an "X" whether the registrant 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, and has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock of the registrants held by nonaffiliates was approximately $130,135,325 as of March 7, 2000. Indicate the number of shares outstanding of each of the issuer's classes of common stock as of March 7, 2000. Common Stock, par value $1 17,949,700 Shares Documents Incorporated by Reference Portions of the proxy statement for the Annual Meeting of Shareholders to be held April 28, 2000 are incorporated by reference in Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 10-K ANNUAL REPORT PART I ITEM 1. BUSINESS: GENERAL K2 Inc. ("K2") is a premier, branded consumer products company with a primary focus on sporting goods and other recreational products as well as certain niche industrial products. K2 offers a diverse portfolio of products used primarily in individual sports activities such as alpine skiing, snowboarding, in-line skating, mountain and BMX biking, fishing and watersport activities. K2's sporting goods include several name brand lines such as K2 and OLIN alpine skis, K2, RIDE AND MORROW snowboards, boots and bindings, K2 in-line skates, K2 bikes, SHAKESPEARE fishing rods and reels, STEARNS personal flotation devices, rainwear and wet suits and K2 backpacks. K2's other recreational products include HILTON corporate casual apparel, PLANET EARTH skateboards, apparel and shoes. K2's industrial products consist primarily of SHAKESPEARE monofilament line used in weed trimmers, in paper mills and as fishing line, and SHAKESPEARE fiberglass and composite marine antennas, and composite utility and decorative light poles. Founded in 1946, K2. has grown to over $600 million in annual sales through a combination of internal growth and strategic acquisitions. For segment and geographic information, see Note 13 to Notes to Consolidated Financial Statements. In recent years, K2 has aggressively expanded into several new sporting goods markets in the United States, Europe and Japan, including in-line skates, snowboards, footwear and fishing tackle kits and combos. Management believes these newer products have benefited from the brand strength, reputation, distribution, and the market share positions of other Company products, several of which are now among the top brands in their respective markets. For example, in the United States, K2 has the #2 market position in in-line skates and snowboard products, and management believes that STEARNS has the #1 market position in personal flotation devices and that Shakespeare's UGLY STIK is the top selling line of moderately priced fishing rods. During the third quarter of 1998, K2 adopted a plan to sell its Simplex building products division ("Division"). As a result, K2 reclassified the Division as a discontinued operation in 1998 and similarly reclassified prior years' operations (see Note 3 to Notes to Consolidated Financial Statements for further discussion). K2 is continuing to actively pursue its plan of disposal and consequently the Division is shown in the accompanying consolidated financial statements as a discontinued operation. The discussion which follows focuses on the continuing operations of K2. K2's common stock was first offered to the public in 1959 and is currently traded on the New York and Pacific Stock Exchanges (symbol: KTO). 1 SPORTING GOODS PRODUCTS Net sales for sporting goods products were $474.3 million in 1999, $404.9 million in 1998 and $410.8 million in 1997. The following table lists K2's principal sporting good products and the brand names under which they are sold.
PRODUCT BRAND NAME - -------------------------------------------- ---------- Alpine skis K2, Olin Snowboards and accessories K2, Ride, 5150, Liquid, Morrow In-line skates K2 Fishing rods and reels Shakespeare, Ugly Stik, Pfleuger Active water sports products Stearns Mountain and BMX bikes K2, Noleen Backpacks K2, Dana Design
ALPINE SKIS. K2 sells its alpine skis under the names K2 and OLIN in the 3 major ski markets of the world--the United States, Europe and Japan. While participation rates for alpine skiing have been relatively flat during the past few years, K2 believes that industry retail sales have declined in the domestic market during the same period. In particular, K2 believes that poor weather conditions in certain markets, the high cost of skiing, the opportunity to participate in alternative activities such as snowboarding, and the increased use of rental or demo skis further contributed to a decline in retail sales. K2 skis have benefited from their popularity among retail purchasers, resulting from their high-quality, innovative features, (such as its performance enhancing skis in the form of "shaped" or "carving" skis and its use of piezoelectronics technology), attractive graphics and creative marketing. K2 recently introduced K2's new MOD ski technology which has been well received by dealers and customers in its initial limited introduction. K2 and OLIN skis have been manufactured by K2 in the United States and Norway. During the fourth quarter, K2 announced a strategic initiative to significantly reduce the cost of its skis by restructuring and downsizing the United States manufacturing operation to take advantage of lower cost manufacturing and sourcing opportunities internationally. As part of this initiative, K2 will move approximately half of ski manufacturing to either K2-run China facility or to third party sourcing operations worldwide. High-end skis, mostly featuring K2's recently introduced MOD ski technology, will continue to be manufactured in the United States. The skis are sold to specialty retail shops and sporting goods chains in the U.S. by independent sales representatives and in Europe and Japan through independent and Company-owned distributors. K2 and OLIN alpine skis are marketed to skiers ranging from beginners to top racers using youthful and often irreverent advertising. Within each brand, K2 offers various styles of skis to meet the performance, usage and terrain requirements of the consumer. From a pricing perspective, K2 positions the brands in the mid-level and premium price points, reflecting the quality of materials used in construction and the continual incorporation of technological innovations. To assist in its marketing efforts, K2 sponsors amateur and professional skiers including the well-known extreme skier, Glen Plake. SNOWBOARDS. K2 sells snowboards, boots, bindings and apparel under the K2, RIDE, MORROW, 5150 and LIQUID brands. K2 also sells strapless snowboard bindings and compatible snowboard boots under the K2 CLICKER brand. Back country accessories, including packs and high performance snowshoes integrating the CLICKER bindings and backpacks for carrying snowboards and other gear when hiking into the back country are being marketed under the K2 Brand. Snowboard apparel has recently been introduced. The snowboard market, which is highly fragmented, has been consolidating in favor of the larger, better established brands. During 1999, K2 completed the acquisition of Morrow snowboards and of Ride, Inc., two leaders in the snowboard market. K2 manufactures most of its own snowboards. K2 believes that its manufacturing capability and ability to innovate provide a competitive advantage. Like its alpine skis, K2 snowboards are of high quality, have innovative features and attractive graphics and are creatively marketed. 2 K2's innovations in its snowboarding line include the CLICKER, an advanced step-in binding system for snowboards jointly developed with Shimano Inc. and sourced and licensed from them under a distribution agreement, the Electra, a snowboard which utilizes piezoelectronics technology for electronic vibration dampening, the Ride M2 construction featuring the edge contact system which results in a better turning board, and the Fatbob board, an extra-wide snowboard. The CLICKER was among the first commercially available step-in binding systems for snowboards. K2's snowboards are manufactured by K2 in the United States and China. During the fourth quarter, K2 announced a restructuring of the snowboard manufacturing operations designed to lower the cost structure, by relocating low-end snowboards to K2's China production facility, and mid- and high-end snowboards to K2's newly acquired Ride manufacturing plant in California. K2's snowboard brands are sold to specialty retail shops and sporting goods chains in the U.S. by independent sales representatives and in Europe and Japan through independent and K2-owned distributors. Like K2 skis, K2, RIDE and MORROW snowboards are marketed using youthful and irreverent advertising, and K2 sponsors professional and amateur snowboarders. IN-LINE SKATES. K2 introduced its K2 soft boot in-line skates in 1994. The in-line skate market in the U.S. grew dramatically as K2's sales of this product went from $10 to $117 million in four years. The domestic market, however, declined in 1999. Growth in the European market also slowed in 1999. K2's in-line skates target the enthusiast and are priced at the mid to upper end of the industry's price points. K2 skates are attractive and of high quality, with innovative features such as a soft mesh and leather upper designed for improved comfort, with a rigid plastic cuff for support. K2's skates incorporate several innovations, including the soft boot with hinged support cuffs either outside or inside the walls of the soft boot. The patented product line is designed for performance as well as superior comfort and support. K2 also sells women's-specific skates and recently introduced adjustable-size, softboot skates for children, and incorporated the softboot technology in a line of ice skates. K2 in-line skates are manufactured to company specifications and primarily assembled by a vendor in Korea and China. They are sold to specialty retail shops and sporting goods chains in the U.S. by independent sales representatives and in Europe and Japan through independent and K2-owned distributors. During 1999, sales of in-line skates in Europe amounted to approximately 64% of total in-line skate sales. FISHING RODS AND REELS. K2 sells fishing rods, reels and fishing line in most of the world. K2 believes that Shakespeare's UGLY STIK models have been the best selling fishing rods in the U.S. over the past 20 years. The success of these fishing rods has allowed K2 to establish a strong position with retailers and mass merchandisers, thereby increasing sales of new rods, reels and kits and combos and allowing K2 to introduce new products such as collapsible furniture, to its distribution. SHAKESPEARE rods and reels are manufactured principally in China, although blanks for the UGLY STIK fishing rod are made by K2 in the United States. SHAKESPEARE products are sold directly by K2 and through independent sales representatives to mass merchandisers (two of which in the aggregate purchase more than one-third of K2's fishing rods and reels). ACTIVE WATER SPORTS PRODUCTS. K2 sells STEARNS flotation vests, jackets and suits ("personal flotation devices"), cold water immersion products, wet suits, outdoor products, rainwear and inflatable and towable water products in the United States and in certain foreign countries. In the United States, occupants of boats are required by law either to wear or have available personal flotation devices meeting Coast Guard standards. STEARNS personal flotation devices are manufactured to such standards and are subject to rigorous testing for certification by Underwriters Laboratories. Stearns manufactures most of its personal flotation devices in the U.S. and sources its other products from Asia. STEARNS products are sold principally through an in-house marketing staff and independent sales representatives to mass merchandisers, 3 specialty shops and chain stores and to the off-shore oil industry, commercial fishermen and other commercial users through independent sales representatives. MOUNTAIN AND BMX BIKES. K2 designs and distributes high quality full-suspension mountain bikes, front suspension mountain bikes, comfort bikes, and BMX Bikes and components under the K2 AND NOLEEN names in the United States and internationally. Performance and comfort are provided by mountain bikes which have shock absorbing elements for either front and rear wheels or front wheels only, thereby improving climbing ability and decreasing rider fatigue and off-road vibration. K2 entered the high-end, full-suspension mountain bike business in 1993 through its acquisition of Girvin and in late 1998, introduced several new products to reposition its product line at more popular price points. In addition to its premium bike, K2's product line includes front suspension or "hardtail" bikes, the K2 comfort series and K2 BMX bikes. The comfort series line, is designed to appeal to a more mature recreational audience and is equipped with dampening technology in the seat and handlebar stem. K2's BMX line is supported by professional BMX riders, providing the product with exposure on television and at other events. The bikes are manufactured and assembled to K2's specifications by vendors and are distributed through an in-house marketing staff and by independent sales representatives to independent bicycle dealers in the U.S. and through distributors internationally. BACKPACKS. Dana Design, which was acquired by K2 in 1995, manufactures and distributes high-end backpacks in the U.S. DANA DESIGN products are known for their comfort, high quality and innovative features, such as custom fitting. The line also includes a series of "activity specific" packs marketed by K2 ski, bike and snowboard. DANA DESIGN and K2 backpacks are primarily manufactured to K2's specifications by vendors internationally for sale by independent sales representatives to specialty retailers in the United States. OTHER RECREATIONAL PRODUCTS Net sales for other recreational products were $41.0 million in 1999, $43.7 million in 1998 and $34.2 million in 1997. The following table lists K2's principal other recreational products and brand names under which they are sold.
PRODUCT BRAND NAME - -------------------------------------------- ------------------------------------ Imprinted Corporate Casuals Hilton Skateboard apparel Planet Earth Snowboard apparel Planet Earth Skateboard shoes Adio and Hawk
CORPORATE CASUALS. K2 manufactures and distributes jackets, shirts, fleece tops and other active wear under the HILTON and USA brand names. The products are sold in the United States to advertising specialty customers, embroiderers and screen printers who in turn sell imprinted items, including garments, principally to corporate buyers. HILTON and USA apparel, which are both manufactured by K2 in the United States and sourced from offshore vendors, are sold through catalogs by a direct sales force and by independent sales representatives. SKATEBOARD AND SNOWBOARD APPAREL AND SKATEBOARD SHOES. Skateboard and snowboard apparel and skateboard shoes are sold in the U.S., Europe and Japan. These products are manufactured to K2's specifications by suppliers, primarily located in Asia. The products are sold through company-owned and independent distributors in Europe and Asia and to retailers in the domestic market by independent sales representatives. K2's skateboard shoes are designed with significant assistance from a group of well-known professional skateboarders. With favorable demographic trends, skateboarding has been enjoying a significant resurgence in popularity, principally among pre-teen and early teen boys. Skateboard shoes, with retail prices between $65 and $85, are marketed under the Adio brand name, and models are named 4 after the specific skateboarder who aided in the design. K2 has recently introduced the "Hawk" line of skateboard shoes. This brand of shoes has been designed and introduced in cooperation with Tony Hawk, the best-known professional skateboarder in the world. INDUSTRIAL PRODUCTS Net sales of industrial products were $119.8 million in 1999, $125.9 million in 1998 and $114.0 million in 1997. The following table lists K2's principal industrial products and the brand names under which they are sold.
PRODUCT BRAND NAME - -------------------------------------------- ------------------------------------ Monofilament Line Shakespeare Composite Utility and Decorative Light Poles Shakespeare Fiberglass Marine Radio Antennas Shakespeare
MONOFILAMENT LINE. Nylon and polyester monofilament line is domestically manufactured and sold by K2 in a variety of diameters, tensile strengths and softness. Monofilament is used in various applications including the manufacture of woven mats for use by paper producers in the United States, Europe and South America and for use as line in weed trimmers in the United States and are sold directly to paperweavers and distributors of cutting line and to others through independent sales representatives. Monofilament sold in Europe for woven mats is manufactured primarily in K2's U.K. facility. Shakespeare monofilament also manufactures fishing line domestically, which is marketed by Shakespeare's fishing tackle division to retailers and mass merchandisers through independent sales representatives. COMPOSITE UTILITY AND DECORATIVE LIGHT POLES. K2 produces and sells directly composite utility and decorative light poles under the SHAKESPEARE name in the United States, principally to public and private utilities and developers for specialty and unique applications. K2 believes that a large majority of major utility companies in the United States have approved the use of composites for its light and utility poles. MARINE RADIO ANTENNAS. K2 manufactures fiberglass radio antennas in the United States for marine, citizen band and military application under the SHAKESPEARE name. The products are sold primarily in the United States. K2 also distributes marine radios and other marine electronics under the SHAKESPEARE name which are manufactured in Asia to K2's specifications. The antennas, radios and other marine electronics are sold by an in-house sales department and independent sales representatives to specialty marine dealers. COMPETITION K2's competition varies among its business lines. The sporting goods markets and recreational products markets are generally highly competitive, with competition centering on product innovation, performance and styling, price, marketing and delivery. Competition in these products (other than snowboards and active wear) consists of a relatively small number of large producers, some of whom have greater financial and other resources than K2. A relatively large number of companies compete in snowboards and active wear. While K2 believes that its well-recognized brand names, established distribution networks and reputation for developing and introducing innovative products have been key factors in the successful introduction of its sporting goods products, there are no significant technological or capital barriers to entry into the markets for many sporting goods and recreational products. These markets face competition from other leisure activities, and sales of leisure products are affected by changes in consumer tastes, which are difficult to predict. K2 believes that its industrial products segment competes based on product quality, service and delivery, however, K2's industrial products are, in most instances, subject to price competition, ranging from moderate in marine antennas and monofilament line to intense for commodity-type products. 5 Composite utility and light poles compete with products made of other materials, such as wood and aluminum. Certain industrial competitors have greater financial and other resources than K2. FOREIGN SOURCING AND RAW MATERIALS K2 has not experienced any substantial difficulty in obtaining raw materials, parts or finished goods inventory for its sporting goods and other recreational products businesses. Certain components and finished products, however, are manufactured or assembled abroad and therefore could be subject to interruption as a result of local unrest, currency exchange fluctuations, increased tariffs, trade difficulties and other factors. A growing portion of K2's sporting goods products are manufactured in the People's Republic of China which trades with the United States under Normal Trade Relations ("NTR") status. This includes most of K2's fishing rods, including its UGLY STIK models, and reels and its in-line skates and certain snowboards and skis. While K2 believes that alternative sources for these products produced in China could be found, maintaining its existing costs of such products will depend on China's continuing to be treated under NTR tariff rates, which the United States from time to time has threatened to rescind. Additionally, the gross margins on K2's products manufactured or sourced in the U.S. or in Asia and distributed in Europe will depend on the relative exchange rates between the U.S. dollar and the Euro. K2 has not experienced any substantial difficulty in obtaining raw materials for its industrial products segment. SEASONALITY AND CYCLICALITY; BACKLOG Sales of K2's sporting goods are generally highly seasonal and in many instances are dependent on weather conditions. K2's industrial products are mildly seasonal. This seasonality causes K2's financial results to vary from quarter to quarter, and K2's sales and earnings are usually weakest in the first quarter. In addition, the nature of K2's ski, snowboard, bike and in-line skate businesses requires that in anticipation of the selling season for these products, it make relatively large investments in inventory. The selling season, in the case of skis and snowboards runs from August through December, in the case of bikes runs from October through April and in the case of in-line skates, runs primarily from February through July. Relatively large investments in receivables are consequently made during and shortly after such seasons. The rapid delivery requirements of K2's customers for its sporting goods products and other recreational products also result in investment in significant amounts of inventory. K2 believes that another factor in its level of inventory investment is the shift by certain of its sporting goods customers from substantial purchases of pre-season inventories to deferral of deliveries until the products' retail seasons and ordering based on rates of sale. Sales of sporting goods and other recreational products depend to a large extent on general economic conditions including the amount of discretionary income available for leisure activities and consumer confidence. Sales of K2's industrial products are dependent to varying degrees upon economic conditions in the container and paper industries. As a result of the nature of many of K2's businesses, backlog is generally not significant, except for the in-line skate business. The backlog of in-line skate sales as of February 28, 1999 and 1998 was approximately $44.2 million and $36.7 million, respectively. The backlog may be subject to cancellation or other adjustments and is not necessarily indicative of future sales. CUSTOMERS K2 believes that its customer relationships are excellent, and no one customer of K2 accounted for ten percent or more of its consolidated annual net sales or 5% of its operating income in 1999 or 1998. 6 RESEARCH AND DEVELOPMENT Consistent with K2's business strategy of continuing to develop innovative brand name products and improving the quality, cost and delivery of products, K2 maintains decentralized research and development departments at several of its manufacturing centers which are engaged in product development and the search for new applications and manufacturing processes. Expenditures for research and development activities totaled approximately $12.1 million in 1999, $12.4 million in 1998 and $12.0 million in 1997 and were expensed as a part of general and administrative expenses in the year incurred. ENVIRONMENTAL FACTORS K2 is one of several potentially responsible parties ("PRP") named in an Environmental Protection Agency matter involving discharge of hazardous materials at old waste sites in South Carolina and Michigan. Although environmental laws technically impose joint and several liability upon each PRP at each site, the extent of K2's required financial contribution to the cleanup of these sites is expected to be limited based on the number and financial strength of the other named PRPs and the volume and types of waste involved which might be attributable to K2. Environmental and related remediation costs are difficult to quantify for a number of reasons including the number of parties involved, the difficulty in determining the extent of the contamination, the length of time remediation may require, the complexity of environmental regulation and the continuing advancement of remediation technology. K2's environmental engineers, consultants and legal counsel have developed estimates based upon cost analyses and other available information for this particular site. K2 accrues for these costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. At December 31, 1999 and 1998, K2 accrued approximately $806,000 and $963,000, respectively, with no provision for expected insurance recovery. EMPLOYEES K2 had approximately 3,000 and 2,700 employees at December 31, 1999 and 1998, respectively. The increase was generally due to acquisitions. K2 believes that its relations with employees generally have been good. PATENTS AND INTELLECTUAL PROPERTY RIGHTS While product innovation is a highly important factor in K2's sporting goods and other recreational products segments and many of K2's innovations have been patented, K2 does not believe that the loss of any one patent would have a material effect on it, however, the loss of the in-line skate patent could result in increased competition and reduced sales and margins. Certain of its brand names, such as K2, OLIN, RIDE, MORROW, SHAKESPEARE, UGLY STIK, PFLEUGER, STEARNS, HILTON and DANA DESIGN are believed by K2 to be well-recognized by consumers and therefore important in the sales of these products. Registered and other trademarks and tradenames of Company products are italicized in this Form 10-K. 7 ITEM 2. PROPERTIES The table below provides information with respect to the principal production and distribution facilities utilized by K2 for continuing operations as of December 31, 1999.
OWNED FACILITIES LEASED FACILITIES -------------------- -------------------- TYPE OF NO. OF SQUARE NO. OF SQUARE LOCATION FACILITY LOCATIONS FOOTAGE LOCATIONS FOOTAGE - -------- -------------- --------- -------- --------- -------- SPORTING GOODS Minnesota............................. Distribution and production 2 302,000 3 106,000 South Carolina........................ Distribution and production 1 100,000 Washington............................ Distribution and production 1 160,000 2 170,000 California............................ Production and warehouse 2 41,000 Nevada................................ Distribution and production 1 21,000 Foreign............................... Distribution and production 1 15,000 22 372,000 -- ------- -- ------- 5 577,000 30 710,000 == ======= == ======= OTHER RECREATIONAL PRODUCTS Alabama............................... Distribution and production 2 160,000 California............................ Distribution 2 40,000 Illinois.............................. Distribution 1 85,000 -- ------- -- ------- 2 160,000 3 125,000 == ======= == ======= INDUSTRIAL PRODUCTS Florida............................... Production 1 15,000 South Carolina........................ Distribution and production 2 515,000 Foreign............................... Distribution and production 1 33,000 -- ------- -- ------- 4 563,000 0 0 == ======= == =======
The corporate headquarters of K2 is located in 11,000 square feet of leased office space in Los Angeles, California. The terms of K2's leases range from one to eight years, and many are renewable for additional periods. The termination of any lease expiring 2000 would not have a material adverse effect on K2's operations. K2 believes that, in general, its plants and equipment are adequately maintained, in good operating condition and are adequate for K2's present needs. K2 regularly upgrades and modernizes its facilities and equipment and expands its facilities to meet production and distribution requirements. ITEM 3. LEGAL PROCEEDINGS Certain of K2's products are used in relatively high risk recreational settings and from time to time K2 is named as a defendant in lawsuits asserting product liability claims relating to its sporting goods products. To date none of these lawsuits has had a material effect on K2, and K2 does not believe that any lawsuit now pending could reasonably be expected to have such an effect. K2 maintains product liability, general 8 liability and excess liability insurance coverages. No assurances can be given that such insurance will continue to be available at an acceptable cost to K2 or that such coverage will be sufficient to cover one or more large claims, or that the insurers will not successfully disclaim coverage as to a pending or future claim. K2 is one of several potentially responsible parties ("PRP") named in an Environmental Protection Agency matter involving discharge of hazardous materials at old waste sites in Michigan and South Carolina. Although environmental laws technically impose joint and several liability upon each PRP at each site, the extent of K2's required financial contribution to the cleanup of these sites is expected to be limited based on the number and financial strength of the other named PRPs and the volume and types of waste involved which might be attributable to K2. Environmental and related remediation costs are difficult to quantify for a number of reasons including the number of parties involved, the difficulty in determining the extent of the contamination, the length of time remediation may require, the complexity of environmental regulation and the continuing advancement of remediation technology. K2's environmental engineers, consultants and legal counsel have developed estimates based upon cost analyses and other available information for these particular sites. K2 accrues for these costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. At December 31, 1999 and 1998, K2 accrued approximately $806,000 and $930,000, respectively, with no provision for expected insurance recovery ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF K2
NAME POSITION AGE - ---- -------- -------- Richard M. Rodstein President and Chief Executive Officer 45 Robert E. Doyle Senior Vice President; President of Simplex Products 53 John J. Rangel Senior Vice President--Finance 46 Tony H. Chow Vice President and Director of Taxes 52 David G. Cook Vice President; President of Stearns 62 Timothy C. Cronin Vice President; President of Hilton Corporate Casuals 49 David H. Herzberg Vice President; President of Shakespeare Monofilament 57 J. Wayne Merck Vice President; President of Shakespeare Composites and Electronics 40 James A. Vandergrift Vice President 49 Susan E. McConnell Secretary 56
Mr. Rodstein has been President of K2 since 1990 and Chief Executive Officer since January 1, 1996. Mr. Doyle has been a Senior Vice President of K2 and president of Simplex Products for more than the past five years. Mr. Rangel, a CPA, has been Senior Vice President-Finance of K2 for more than the past five years. Mr. Chow has been a Vice President of K2 for more than the past five years. Mr. Cook has been a Vice President of K2 and president of Stearns for more than the past five years. Mr. Cronin has been a Vice President of K2 since January 1, 1996 and president of Hilton Corporate Casuals since November 1996. Mr. Cronin was Executive Vice President of Hilton Corporate Casuals from October 1992 to October 1996. Mr. Herzberg has been a Vice President of K2 and president of Shakespeare Monofilament for more than the past five years. 9 Mr. Merck has been a Vice President of K2 since January 1, 1996 and president of Shakespeare Composites & Electronics since June 1996. Mr. Merck was president of K2's former Anthony Pools business from February 1994 to June 1996. Mr. Vandergrift has been a Vice President of K2 since January 1, 1996 and vice president of product development of K-2 Corporation for more than the past five years. Mrs. McConnell, a California attorney, has been Secretary of K2 for more than the past five years. Officers of K2 are elected for one year by the directors at their first meeting after the annual meeting of shareholders and hold office until their successors are elected and qualified. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS PRINCIPAL MARKETS K2's Common Stock is listed on the New York Stock Exchange and the Pacific Stock Exchange under the symbol "KTO." At March 7, 2000 there were 1,847 holders of record of Common Stock of K2. COMMON STOCK PRICES AND DIVIDENDS The following table sets forth, for the quarters indicated, the reported high, low and closing sales prices of K2's Common Stock, as reported by the New York Stock Exchange during K2's two most recent fiscal years, and the cash dividends per share declared by K2 during those years:
STOCK PRICES --------------------------------------- CASH DIVIDENDS HIGH LOW CLOSE PER SHARE ----------- ----------- ----------- -------------- 1999 Fourth................................................. 8 15/16 6 15/16 7 3/4 -- Third.................................................. 10 9/16 8 13/16 8 13/16 -- Second................................................. 11 5/8 7 7/8 8 15/16 -- First.................................................. 11 5/8 8 9/16 9 $.11 1998 Fourth................................................. 17 7/16 7 3/4 10 5/16 $.11 Third.................................................. 21 1/8 15 17 11/16 $.11 Second................................................. 23 5/8 16 11/16 17 5/8 $.11 First.................................................. 23 11/16 17 3/4 22 5/16 $.11
DIVIDENDS K2 paid a cash dividend on the Common Stock from 1978 through March 31, 1999. On May 6, 1999, the Board of Directors of K2 announced the discontinuance of the cash dividend. K2 is subject to credit agreements which limit its ability to pay cash dividends. As of December 31, 1999, $9.3 million of retained earnings were free of such restrictions. See Note 6 of Notes to Consolidated Financial Statements for further description of K2's credit facilities. TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT FOR COMMON STOCK Harris Trust Company of California 601 South Figueroa Street, Suite 4900 Los Angeles, California 90017 11 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31(A) ------------------------------------------------------------ 1999 (B) 1998 (C) 1997 (D) 1996 1995 ---------- ---------- ---------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE FIGURES AND PERCENTAGES) INCOME STATEMENT DATA: Net sales............................... $635,105 $574,510 $559,030 $513,170 $448,575 Cost of products sold (e)............... 462,033 418,950 391,860 360,029 321,053 -------- -------- -------- -------- -------- Gross profit............................ 173,072 155,560 167,170 153,141 127,522 Selling expenses........................ 95,774 87,389 79,832 67,324 54,538 General and administrative expenses (e)................................... 40,341 39,030 38,303 38,490 34,758 Research and development expenses....... 12,113 12,391 11,979 9,317 6,437 -------- -------- -------- -------- -------- Operating income........................ 24,844 16,750 37,056 38,010 31,789 Interest expense........................ 12,741 12,163 10,560 9,294 9,916 Other income, net....................... (413) (236) (619) (1,476) (1,396) -------- -------- -------- -------- -------- Income from continuing operations before provision for income taxes............ 12,516 4,823 27,115 30,192 23,269 Provision for income taxes.............. 4,005 955 7,815 9,105 6,947 -------- -------- -------- -------- -------- Income from continuing operations....... 8,511 3,868 19,300 21,087 16,322 Discontinued operations, net of taxes (f)................................... 1,332 975 2,600 4,130 (1,443) -------- -------- -------- -------- -------- Net Income.............................. $ 9,843 $ 4,843 $ 21,900 $ 25,217 $ 14,879 ======== ======== ======== ======== ======== Basic earnings per share: Continuing operations................. $ 0.50 $ 0.23 $ 1.17 $ 1.27 $ 1.14 Discontinued operations............... 0.08 0.05 0.15 0.25 (0.10) -------- -------- -------- -------- -------- Net income............................ $ 0.58 $ 0.29 $ 1.32 $ 1.52 $ 1.04 ======== ======== ======== ======== ======== Diluted earnings per share: Continuing operations................. $ 0.50 $ 0.23 $ 1.15 $ 1.26 $ 1.13 Discontinued operations............... 0.08 0.06 0.16 0.25 (0.10) -------- -------- -------- -------- -------- Net income............................ $ 0.58 $ 0.29 $ 1.31 $ 1.51 $ 1.03 ======== ======== ======== ======== ======== Dividends: Cash--per share....................... $ 0.11 $ 0.44 $ 0.44 $ 0.44 $ 0.44 Basic shares............................ 16,880 16,554 16,541 16,574 14,367 Diluted shares.......................... 16,883 16,637 16,713 16,734 14,498 BALANCE SHEET DATA: Total current assets.................... $345,809 $335,570 $305,048 $251,606 $278,793 Total assets............................ 487,878 452,995 419,413 357,006 374,373 Total current liabilities............... 158,623 127,138 115,227 63,425 110,483 Long-term debt.......................... 107,280 110,724 88,668 89,096 75,071 Shareholders' equity.................... 218,520 202,119 202,885 188,988 175,816
- ------------------------ (a) Certain income statement and balance sheet accounts have been restated to reflect the Simplex building products division as discontinued operations. See Note 3 to Notes to Consolidated Financial Statements. (b) Gross profit, operating income, income from continuing operations and net income are $183,572, $35,344, $15,651, and $16,983, respectively, before restructuring costs totaling $6,500 ($4,420 net of taxes) and downsizing costs totaling $4,000 ($2,720 net of taxes). See Note 2 to Notes to Consolidated Financial Statements. 12 (c) Gross profit, operating income, income from continuing operations and net income are $166,060, $31,250, $13,293 and $14,268, respectively, before charges totaling $14,500 ($9,425 net of taxes). See Note 2 to Notes to Consolidated Financial Statements. (d) Operating income, income from continuing operations and net income are $39,456, $20,860 and $23,460, respectively, before restructuring costs of $2,400 ($1,560 net of taxes). See Note 2 to Notes to Consolidated Financial Statements. (e) For 1999, cost of products sold includes a $10,500 charge recorded in the fourth quarter. For 1998, cost of products sold includes a $10,500 charge and general and administrative expenses includes a $4,000 charge recorded in the third quarter of 1998. See Note 2 to Notes to Consolidated Financial Statements. (f) See Note 3 to Notes to Consolidated Financial Statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS K2 Inc. is a leading designer, manufacturer and marketer of brand name sporting goods which represent $474.3 million, or 74.7% of K2's 1999 consolidated net sales, and other recreational products, which represent $41.0 million in 1999 sales. K2 is also a manufacturer and supplier of selected industrial products, which had sales of $119.8 million in 1999. On October 7, 1999 K2 completed the acquisition of Ride, Inc. ("Ride"), a designer and manufacturer of snowboard equipment, apparel and accessories, in an all-stock merger transaction valued at $12.3 million. The results of operations of Ride have been included in the consolidated financial statements since the date of acquisition. During 1999, K2 announced a plan to reduce the cost structure of its ski and snowboard operations by restructuring and downsizing its Seattle manufacturing operation in favor of lower cost manufacturing and sourcing opportunities. Consequently, K2 recorded charges to cost of products sold for restructuring costs of $6.5 million, or $4.4 million and $.26 per diluted share after tax, and downsizing costs of $4.0 million, or $2.7 million and $.16 per diluted share after tax. These costs are associated with the downsizing of production and reduction of personnel, as well as the write-off of related equipment and inventory. In 1998, K2 adopted a plan to dispose of its Simplex building products division. This plan is consistent with K2's strategy to focus on its core sporting goods and other recreational products businesses. As a result, K2 reclassified Simplex as a discontinued operation in 1998 and similarly reclassified prior years' operations. K2 currently continues to pursue its plan to dispose of Simplex and, accordingly, has reported the operation as discontinued in the current year. The discussion which follows focuses on the continuing operations of K2. REVIEW OF OPERATIONS: COMPARISON OF 1999 TO 1998 Net sales from continuing operations increased to $635.1 million from $574.5 million in the prior year. Income from continuing operations for 1999 was $8.5 million, or $.50 per diluted share in 1999 as compared to $3.9 million, or $.23 per diluted share, in the prior year. Net income improved to $9.8 million, or $.58 per diluted share, from $4.8 million, or $.29 per diluted share, in the prior year. NET SALES. In the sporting goods segment, net sales increased 17.1% to $474.3 million from $404.9 million in 1998. The increase was attributable to strong demand during the year for most of the products in the segment. In-line skates, snowboard products, fishing tackle and bikes all registered double- digit growth. The increase in shipments of in-line skates reflected the strong demand for K2's softboot skates, especially in the European market, and worldwide growth of the children's softboot skate line. Improved snowboard volume reflected the benefit of the Ride and Morrow acquisitions completed during 13 the year and expansion of distribution into the Japanese market. Shakespeare fishing tackle continued to show strength in sales led by the popular Ugly Stik fishing rod series, packaged rods and reels and new product introductions. Bikes benefited from its repositioned bike product line. Sales of Stearns products increased due to new product introductions. Offsetting these increases was a decline in ski shipments for the year reflecting the mild winter season in the domestic market and K2's lower domestic market share. In the other recreational products segment, net sales declined 6.2% to $41.0 million from $43.7 million in the prior year. Sales of skateboard shoes and apparel for the year increased substantially over the prior year, however, declines in sales to the advertising specialty market more than offset K2's strength in the skateboard business. In the industrial products group, net sales declined 4.8%, to $119.8 million from $125.9 million in 1998. The sales decline reflected reduced demand for monofilament line used in the paper industry. Partially offsetting this decline was improved sales of specialty resins and marine antennas. GROSS PROFIT. Gross profit for the year increased to $173.1 million, or 27.3% of sales in 1999, from $155.6 million, or 27.1% of sales in 1998. For the years ended 1999 and 1998, gross profit was net of a $10.5 million charge in each period. In the fourth quarter of 1999, K2 announced a strategic initiative to significantly reduce the cost structure of its ski and snowboard operations by restructuring and downsizing the Seattle manufacturing operation to take advantage of lower cost manufacturing and sourcing opportunities in Asia, Europe and the United States. This resulted in a charge to cost of products sold for restructuring costs of $6.5 million and related downsizing costs of $4.0 million. In 1998, a charge was recorded to write-down the cost of high-end, full suspension mountain bike and "aggressive" skate inventory resulting from the sudden shift in market demand and subsequent repositioning of the bike business into more popularly priced, front suspension mountain bikes, comfort bikes and BMX bikes. Excluding the impact of the charge in both years, gross profit as a percentage of sales was comparable at 28.9% COSTS AND EXPENSES. Selling expenses increased 9.5% to $95.8 million, or 15.1% of net sales as compared with $87.4 million, or 15.2% of sales in 1998. The increase was attributable to increased sales volume in the sporting goods segment along with increased selling expenses related to recent acquisitions. General and administrative expenses increased 3.4% to $40.3 million, or 6.4% of net sales, compared with $39.0 million, or 6.8% of net sales in 1998. 1998 expense included a $4.0 million charge to write-down equipment and other items no longer used to manufacture mountain bikes, and for the costs related to repositioning the bike business. Excluding the impact of the 1998 charge, expenses for 1999 increased due to the fourth quarter impact of the Ride acquisition. Research and development expenses declined to $12.1 million from $12.4 million in 1998. OPERATING INCOME. Operating income from continuing operations improved to $24.8 million, or 3.9% of net sales, from $16.8 million, or 2.9% of net sales, in 1998. Excluding 1999 restructuring and downsizing costs totaling $10.5 million and the 1998 charges of $14.5 million, operating income from continuing operations for the years ended December 31, 1999 and 1998 was $35.3 million, or 5.5% of sales, and $31.2 million, or 5.4% of sales, respectively. The improvement is attributable to increased sales volume over the prior year on comparable gross margins. INTEREST EXPENSE. Interest expense increased largely due to higher average borrowing balances, by $.6 million in 1999. OTHER INCOME. Other income, which includes royalties, interest income and other miscellaneous income, increased to $.4 million from $.2 million in 1998. INCOME TAXES. The income tax rate for 1999 increased due to an increase in domestic earnings as percentage of total earnings. 14 SEGMENT INFORMATION. Total segment operating profit or loss (before interest, corporate expenses and income taxes) improved to $30.6 million from $22.6 million in 1998. In the sporting goods segment, operating profit increased to $15.0 million from $5.3 million in 1998. Excluding the $10.5 million charge for restructuring and downsizing costs in 1999 and the $14.5 million charge for reserves in 1998, segment operating profit was $25.5 million compared with $19.8 million in 1998. The improvement was attributable to the increases in sales volume at comparable margins in most product lines over the prior year. In the other recreational products segment, an operating loss of $1.9 million was reported in 1999 as compared with an operating loss of $1.1 million in 1998. The increase in the loss was attributable to the decline in sales volume without a corresponding reduction in related expenses in the advertising specialty market. In the industrial products segment, operating profit declined to $17.5 million from $18.4 million in 1998, but was comparable as a percentage of net sales at 14.6%. The decline was due to reduced sales volume of monofilament line used in the paper industry. REVIEW OF OPERATIONS: COMPARISON OF 1998 TO 1997 Net sales from continuing operations increased to $574.5 million from $559.0 million in the prior year. Income from continuing operations for 1998 was $3.9 million, or $.23 per diluted share, as compared to $19.3 million, or $1.15 per diluted share in the prior year. Net income declined to $4.8 million, or $.29 per diluted share, from $21.9 million, or $1.31 per diluted share in the prior year. NET SALES. In the sporting goods segment, net sales decreased 1.4% to $404.9 million from $410.8 million in 1997. The decrease was primarily due to a decline in ski and mountain bike sales. Unfavorable weather conditions in the important fourth quarter combined with the impact of declining industry sales worldwide resulted in lower shipments of K2 and Olin brand skis. Sales of the bike business were down substantially due to a rapid shift in the marketplace away from high-end, full suspension mountain bikes. Since K2 bikes were positioned in the high-end niche, full-suspension mountain bike shipments declined 47% for the year. More modest declines were incurred in sales of outdoor products. K2 softboot in-line skate sales were comparable with the prior year. A decline in sales of "aggressive" skates, due to an industry-wide reduction in demand, was offset by the growth of K2 children's skates. Sales increases were reported in K2 snowboard products, Shakespeare fishing tackle and Stearns products. Although also feeling the effects of poor weather conditions in late 1998, snowboard products benefited from strong demand for the Clicker step-in binding, related boots and snowboards. Shipments of Shakespeare's Ugly Stik fishing rods grew during the year in acceptance of several new models. New kit and combo products and other new products also contributed to overall growth in fishing tackle sales. New product introductions including inflatables, waders and other products by Stearns also contributed to the increase in sales. In the other recreational products segment, net sales grew 27.8% to $43.7 million from $34.2 million in the prior year. Sales growth was driven primarily by the acceptance of skateboard shoes, snowboard apparel and other apparel sales of the Planet Earth group, and by the inclusion for the full year of the base business, which was acquired in 1997. In the industrial products group, net sales increased 10.4%, to $125.9 million from $114.0 million in 1997. Improved sales were reported by the Shakespeare Monofilament business due to new product introductions and increased penetration of its cutting line business. Net sales in 1998 of fiberglass light poles and marine and military antennas were comparable with the prior year. GROSS PROFIT. Gross profit declined to $155.6 million, or 27.1% of sales in 1998, from $167.2 million, or 29.9% of sales in 1997. Gross profit in 1998 was net of a $10.5 million charge (a discussion regarding an additional $4.0 million which was charged against general and administrative expenses is included below). Excluding the impact of the charge, gross profit as a percentage of sales declined to 28.9%. The charge was recorded to write down the cost of high-end, full suspension mountain bike and "aggressive" skate 15 inventory made necessary by the sudden shift in market demand and subsequent repositioning of the bike business into more popularly priced, front suspension mountain bikes, comfort bikes and BMX bikes. The remaining reduction in the gross profit percentage was due mainly to an unfavorable sales mix which included a larger proportion of closeout bikes, skates and skis at reduced or no margins. COSTS AND EXPENSES. Selling expenses increased 9.5% to $87.4 million from $79.8 million in 1997. The increase was largely volume-driven and related to launches of new products, such as skateboard shoes and apparel, and the continued support of K2's product lines in the marketplace. General and administrative expenses increased 1.8% to $39.0 million from $38.3 million in 1997, although as a percentage of sales they declined slightly from the prior year. 1998 expense included a $4.0 million charge to write down equipment and other items no longer used to manufacture mountain bikes referred to above, and for the costs related to repositioning the bike business. 1997 expense included a $2.4 million restructuring charge to consolidate the mountain bike and outdoor equipment operations. Research and development expense increased to $12.4 million from $12.0 million in 1997. OPERATING INCOME. Operating income from continuing operations declined to $16.8 million, or 2.9% of net sales, from $37.1 million, or 6.6% of net sales, in 1997. The percentage decrease is mainly due to the charge discussed above which totaled $14.5 million, and due to an unfavorable mix of sales which included a greater proportion of skis, "aggressive" skates and mountain bikes sold at discounted prices. Excluding the charge, operating income was $31.3 million, or 5.4% of net sales. INTEREST EXPENSE. Interest expense increased by a net amount of $1.6 million in 1998. Lower interest rates resulted in a decrease of $1.1million while higher average borrowing balances resulted in an increase of $2.7 million. OTHER INCOME. Other income, which includes royalties, interest income and other miscellaneous income, decreased to $.2 million from $.6 million in 1997. INCOME TAXES. The income tax rate for 1998 declined due to a reduction of the income tax valuation reserve, as a result of further utilization of prior year foreign net losses utilized in the current period. SEGMENT INFORMATION. Total segment operating profit or loss (before interest, corporate expenses and income taxes) decreased to $22.6 million from $44.5 million in 1997. In the sporting goods segment operating profit declined to $5.3 million from $26.3 million in 1997. The decrease was due to a wider loss in the full-suspension mountain bike business reflecting a decline in sales due to a shift in the market and resulting sale of inventory at reduced prices, resulting in a $14.5 million charge, and sales of other sporting goods products at reduced margins (such as skis and in-line skates as described above). In the other recreational products segment, an operating loss of $1.1 million was reported in 1998 as compared with operating profit of $.7 million in 1997. The current year loss was due to start-up costs of new products for the emerging sports market, partially offset by improved operating profits of the activewear group. In the industrial products segment, operating profit increased $18.4 million from $17.5 million in 1997. The improvement was attributable to sales-related gains in the monofilament and specialty resins businesses. LIQUIDITY AND SOURCES OF CAPITAL K2's continuing operations provided $47.4 million of cash as contrasted with $22.7 million of cash used in 1998. The $70.1 million year-to-year improvement in cash, excluding the effects of acquisitions, is primarily attributable to the reduction in inventories as compared with the prior year's increase, and an increase in accounts payable as compared with the prior year's decrease. The reduction in inventory levels, is attributable to a program initiated by all segments to reduce inventory levels by working with the supply 16 chain to reduce purchasing lead times and receiving product when needed. The increase in accounts payable is attributable to more favorable payment terms obtained from vendors throughout K2. Net cash used in investing activities from continuing operations was $14.7 million, as compared to $16.5 million in 1998. The improvement was attributable to a reduction in net capital expenditures in the current year. No material commitments for capital expenditures existed at year end. Cash used in financing activities was $28.0 million as contrasted with cash provided of $31.7 million in 1998. Cash provided in 1999 from operations was used to pay down short and long-term debt and debt assumed from acquisitions, resulting in a reduction of total debt of $10.4 million as compared to the prior year. K2's principal long-term borrowing facility is a $75 million Credit Line ("Credit Line") which becomes due on September 30, 2004. Additionally, K2 has a $50 million accounts receivable purchase facility ("Purchase Facility"). At December 31, 1999, $39.5 million was outstanding under the Credit Line and $50.0 million of accounts receivable had been sold under the Purchase Facility. Under the Credit Line and Purchase Facility, K2 is subject to an agreement which, among other things, restricts amounts available for payment of cash dividends and stock repurchases by K2. As of December 31, 1999, $9.3 million of retained earnings were free of such restrictions. K2 also had $22.2 million of 8.39% unsecured senior notes due through 2004, payable in six equal principal payments, and $50.0 million of 8.41% unsecured notes due through 2009, payable in seven equal principal payments commencing in 2003. The notes are subject to agreements which are generally less restrictive than the long-term borrowing facilities. Additionally, at December 31, 1999, K2 had $84.6 million under foreign and domestic short-term lines of credit with $56.8 million outstanding and no borrowings available under K2's debt covenant restrictions. For further information regarding K2's borrowings, see Note 6 to Notes to Consolidated Financial Statements. K2 anticipates its cash needs in 2000 will be provided from operations and from borrowings, principally under its Credit Line and Purchase Facility and, to a lesser extent, other existing credit lines. ENVIRONMENTAL MATTERS K2 is one of several named potentially responsible parties ("PRP") in an Environmental Protection Agency matter involving discharge of hazardous materials at old waste sites in South Carolina and Michigan. Although environmental laws technically impose joint and several liability upon each PRP at each site, the extent of K2's required financial contribution to the cleanup of these sites is expected to be limited based on the number and financial strength of the other named PRPs and the volume and types of waste involved which might be attributable to K2. Environmental and related remediation costs are difficult to quantify for a number of reasons including the number of parties involved, the difficulty in determining the extent of the contamination, the length of time remediation may require, the complexity of environmental regulation and the continuing advancement of remediation technology. K2's environmental engineers, consultants and legal counsel have developed estimates based upon cost analyses and other available information for this particular site. K2 accrues for these costs when it is probable a liability has been incurred and the amount can be reasonably estimated. At December 31, 1999 and 1998, K2 had recorded an estimated liability of approximately $806,000 and $963,000, respectively, with no provision for expected insurance recovery. The ultimate outcome of this matter cannot be predicted with certainty, however, and taking into consideration reserves provided, management does not believe this matter will have a material adverse effect on K2's financial statements. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which 17 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires companies to recognize all derivatives on the balance sheet at fair value. K2 will adopt SFAS No. 133 in 2000. The adoption of the new standard is not expected to have a material effect on its results of operations or financial position. IMPACT OF INFLATION AND CHANGING PRICES The inflation rate, as measured by the Consumer Price Index, has been relatively low in the last few years, and therefore, pricing decisions by K2 have largely been influenced by competitive market conditions. Depreciation expense is based on the historical cost to K2 of its fixed assets, and therefore, is considerably less than it would be if it were based on current replacement cost. While buildings, machinery and equipment acquired in prior years will ultimately have to be replaced at significantly higher prices, it is expected that this will be a gradual process over many years. YEAR 2000 ISSUE In prior years, K2 discussed the nature and progress of its plans to become year 2000 ready. In late 1999, K2 completed its remediation and testing of systems. As a result of those planning and implementation efforts, K2 experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. K2 is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. K2 incurred approximately $1.1 ($.7 million expensed and $.4 million capitalized) million during 1999 in connection with remediating its systems. K2 will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. STATEMENT REGARDING FORWARD LOOKING DISCLOSURE This Annual Report on Form 10-K contains "forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent K2's expectations or beliefs concerning future events, including, but not limited to, the following: statements regarding market trends regarding softboot in-line skates, bikes, skis and snowboards, inventory levels at retail, product acceptance and demand, marketing efforts, growth efforts, cost reduction efforts, margin enhancement efforts, product development efforts, success of new product introductions, marketing positioning and overall market trends which involve substantial risks and uncertainties. Actual results could differ materially from those indicated in forward-looking statements by reason of a number of factors, many of which are outside of K2's control. Among such factors are the following: - Developments in the economies of the United States, Europe and Asia. A substantial portion of K2 sales are to customers in Europe and Asia, and a significant portion of K2 products are manufactured in China. Adverse economic changes in the United States or such foreign markets could result in decreased sales and revenues, inflationary pressures on costs of production, and/or increases in interest and other costs. - CHANGES IN CURRENCY EXCHANGE RATES. Changes in the exchange rates between the United States dollar and the currencies of Europe and Asia could make K2 products less-competitive in foreign markets, and could reduce the value of revenues represented by foreign currencies. - UNEXPECTED DELAYS AND COSTS OF RESTRUCTURING. K2 has undertaken a significant restructuring of its manufacturing operations for skis and snowboards, including a shift in some manufacturing to 18 China. Failure to complete the restructuring timely and efficiently could eliminate anticipated cost savings, or even lead to increased costs of production. - UNFAVORABLE POLITICAL DEVELOPMENTS. K2's business is dependent on international trade, both for sales of finished goods and low-cost sourcing of products. Any political developments adversely affecting trade with Europe or Asia, including China, could severely impact K2 results of operations. - COMPETITIVE DEVELOPMENTS AND INITIATIVES BY K2'S COMPETITORS. New product introductions, financial incentives to retailers and other initiatives by K2 competitors could weaken the market position of K2 products. - RAPID CHANGES IN MARKETING STRATEGIES, PRODUCT DESIGN, STYLES AND TASTES. Consumer demand for recreational products is strongly influenced by matters of taste and style. Further, development of the internet is leading to dramatic changes in product marketing and distribution. K2's success is dependent, in significant part, on its ability to keep abreast of, and lead, such changes. - WEATHER. Sales of K2's recreational products are strongly influenced by the weather. Poor snow conditions in the winter or summer conditions unfavorable to water sports can adversely affect sales of important K2 products. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK K2's earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. K2 manages its exposures to changes in foreign currency exchange rates on certain firm purchase commitments and anticipated, but not yet committed purchases, by entering into foreign currency forward contracts. K2's risk management objective is to reduce its exposure to the effects of changes in exchange rates on the cost of products sold over quarterly time horizons. Foreign currency exchange rate movements also affect K2's competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-U.S. based competitors and may affect the profitability and pricing strategies of K2 as well. K2's foreign currency risk policies entail entering into foreign currency derivative instruments only to manage risk of currency fluctuations over a given period of time, not for speculative investments. Considering both the anticipated cash flows from firm purchase commitments and anticipated purchases for the next quarter and the foreign currency derivative instruments in place at year end, a hypothetical 10% weakening of the U.S. dollar relative to all other currencies would not materially adversely affect expected first quarter 2000 earnings or cash flows. This analysis is dependent on actual purchases during the next quarter occurring within 90% of budgeted forecasts. The effect of the hypothetical change in exchange rates ignores the effect this movement may have on other variables including competitive risk. If it were possible to quantify this competitive impact, the results could well be different than the sensitivity effects shown above. In addition, it is unlikely that all currencies would uniformly strengthen or weaken relative to the U.S. dollar. In reality, some currencies may weaken while others may strengthen. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA K2 INC. STATEMENTS OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31 ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE FIGURES) Net sales................................................... $635,105 $574,510 $559,030 Cost of products sold....................................... 462,033 418,950 391,860 -------- -------- -------- Gross profit.............................................. 173,072 155,560 167,170 Selling expenses............................................ 95,774 87,389 79,832 General and administrative expenses......................... 40,341 39,030 38,303 Research and development expenses........................... 12,113 12,391 11,979 -------- -------- -------- Operating income.......................................... 24,844 16,750 37,056 Interest expense............................................ 12,741 12,163 10,560 Other income, net........................................... (413) (236) (619) -------- -------- -------- Income from continuing operations before provision for income taxes............................................ 12,516 4,823 27,115 Provision for income taxes.................................. 4,005 955 7,815 -------- -------- -------- Income from continuing operations......................... 8,511 3,868 19,300 Discontinued operations, net of taxes....................... 1,332 975 2,600 -------- -------- -------- Net Income.................................................. $ 9,843 $ 4,843 $ 21,900 ======== ======== ======== Basic earnings per share: Continuing operations..................................... $ 0.50 $ 0.23 $ 1.17 Discontinued operations................................... 0.08 0.06 0.15 -------- -------- -------- Net income................................................ $ 0.58 $ 0.29 $ 1.32 ======== ======== ======== Diluted earnings per share: Continuing operations..................................... $ 0.50 $ 0.23 $ 1.15 Discontinued operations................................... 0.08 0.06 0.16 -------- -------- -------- Net income................................................ $ 0.58 $ 0.29 $ 1.31 ======== ======== ======== Basic shares outstanding.................................... 16,880 16,554 16,541 Diluted shares outstanding.................................. 16,883 16,637 16,713
See notes to consolidated financial statements 20 K2 INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31 --------------------- 1999 1998 --------- --------- (IN THOUSANDS, EXCEPT NUMBER OF SHARES) ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 9,421 $ 3,394 Accounts receivable, net.................................. 149,151 126,011 Inventories, net.......................................... 172,154 188,348 Deferred taxes and income taxes receivable................ 10,030 12,780 Prepaid expenses and other current assets................. 5,053 5,037 -------- -------- Total current assets.................................... 345,809 335,570 PROPERTY, PLANT AND EQUIPMENT Land and land improvements................................ 1,637 992 Buildings and leasehold improvements...................... 32,219 29,814 Machinery and equipment................................... 124,421 111,872 Construction in progress.................................. 4,176 8,393 -------- -------- 162,453 151,071 Less allowance for depreciation and amortization.......... 89,858 84,480 -------- -------- 72,595 66,591 OTHER ASSETS Intangibles, principally goodwill, net.................... 38,928 19,564 Net assets of discontinued operations..................... 24,706 27,511 Other..................................................... 5,840 3,759 -------- -------- Total Assets............................................ $487,878 $452,995 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Bank loans................................................ $ 57,359 $ 64,350 Accounts payable.......................................... 44,231 20,807 Accrued payroll and related............................... 19,781 15,982 Other accruals............................................ 32,808 21,555 Current portion of long-term debt......................... 4,444 4,444 -------- -------- Total current liabilities............................... 158,623 127,138 Long-term Debt.............................................. 107,280 110,724 Deferred Taxes.............................................. 3,455 13,014 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred Stock, $1 par value, authorized 12,500,000 shares, none issued Common Stock, $1 par value, authorized 40,000,000 shares, issued shares--18,672,646 in 1999 and 17,190,652 in 1998.................................................... 18,673 17,191 Additional paid-in capital................................ 143,326 132,488 Retained earnings......................................... 75,248 67,227 Employee Stock Ownership Plan and stock option loans...... (1,975) (1,981) Treasury shares at cost, 733,110 in 1999 and 623,759 in 1998.................................................... (8,992) (8,106) Accumulated other comprehensive loss...................... (7,760) (4,700) -------- -------- Total Shareholders' Equity.............................. 218,520 202,119 -------- -------- Total Liabilities and Shareholders' Equity.............. $487,878 $452,995 ======== ========
See notes to consolidated financial statements 21 K2 INC. STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 --------------------------------------------------------------------------------------- EMPLOYEE STOCK ACCUMULATED ADDITIONAL OWNERSHIP TREASURY OTHER COMMON PAID-IN RETAINED PLAN AND STOCK SHARES, COMPREHENSIVE STOCK CAPITAL EARNINGS OPTION LOANS AT COST LOSS TOTAL -------- ---------- -------- -------------- -------- ------------- -------- (IN THOUSANDS EXCEPT PER SHARE FIGURES) BALANCE AT DECEMBER 31, 1996............. $17,132 $131,627 $55,047 $(7,087) $(6,719) $(1,012) $188,988 Net income for the year 1997........................ 21,900 21,900 Translation adjustments....... (3,905) (3,905) -------- Comprehensive income.......... 17,995 Exercise of stock options..... 28 459 487 Cash dividends, $.44 per share....................... (7,279) (7,279) Repurchase of shares and stock option loan repayments...... 1,070 (1,387) (317) Employee Stock Ownership Plan, amortization, loan and partial loan repayment...... 3,011 3,011 ------- -------- ------- ------- ------- ------- -------- BALANCE AT DECEMBER 31, 1997............. 17,160 132,086 69,668 (3,006) (8,106) (4,917) 202,885 Net income for the year 1998........................ 4,843 4,843 Translation adjustments....... 217 217 -------- Comprehensive income.......... 5,060 Exercise of stock options..... 31 402 433 Cash dividends, $.44 per share....................... (7,284) (7,284) Stock option loan(s).......... (96) (96) Employee Stock Ownership Plan, amortization, loan and partial loan repayment...... 1,121 1,121 ------- -------- ------- ------- ------- ------- -------- BALANCE AT DECEMBER 31, 1998............. 17,191 132,488 67,227 (1,981) (8,106) (4,700) 202,119 Net income for the year 1999........................ 9,843 9,843 Translation adjustments....... (3,060) (3,060) -------- Comprehensive income.......... 6,783 Issuance of shares from acquisition of Ride, Inc.... 1,482 10,838 12,320 Repurchase of shares.......... (886) (886) Cash dividends, $.11 per share....................... (1,822) (1,822) Stock option loan(s).......... (4) (4) Employee Stock Ownership Plan, amortization, loan and partial loan repayment...... 10 10 ------- -------- ------- ------- ------- ------- -------- BALANCE AT DECEMBER 31, 1999............. $18,673 $143,326 $75,248 $(1,975) $(8,992) $(7,760) $218,520 ======= ======== ======= ======= ======= ======= ========
See notes to consolidated financial statements 22 K2 INC. STATEMENTS OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31 ------------------------------- 1999 1998 1997 --------- -------- -------- (THOUSANDS) OPERATING ACTIVITIES Income from continuing operations......................... $ 8,511 $ 3,868 $ 19,300 Gain on sale of investments............................... (3,500) Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Depreciation of property, plant and equipment........... 11,685 11,183 10,313 Amortization of intangibles............................. 2,041 1,556 1,261 Deferred taxes and income taxes receivable.............. (6,522) (4,515) (1,476) Changes in operating assets and liabilities: Accounts receivable................................... (10,653) (13,521) (27,638) Inventories........................................... 25,830 (5,353) (31,813) Prepaid expenses and other current assets............. 283 1,438 (1,139) Accounts payable...................................... 14,389 (16,500) 4,325 Payrolls and other accruals........................... 1,867 (828) 4,733 --------- -------- -------- Net cash provided by (used in) continuing operations...... 47,431 (22,672) (25,634) INVESTING ACTIVITIES Property, plant and equipment expenditures................ (16,204) (17,257) (19,425) Disposals of property, plant and equipment................ 4,013 1,527 298 Purchases of businesses, net of cash acquired............. (2,629) (834) Proceeds on sale of investments........................... 9,908 Other items, net.......................................... 99 (729) (5,654) --------- -------- -------- Net cash used in investing activities..................... (14,721) (16,459) (15,707) FINANCING ACTIVITIES Borrowings under long-term debt........................... 125,035 62,500 51,892 Payments of long-term debt................................ (128,479) (40,444) (52,755) Net increase (decrease) in short-term bank loans.......... (22,749) 15,383 41,658 Net proceeds from accounts receivable facility............ 3,275 Exercise of stock options................................. 433 487 Dividends paid............................................ (1,822) (7,284) (7,279) Net repayments by ESOP.................................... 1,107 3,000 --------- -------- -------- Net cash (used in) provided by financing activities....... (28,015) 31,695 40,278 --------- -------- -------- Net increase (decrease) in cash and cash equivalents from continuing operations..................................... 4,695 (7,436) (1,063) DISCONTINUED OPERATIONS Income from discontinued operations....................... 1,332 975 2,600 Adjustments to reconcile income from discontinued operations to net cash used in discontinued operations: Depreciation and amortization........................... 2,939 2,844 2,652 Capital expenditures.................................... (2,565) (3,442) (4,303) Other items, net........................................ (374) 4,747 (4,734) --------- -------- -------- Cash provided by (used in) discontinued operations.......... 1,332 5,124 (3,785) --------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 6,027 (2,312) (4,848) Cash and cash equivalents at beginning of year.............. 3,394 5,706 10,554 --------- -------- -------- Cash and cash equivalents at end of year.................... $ 9,421 $ 3,394 $ 5,706 ========= ======== ========
See notes to consolidated financial statements 23 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION K2 is a leading designer, manufacturer and marketer of brand name sporting goods, which represent $474.3 million, or 74.7%, of K2's 1999 consolidated net sales, and other recreational products, which represent $41.0 million in 1999 net sales. K2 is also a manufacturer and supplier of selected industrial products, which had sales of $119.8 million in 1999. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of K2 and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. FISCAL PERIODS K2 maintains its books using a 52/53 week year ending on the last Sunday of December. For purposes of the consolidated financial statements, the year end is stated as of December 31. The years ended December 31, 1999, 1998 and 1997 consisted of 52 weeks. REVENUE RECOGNITION K2 recognizes revenue from product sales upon shipment to its customers. USE OF ESTIMATES The preparation of financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions affecting the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual amounts could differ from those estimates. FOREIGN CURRENCY TRANSLATION The functional currency for most foreign operations is the local currency. The financial statements of foreign subsidiaries have been translated into United States dollars. Asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Revenue and expense accounts have been translated using the average exchange rate for the year. The gains and losses associated with the translation of the financial statements resulting from the changes in exchange rates from year to year have been reported in the other comprehensive income or loss account in shareholders' equity. Transaction gains or losses, other than intercompany debt deemed to be of a long-term nature, are included in net income in the period in which they occur. CASH EQUIVALENTS Short-term investments (including any debt securities) that are part of K2's cash management portfolio are classified as cash equivalents and are carried at amortized cost. These investments are highly liquid, are of limited credit risk and have original maturities of three months or less when purchased. The carrying amount of cash equivalents approximates market. 24 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTS RECEIVABLE AND ALLOWANCES Accounts receivable are the result of K2's worldwide sales activities. Although K2's credit risk is spread across a large number of customers within a wide geographic area, periodic concentrations within a specific industry occur due to the seasonality of its businesses. At December 31, 1999 and 1998, K2's receivables from sporting goods retailers who sell skis, skates, snowboards and bikes amounted to 71% and 66%, respectively of total receivables. K2 generally does not require collateral and performs periodic credit evaluations to manage its credit risk. Accounts receivable are net of allowances for doubtful accounts of $6,572,000 and $5,798,000 at December 31, 1999 and 1998, respectively. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined on the LIFO method with respect to approximately 14% and 23% of total inventories at December 31, 1999 and 1998, respectively. Cost was determined on the FIFO method for all other inventories. LONG-LIVED ASSETS Long-lived assets, include, among others, goodwill, intangible assets, and property, plant and equipment and are reviewed periodically to determine if the carrying values are not impaired. K2 considers the future undiscounted cash flows of the acquired companies in assessing the recoverability of these assets. If indicators of impairment are present, or if long-lived assets are expected to be disposed of, impairment losses are recorded. Any impairment is charged to expense in the period in which the impairment is incurred. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is provided on the straight-line method based upon the estimated useful lives of the assets. In the fourth quarter of 1999, K2 wrote down certain equipment in connection with the restructuring of its ski and snowboard operations no longer in use. In the third quarter of 1998, K2 wrote down certain equipment related to its bike product line no longer in use. INTANGIBLES Goodwill arising from acquisitions is amortized on a straight-line basis over a period ranging from 15 to 40 years. Other intangibles are amortized on a straight-line basis over 3 to 15 years. Accumulated amortization of intangibles as of December 31, 1999 and 1998, amounted to $8,867,000 and $7,259,000, respectively. STOCK-BASED COMPENSATION AND OTHER EQUITY INSTRUMENTS K2 and its subsidiaries account for employee and directors' stock option grants using the intrinsic method. Generally, the exercise price of K2's employee stock options equals or exceeds the market price of the underlying stock on the date of grant and no compensation expense is recognized. If the option price is less than the fair value, K2 records compensation expense over the vesting period of the option. Options 25 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) granted to non-employees are accounted for using the fair value method. K2 disclosed the pro forma effects of using the fair value method for all option plans in the accompanying financial statements. ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising costs for the years ended December 31, 1999, 1998 and 1997 amounted to $23,680,000, $21,903,000 and $20,548,000, respectively. RESEARCH AND DEVELOPMENT Research and development costs are charged to expense as incurred. OTHER INCOME Other income includes interest income, royalties and other miscellaneous income INCOME TAXES Income taxes are recorded using the liability method. EARNINGS PER SHARE Basic earnings per share ("EPS") are determined by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS reflects the potential dilutive effects of stock options, using the treasury stock method. The dilutive effects of stock options included in the dilutive EPS calculation at December 31, 1999, 1998 and 1997 were 3,000, 83,000 and 171,000, respectively. During 1999, 1998 and 1997, the computation of diluted EPS did not include the options to purchase 1,064,000, 542,000 and 4,500 shares of common stock, respectively, because their inclusion would have been antidilutive. NEWLY ISSUED ACCOUNTING STANDARDS Effective in 2001 accounting for gains or losses resulting from changes in the value of derivatives would be changed depending on the use of the derivative and whether they qualify for hedge accounting. The adoption of this new requirement is not expected to have a material impact on the financial position or results of operations of K2. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current year presentation. NOTE 2--CHARGES AGAINST EARNINGS In the fourth quarter of 1999, a pre-tax charge of $10.5 million was charged to cost of products sold to cover restructuring costs of $6.5 million and downsizing costs of $4.0 million. K2's strategic initiative was adopted in 1999 to reduce the cost structure of its ski and snowboard operations by taking advantage of lower cost manufacturing and sourcing opportunities. In accordance with the initiative, K2's Seattle manufacturing facility has been downsized and approximately half of its ski and all of its snowboard 26 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 2--CHARGES AGAINST EARNINGS (CONTINUED) manufacturing have been moved to either K2's China or California production facilities or to third party sourcing operations worldwide. The restructuring charge reflects expenses associated with the write-off of related equipment and inventory, the reduction of approximately 200 production personnel and the utilization of approximately 200 temporary workers. The downsizing costs were incurred in 1999 as a result of reducing the size of the Seattle manufacturing facility. Approximately $5.3 million of the total amount is cash related. The following table summarizes the activity in 1999:
SEVERANCE EQUIPMENT INVENTORY AND RELATED SUBTOTAL DOWNSIZING TOTAL --------- --------- ----------- -------- ---------- -------- (THOUSANDS) 1999 Charges......................... $3,355 $2,229 $923 $6,507 $3,993 $10,500 UTILIZED: Cash............................... 500 130 630 3,852 4,482 Non-cash........................... 3,355 1,132 4,487 141 4,628 ------ ------ ---- ------ ------ ------- 3,355 1,632 130 5,117 3,993 9,110 Balance December 31, 1999............ $ -- $ 597 $793 $1,390 $ -- $ 1,390 ====== ====== ==== ====== ====== =======
In the third quarter of 1998, a pre-tax charge of $14.5 million was included in earnings from continuing operations. Of this amount, $10.5 million was charged to cost of products sold to write down certain categories of bike and skate inventories as a result of a sudden change in the market demand for those products. The balance of the charge was recorded in general and administrative expenses for costs associated with the change in the bike business and implementing planned cost reduction programs at the winter sports operations. The charges primarily related to non-cash items. At December 31, 1999, in addition to the reserves in the table above, approximately $13.5 million of the 1998 charges had been utilized with approximately $2.1 million of reserves remaining primarily against inventory and accounts receivable. These reserves are expected to be utilized in the year 2000, with no significant cash outflow, as the related inventory is disposed of and the accounts receivable balances are written off. In 1997, a pre-tax restructuring charge of $2.4 million was recorded in connection with the announcement of K2's plan to consolidate its mountain bike and outdoor equipment operations into its existing facility on Vashon Island, Washington, and to move its production of outdoor products to outside sources. The restructuring was completed during 1998. NOTE 3--DISCONTINUED OPERATIONS On September 10, 1998, K2 adopted a plan to dispose of its Simplex building products division as part of K2's strategic focus on the core sporting goods and other recreational businesses. Accordingly, Simplex is shown in the accompanying consolidated financial statements as a discontinued operation. Income from discontinued operations are net of taxes of $718,000, $525,000 and $1,400,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Net assets of discontinued operations were segregated in the accompanying consolidated balance sheets and consisted primarily of accounts receivable, inventories and fixed assets, offset by accounts payable, accrued payroll and related items and other accruals. Net sales of $72,985,000, $86,616,000 and $87,903,000 for the years ended December 31, 1999, 27 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 3--DISCONTINUED OPERATIONS (CONTINUED) 1998 and 1997, respectively, were excluded from consolidated net sales in the accompanying consolidated statements of income. NOTE 4--ACQUISITIONS On October 7, 1999 K2 completed the acquisition of Ride, Inc. ("Ride"), a designer and manufacturer of snowboard equipment, apparel and accessories, in an all-stock merger transaction. Under the terms of the merger, each share of Ride common and preferred stock was converted into 1/10 share of common stock of K2. Based on the number of preferred and common shares outstanding of Ride as of the acquisition date, approximately 1,482,000 shares of K2's common stock were issued to the Ride shareholders and the purchase price was valued at $12.3 million. This transaction was accounted for using the purchase method of accounting; accordingly, the purchased assets and liabilities have been recorded at their estimated fair values at the date of the acquisition. The preliminary purchase price allocation resulted in an excess of cost over net assets acquired of approximately $15.3 million, to be amortized on a straight-line basis over 20 years. The results of operations of Ride have been included in the consolidated financial statements since the date of acquisition. The following summarized unaudited pro forma results of operations of K2 assume the acquisition of Ride had occurred as of the beginning of the respective periods. This pro forma information does not purport to be indicative of what would have occurred had the acquisition been made as of those dates, or of results which may occur in the future: PRO FORMA INFORMATION (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, -------------------------- 1999 1998 ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales............................................ $653,582 $616,288 Loss from continuing operations...................... (11,440) (5,008) Loss per common share................................ (.63) (.28)
On March 26, 1999, K2 acquired certain assets relating to the Morrow snowboard business, including the Morrow trademark, from Morrow Snowboards, Inc. The net cash purchase price was approximately $3.0 million. The purchase price allocation resulted in an excess of cost over net assets acquired of approximately $1.7 million, to be amortized on a straight-line basis over 15 years. The results of operations related to the acquisition have been included in the consolidated financial statements since the date of acquisition. The acquisition did not have a material pro forma impact on operations. On August 19, 1998, K2 purchased the remaining 65% of shares of K2 Japan Corporation not previously owned by K2. K2 Japan Corporation is a distributor of K2 branded products located in Japan. The transaction was accounted for using the purchase method of accounting and the results of operations from this business have been included in the consolidated statements of income from the date of acquisition. The purchase price of the acquisition was not material. The fair value of the liabilities of K2 28 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 4--ACQUISITIONS (CONTINUED) Japan Corporation at the acquisition date approximated the fair value of the assets acquired including $2.7 million of goodwill to be amortized over 25 years. NOTE 5--INVENTORIES Inventories consisted of the following at December 31:
1999 1998 -------- -------- (THOUSANDS) Finished goods.......................................... $129,429 $146,233 Work in process......................................... 10,573 8,078 Raw materials........................................... 34,228 37,911 -------- -------- Total at lower of FIFO cost or market (approximates current cost)....................................... 174,230 192,222 Less LIFO valuation reserve............................. 2,076 3,874 -------- -------- $172,154 $188,348 ======== ========
NOTE 6--BORROWINGS AND OTHER FINANCIAL INSTRUMENTS At December 31, 1999, K2 had $84.6 million under foreign and domestic short-term lines of credit with $56.8 million outstanding and no borrowings available under K2's debt covenant restrictions. The foreign subsidiaries' lines of credit generally have no termination date but are reviewed annually for renewal and are denominated in the subsidiaries' local currencies. At December 31, 1999, interest rates on short-term lines of credit ranged from 2.1% to 11.2%. The weighted average interest rates on short-term lines of credit as of December 31, 1999 and 1998 were 6.5% and 4.4%, respectively. 29 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 6--BORROWINGS AND OTHER FINANCIAL INSTRUMENTS (CONTINUED) The principal components of long-term debt at December 31 were:
1999 1998 -------- -------- (THOUSANDS) Notes payable due in seven equal annual principal installments through 2009 with annual interest payable at 8.41%.............................................. $ 50,000 Notes payable due in six equal annual principal installments through 2004 with semi-annual interest payable at 8.39%...................................... 22,224 $ 26,668 $75 million five-year unsecured bank revolving credit line due September 30, 2004, interest payments due at LIBOR plus 1.00% to 2.00% and a commitment fee of 0.225% to 0.50% on the unused portion of the line through September 30, 2004............................ 39,500 $100 million bank revolving credit line replaced by the $75 million credit line described above............... 88,500 -------- -------- 111,724 115,168 Less-amounts due within one year........................ 4,444 4,444 -------- -------- $107,280 $110,724 ======== ========
The principal amount of long-term debt maturing in each of the five years following 1999 is:
(THOUSANDS) 2000........................................................ $ 4,444 2001........................................................ 4,444 2002........................................................ 4,444 2003........................................................ 11,587 2004........................................................ 51,091 Thereafter.................................................. 35,714 -------- $111,724 ========
Interest paid on short- and long-term debt for the years ended December 31, 1999, 1998 and 1997 was $12.7 million, $12.2 million and $10.6 million, respectively. Under an accounts receivable arrangement, K2 can sell with limited recourse, undivided participation interests in designated pools of accounts receivable for a period of up to five years, in an amount not to exceed $50 million. Under this arrangement, $50 million of accounts receivables as of December 31, 1999 and 1998, were sold. The $75 million credit line and the accounts receivable arrangement, among other things, restrict amounts available for payment of cash dividends and stock repurchases by K2. As of December 31, 1999, $9.3 million of retained earnings were free of such restrictions. The interest rate on the $75 million credit line at December 31, 1999 was 8.5%. K2 had $21.0 million of letters of credit outstanding as of December 31, 1999. 30 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 6--BORROWINGS AND OTHER FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts for the short-term lines of credit and the long-term bank revolving credit line approximate their fair value since floating interest rates are charged, which approximate market rates. The fair value of the $50.0 million 8.41% notes payable, based on quoted market price, is $46.6 million as compared to a carrying amount of $50.0 million. The fair value of the $22.2 million 8.39% notes payable, based on quoted market price, is $21.0 million as compared to a carrying amount of $22.2 million. K2, including its foreign subsidiaries, enters forward exchange contracts to hedge certain firm and anticipated sales and purchase commitments which are denominated in U.S. or foreign currencies. The purpose of the foreign currency hedging activities is to reduce K2's risk of fluctuating exchange rates. At December 31, 1999, K2 had foreign exchange contracts with maturities of within one year to exchange various foreign currencies to dollars in the aggregate amount of $33.6 million, and with a fair market value of approximately $33.2 million based on current market rates. The fair value of these contracts, represented a net unrealized gain of approximately $438,000 as of December 31, 1999 and will be recognized in earnings when the underlying transaction occurs. Counterparties on foreign exchange contracts expose K2 to credit losses in the event of non-performance, but K2 does not anticipate non-performance. NOTE 7--INCOME TAXES Pretax income from continuing operations for the years ended December 31 was taxed under the following jurisdictions:
1999 1998 1997 -------- -------- -------- (THOUSANDS) Domestic......................................... $ 6,365 $(2,543) $22,003 Foreign.......................................... 6,151 7,366 5,112 ------- ------- ------- $12,516 $ 4,823 $27,115 ======= ======= =======
Components of the income tax provision applicable to continuing operations for the three years ended December 31 are:
1999 1998 1997 ------------------- ------------------- ------------------- CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED -------- -------- -------- -------- -------- -------- (THOUSANDS) Federal.................. $ 9,147 $(7,317) $1,525 $(2,825) $8,140 $(1,695) State.................... 705 (25) 575 70 60 470 Foreign.................. 2,050 (555) 2,115 (505) 405 435 ------- ------- ------ ------- ------ ------- $11,902 $(7,897) $4,215 $(3,260) $8,605 $ (790) ======= ======= ====== ======= ====== =======
31 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 7--INCOME TAXES (CONTINUED) The principal elements accounting for the difference between the statutory federal income tax rate and the effective tax rate for the three years ended December 31 are:
1999 1998 1997 -------- -------- -------- (PERCENT) Statutory federal income tax rate...................... 35.0 35.0 35.0 State income tax effect, net of federal benefit........ 3.5 8.7 1.3 Valuation allowance and foreign earnings............... (5.5) (20.5) (6.1) Other.................................................. (1.0) (3.4) (1.4) ----- ----- ----- 32.0 19.8 28.8 ===== ===== =====
No provision for United States income taxes has been made on undistributed earnings of foreign subsidiaries, since these earnings are considered to be permanently reinvested. At December 31, 1999, foreign subsidiaries had unused operating loss carryforwards of approximately $6.1 million of which approximately $260,000 expires in 2001 and the remainder carries forward indefinitely. Since the use of these operating loss carryforwards is limited to future taxable earnings of the related foreign subsidiaries, a valuation allowance has been recognized to offset the deferred tax assets arising from such carryforwards. The valuation allowance, which is included in the tax effect of foreign earnings above, was reduced by $0.3 million in 1999 and $1.6 million in 1998, due to the utilization of the related operating loss carryforwards, and increased in 1997 by a net $4.1 million due to a previously unusable foreign loss carryforward which became usable. At the acquisition date, Ride had federal net operating loss carryovers. The ability of K2 to utilize these losses to reduce future tax due is very limited. For financial reporting purposes, the realization of these carryovers, if any, will reduce goodwill recorded on the acquisition of Ride. 32 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 7--INCOME TAXES (CONTINUED) Deferred tax assets and liabilities are comprised of the following at December 31:
1999 1998 -------- -------- (THOUSANDS) Deferred tax liabilities: Depreciation and amortization of property, plant and equipment............................................... $ 5,618 $ 5,078 Trademark amortization.................................... 390 364 Other..................................................... 1,758 7,572 ------- ------- Deferred tax liabilities................................ 7,766 13,014 Deferred tax assets: Insurance accruals........................................ 2,044 1,426 Tax effect of foreign loss carryforwards.................. 3,063 2,999 Tax effect of domestic loss carryforwards................. 3,000 0 Bad debt reserve.......................................... 1,167 1,207 Inventory reserve......................................... 1,106 2,038 Other..................................................... 11,112 8,109 ------- ------- 21,492 15,779 Valuation allowance....................................... 6,063 2,999 ------- ------- Current deferred tax assets............................. 15,429 12,780 ------- ------- Deferred tax (assets) liabilites, net..................... $(7,663) $ 234 ======= =======
Income taxes paid, net of refunds, in the years ended December 31, 1999, 1998 and 1997 were $9.0 million, $5.3 million and $10.9 million, respectively. NOTE 8--COMMITMENTS AND CONTINGENCIES Future minimum payments under noncancelable operating leases as of December 31, 1999 are as follows:
(THOUSANDS) 2000........................................................ $ 5,166 2001........................................................ 4,239 2002........................................................ 2,271 2003........................................................ 1,532 2004........................................................ 787 Thereafter.................................................. 211 ------- $14,206 =======
Leases are primarily for rentals of facilities, and about two-thirds of these contain rights to extend the terms from one to ten years. 33 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED) Net rental expense, including those rents payable under noncancelable leases and month-to-month tenancies, amounted to $4,797,000, $4,417,000 and $3,684,000 for the years ended December 31, 1999, 1998 and 1997, respectively. K2 has not experienced any substantial difficulty in obtaining raw materials, parts or finished goods inventory for its sporting goods and other recreational products businesses. Certain components and finished products, however, are manufactured or assembled abroad and therefore could be subject to interruption as a result of local unrest, currency exchange fluctuations, increased tariffs, trade difficulties and other factors. Major portions of K2's in-line skates are manufactured by a single supplier. K2 believes alternate sources for these products could be found. K2 is subject to various legal actions and proceedings in the normal course of business. While the ultimate outcome of these matters cannot be predicted with certainty, management does not believe these matters will have a material adverse effect on K2's financial statements. K2 is one of several named potentially responsible parties ("PRP") in an Environmental Protection Agency matter involving discharge of hazardous materials at old waste sites in South Carolina and Michigan. Although environmental laws technically impose joint and several liability upon each PRP at each site, the extent of K2's required financial contribution to the cleanup of these sites is expected to be limited based upon the number and financial strength of the other named PRPs and the volume and types of waste involved which might be attributable to K2. Environmental and related remediation costs are difficult to quantify for a number of reasons including the number of parties involved, the difficulty in determining the extent of the contamination, the length of time remediation may require, the complexity of environmental regulation and the continuing advancement of remediation technology. K2's environmental engineers, consultants and legal counsel has developed estimates based upon cost analyses and other available information for this particular site. K2 accrues for these costs when it is probable a liability has been incurred and the amount can be reasonably estimated. At December 31, 1999 and 1998, K2 had recorded an estimated liability of approximately $806,000 and $963,000, respectively, with no provision for expected insurance recovery. The ultimate outcome of these matters cannot be predicted with certainty, however, management does not believe these matters will have a material adverse effect on K2's financial statements. NOTE 9--PENSION PLANS AND OTHER BENEFIT PLANS K2 sponsors several trusteed noncontributory defined benefit pension plans covering most of its employees. Benefits are generally based on years of service and the employee's highest compensation for five consecutive years during the years of credited service. Contributions are intended to provide for benefits attributable to service to date and service expected to be provided in the future. K2 funds these plans in accordance with the Employee Retirement Income Security Act of 1974. K2 also sponsors defined contribution pension plans covering most of its domestic employees. Contributions by K2 for the defined contribution plans are determined as a percent of the amounts contributed by the respective employees. During 1999, 1998 and 1997, K2 expensed contributions of $940,000, $928,000 and $753,000, respectively, related to these plans. 34 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 9--PENSION PLANS AND OTHER BENEFIT PLANS (CONTINUED) The following table sets forth the defined benefit plans' funded status and amounts recognized in K2's consolidated balance sheets at December 31:
PENSION PLAN ------------------- 1999 1998 -------- -------- (THOUSANDS) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year.................. $ 58,411 $51,896 Service cost............................................. 2,089 1,749 Interest cost............................................ 4,041 3,796 Actuarial (gain) loss.................................... (8,294) 3,994 Benefits paid............................................ (3,085) (3,024) -------- ------- Benefit obligation at end of year........................ $ 53,162 $58,411 ======== ======= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year........... $ 50,611 $48,432 Actual return on fair value of plan assets............... 9,531 4,884 Employer contributions................................... 319 319 Benefits paid............................................ (3,085) (3,024) -------- ------- Fair value of plan assets at end of year................. 57,376 50,611 -------- ------- Funded status of the plan................................ 4,214 (7,800) Unrecognized prior service cost.......................... 1,146 1,283 Unrecognized net transition asset........................ (65) (275) Unrecognized actuarial (gain) loss....................... (10,705) 2,666 -------- ------- Accrued benefit cost..................................... $ (5,410) $(4,126) ======== ======= WEIGHTED AVERAGE ASSUMPTIONS Discount rate............................................ 7.75% 6.75% Expected return on plan assets........................... 9.00% 9.00% Rate of compensation increase............................ 5.00% 5.00%
The actuarial gains included in the benefit obligation for 1999 are the result of the increase in the discount rate assumption made for the year as well as a change in demographic data. The actuarial losses included in the benefit obligation for 1998 are primarily the result of a decrease in the discount rate assumption made for the year. 35 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 9--PENSION PLANS AND OTHER BENEFIT PLANS (CONTINUED) Net pension cost consisted of the following for the year ended December 31:
PENSION PLAN ------------------------------ 1999 1998 1997 -------- -------- -------- (THOUSANDS) NET PERIODIC COST Service cost...................................... $ 2,089 $ 1,749 $ 1,707 Interest cost..................................... 4,041 3,796 3,698 Expected return on plan assets.................... (4,474) (4,280) (3,857) Amortization of prior service cost................ 137 139 110 Amortization of transition asset.................. (210) (210) (210) Amortization of loss.............................. 20 13 24 ------- ------- ------- Net periodic cost................................. $ 1,603 $ 1,207 $ 1,472 ======= ======= =======
36 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 10--QUARTERLY OPERATING DATA (UNAUDITED)
QUARTER -------------------------------------------- FIRST SECOND THIRD FOURTH (A) YEAR (B) -------- -------- -------- ----------- --------- (IN MILLIONS, EXCEPT PER SHARE FIGURES) 1999 Net sales from continuing operations.............. $163.0 $158.3 $139.9 $173.9 $635.1 Gross profit...................................... 44.3 48.2 43.7 36.9 173.1 Income (loss) from continuing operations.......... 3.1 7.1 3.3 (5.0) 8.5 Discontinued operations, net of taxes............. 0.1 0.9 0.0 0.3 1.3 ------ ------ ------ ------ ------ Net income (loss)................................. $ 3.2 $ 8.0 $ 3.3 $ (4.7) $ 9.8 ====== ====== ====== ====== ====== Basic earnings (loss) per share Continuing operations........................... $ 0.19 $ 0.43 $ 0.20 $(0.29) $ 0.50 Discontinued operations......................... 0.01 0.05 0.00 0.02 0.08 ------ ------ ------ ------ ------ Net income (loss)............................... $ 0.20 $ 0.48 $ 0.20 $(0.27) $ 0.58 ====== ====== ====== ====== ====== Diluted earnings (loss) per share Continuing operations........................... $ 0.19 $ 0.43 $ 0.20 $(0.29) $ 0.50 Discontinued operations......................... 0.01 0.05 0.00 0.02 0.08 ------ ------ ------ ------ ------ Net income (loss)............................... $ 0.20 $ 0.48 $ 0.20 $(0.27) $ 0.58 ====== ====== ====== ====== ====== Cash dividend per share........................... $ 0.11 $ -- $ -- $ -- $ 0.11 Stock prices: High............................................ $11.63 $11.63 $10.56 $ 8.94 $11.63 Low............................................. $ 8.56 $ 7.88 $ 8.81 $ 6.94 $ 6.94
- ------------------------ (a) Gross profit, income from continuing operations and net income are $47.4, $2.1and $2.4, respectively, before restructuring costs totaling $6.5 ($4.4 net of taxes) and downsizing costs totaling $4.0 ($2.7 net of taxes). See Note 2 to Notes to Consolidated Financial Statements. (b) Gross profit, income from continuing operations and net income are $183.6, $15.7 and $17.0, respectively, before restructuring costs totaling $6.5 ($4.4 net of taxes) and downsizing costs totaling $4.0 ($2.7 net of taxes). See Note 2 to Notes to Consolidated Financial Statements. 37 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 10--QUARTERLY OPERATING DATA (UNAUDITED) (CONTINUED)
QUARTER ------------------------------------------- FIRST SECOND THIRD (A) FOURTH YEAR (B) -------- -------- ---------- -------- --------- (IN MILLIONS, EXCEPT PER SHARE FIGURES) 1998 Net sales from continuing operations............... $151.0 $156.8 $133.9 $132.8 $574.5 Gross profit....................................... 41.5 47.7 29.4 37.0 155.6 Income (loss) from continuing operations........... 2.7 7.4 (7.9) 1.6 3.8 Discontinued operations, net of taxes.............. 0.4 0.7 (0.4) 0.3 1.0 ------ ------ ------ ------ ------ Net income (loss).................................. $ 3.1 $ 8.1 $ (8.3) $ 1.9 $ 4.8 ====== ====== ====== ====== ====== Basic earnings (loss) per share Continuing operations............................ $ 0.16 $ 0.45 $(0.48) $ 0.10 $ 0.23 Discontinued operations.......................... 0.03 0.04 (0.03) 0.02 0.06 ------ ------ ------ ------ ------ Net income (loss)................................ $ 0.19 $ 0.49 $(0.51) $ 0.12 $ 0.29 ====== ====== ====== ====== ====== Diluted earnings (loss) per share Continuing operations............................ $ 0.16 $ 0.45 $(0.48) $ 0.10 $ 0.23 Discontinued operations.......................... 0.03 0.04 (0.03) 0.02 0.06 ------ ------ ------ ------ ------ Net income (loss)................................ $ 0.19 $ 0.49 $(0.51) $ 0.12 $ 0.29 ====== ====== ====== ====== ====== Cash dividend per share............................ $ 0.11 $ 0.11 $ 0.11 $ 0.11 $ 0.44 Stock prices: High............................................. $23.69 $23.63 $21.13 $17.44 $23.69 Low.............................................. $17.75 $16.69 $15.00 $ 7.75 $ 7.75
- ------------------------ (a) Gross profit, income from continuing operations and net income are $39.9, $1.5 and $1.1, respectively, before charges totaling $14.5 ($9.4 net of taxes). See Note 2 to Notes to Consolidated Financial Statements. (b) Gross profit, income from continuing operations and net income are $166.1, $13.3 and $14.3, respectively, before charges totaling $14.5 ($9.4 net of taxes). See Note 2 to Notes to Consolidated Financial Statements. NOTE 11--STOCK OPTIONS Under K2's 1999 and 1994 Incentive Stock Option Plans ("1999 Plan" and "1994 Plan", respectively), options may be granted to eligible directors and key employees of K2 and its subsidiaries at not less than 100% of the market value of the shares on the dates of grant. No further options may be granted under the 1994 Plan. The 1999 Plan permits the granting of options for terms not to exceed ten years from date of grant. The options are exercisable on such terms as may be established at the dates of grant. 38 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 11--STOCK OPTIONS (CONTINUED) K2 is authorized, at the discretion of the Compensation Committee, to provide loans to key employees in connection with the exercise of stock options under the 1999 and 1994 Plans. At December 31, 1999 and 1998, there was a total of $215,000 and $230,000, respectively, of loans to key employees made to enable the exercise of stock options, and accrued interest outstanding. The loans are due on various dates through June 2003. The amounts of these loans are shown as a reduction of shareholders' equity. The loans are collateralized by the underlying shares of stock issued and bear interest at the applicable rates published by the IRS. Options granted, exercised and forfeited for the 1999 Plan and 1994 Plan were as follows:
EXERCISE PRICE ------------------------------ WEIGHTED SHARES LOW HIGH AVERAGE --------- -------- -------- -------- Options outstanding at December 31, 1996................. 689,059 $11.11 $26.50 $20.56 Granted................................................ 234,000 23.50 29.88 23.68 Exercised.............................................. (28,418) 11.11 23.00 17.13 Forfeited.............................................. (16,850) 16.38 29.88 24.33 --------- Options outstanding at December 31, 1997................. 877,791 11.11 29.88 21.43 Granted................................................ 359,500 11.25 21.50 11.38 Exercised.............................................. (30,572) 11.11 22.88 14.15 Forfeited.............................................. (84,058) 11.11 29.88 22.41 --------- Options outstanding at December 31, 1998................. 1,122,661 11.11 29.88 18.33 Granted................................................ 229,500 7.50 10.63 7.55 Forfeited.............................................. (63,050) 10.63 29.88 18.42 --------- Options outstanding at December 31, 1999................. 1,289,111 7.50 29.88 16.40 =========
At December 31, 1999, 1998 and 1997, stock options to purchase 695,761, 500,711 and 667,332, shares were exercisable at weighted average prices of $20.21, $20.02 and $21.19, respectively. At December 31, 1999, 2,534,536 shares of common stock were reserved for issuance under the Plans. K2 uses the intrinsic-value method of accounting for stock-based awards granted to employees. Accordingly, K2 has not recognized compensation expense for its stock-based awards to employees. Had K2 elected to adopt the fair value approach, net income and basic and diluted earnings per share would have been $8,525,000, $.51 and $.50, respectively, for the year ended December 31, 1999, $3,950,000, $.24 39 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 11--STOCK OPTIONS (CONTINUED) and $.24, respectively, for the year ended December 31, 1998 and $21,157,000, $1.28 and $1.27, respectively, for the year ended December 31, 1997. The pro forma effect was calculated using Black-Scholes option valuation model, and the following assumptions were utilized.
1999 1998 1997 -------- -------- -------- Risk free interest rate......................... 5.5% 5.0% 5.0% Expected life................................... 5 years 5 years 5 years Expected volatility............................. .388 .326 .225 Expected dividend yield......................... -- 3.9% 2.2%
The pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years. Since changes in the subjective assumptions used in the Black-Scholes model can materially affect the fair value estimate, management believes the model does not provide a reliable measure of the fair value of its options. Options are granted at an exercise price equal to the fair market value at the date of grant. Information regarding stock options outstanding as of December 31, 1999 is as follows:
OPTIONS OUTSTANDING --------------------------------- OPTIONS EXERCISABLE WEIGHTED ------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE EXERCISE CONTRACTUAL EXERCISE PRICE RANGE SHARES PRICE LIFE SHARES PRICE - ----------- -------- -------- ----------- -------- -------- $7.50 to $11.11.............................. 286,331 $ 8.27 8.58 years 57,331 $11.11 $11.250 to $17.25............................ 494,680 12.89 7.50 years 232,280 14.74 $21.50 to $29.88............................. 508,100 24.41 7.13 years 406,150 24.63
NOTE 12--SHAREHOLDERS' EQUITY PREFERRED STOCK Shares are issuable in one or more series, and the Board of Directors has authority to fix the terms and conditions of each series. No shares were issued or outstanding during 1999 and 1998. EMPLOYEE STOCK OWNERSHIP PLAN K2 has an Employee Stock Ownership Plan ("ESOP") which covers substantially all of its domestic non-union employees with at least one year of service. As of December 31, 1999, the trust was indebted to K2 in the aggregate amount of $565,000 in connection with stock purchases made from 1982 through 1984 of which 131,836 shares with an aggregate market value of $1,005,000 as of December 31, 1999 remained unallocated to participants. These loans are repayable over the next three to five years with interest at prime plus 1/2%, not to exceed 18%, and the unallocated shares will be released to participants proportionately as these loans are repaid. Of the total dividends received by the ESOP on its investment in K2's Common Stock, dividends on allocated and unallocated shares in the amount of $29,000 and $167,000 in 40 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 12--SHAREHOLDERS' EQUITY (CONTINUED) 1999 and 1998, respectively, were used to service these loans. Allocated shares as of December 31, 1999 totaled 1,584,816. Additionally, the trust was indebted to K2 in the amount of $1,100,000 at December 31, 1999 and 1998, in connection with distributions made to terminees. Shareholders' equity has been reduced by the amounts of the loans and any payments made by K2 on behalf of the trust. The payments, made by K2 on behalf of the trust, which at December 31, 1999 totaled $89,000, are being amortized to expense over the lives of the loans. The amount of K2's annual contribution to the ESOP is at the discretion of K2's Board of Directors. For the two years 1999 and 1998, contributions were limited to amounts in excess of annual dividends, net of debt service, of the ESOP necessary to fund obligations arising in each of those years to retired and terminated employees. These amounts were $200,000 and $100,000, respectively. ESOP expense, including amortization of the foregoing payments, was $638,000 and $156,000 in 1999 and 1998, respectively. No expense was recorded and no contributions were made in 1997. PREFERRED STOCK RIGHTS Rights are outstanding which entitle the holder of each share of Common Stock of K2 to buy one one-hundredth of a share of Series A Junior Participating Cumulative Preferred Stock at an exercise price of $60.00 per one one-hundredth of a share, subject to adjustment. The rights are not separately tradable or exercisable until a party either acquires, or makes a tender offer resulting in ownership of, at least 15% of K2's common shares. If a person becomes the owner of at least 15% of K2's outstanding common shares (an "Acquiring Person"), each holder of a right other than such Acquiring Person and its affiliates is entitled, upon payment of the then-current exercise price per right (the "Exercise Price"), to receive shares of Common Stock (or Common Stock equivalents) having a market value of twice the Exercise Price. If K2 subsequently engages in a merger, a business combination or an asset sale with the Acquiring Person, each holder of a right other than the Acquiring Person and its affiliates is thereafter entitled, upon payment of the Exercise Price, to receive stock of the Acquiring Person having a market value of twice the Exercise Price. At any time after any party becomes an Acquiring Person, the Board of Directors may exchange the rights (except those held by the Acquiring Person) at an exchange ratio of one common share per right. Prior to a person becoming an Acquiring Person, the rights may be redeemed at a redemption price of one cent per right, subject to adjustment. The rights are subject to amendment by the Board. NOTE 13--SEGMENT DATA K2 classifies its business into three segments based on similar product types consisting of sporting goods products, other recreational products and selected industrial products. The sporting goods segment consists primarily of sports equipment used to participate in individual sports activities sold primarily through sporting goods specialty dealers, regional and national sporting goods chains and the sporting goods department of mass merchants. The equipment includes in-line skates, skis, snowboards, bikes, fishing tackle and flotation vests. The other recreational products segment are primarily active leisure apparel sold principally into the advertising specialty market through distributors, and leisure footwear and other apparel sold through specialty sporting goods dealers. The industrial products segment includes monofilament line sold to the paper industry, string trimmer line sold to a variety of distributors, retailers 41 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 13--SEGMENT DATA (CONTINUED) and equipment manufacturers, fiberglass light poles sold to contractors, utility companies and municipalities and marine and CB radio antennas sold to marine dealers. K2 evaluates performance based on operating profit or loss (before interest, corporate expenses and income taxes). The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1 of Notes to Consolidated Financial Statements. Intercompany profit or loss is eliminated where applicable. The information presented below is as of or for the year ended December 31.
NET SALES TO UNAFFILIATED CUSTOMERS INTERSEGMENT SALES OPERATING PROFIT (LOSS) ------------------------------ ------------------------------ ------------------------------ 1999 1998 1997 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- -------- -------- -------- (MILLIONS) Sporting goods................. $474.3 $404.9 $410.8 $30.4 $18.6 $21.2 $15.0* $ 5.3* $26.3* Other recreational............. 41.0 43.7 34.2 0.2 0.3 -- (1.9) (1.1) 0.7 Industrial..................... 119.8 125.9 114.0 1.1 1.4 0.9 17.5 18.4 17.5 ------ ------ ------ ----- ----- ----- ----- ----- ----- Total segment data........... $635.1 $574.5 $559.0 $31.7 $20.3 $22.1 30.6 22.6 44.5 ====== ====== ====== ===== ===== ===== ----- ----- ----- Corporate expenses, net........ (5.4) (5.6) (6.8) Interest expense............... 12.7 12.2 10.6 ----- ----- ----- Income from continuing operations before provision for income taxes............. $12.5 $ 4.8 $27.1 ===== ===== =====
- ------------------------ * 1999, 1998 and 1997 include charges of $10.5 million, $14.5 million and $2.4 million, respectively.
DEPRECIATION AND IDENTIFIABLE ASSETS AMORTIZATION CAPITAL EXPENDITURES ------------------------------ ------------------------------ ------------------------------ 1999 1998 1997 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- -------- -------- -------- (MILLIONS) Sporting goods................. $346.9 $301.3 $283.6 $ 9.9 $ 9.3 $ 8.1 $13.0 $ 6.9 $14.5 Other recreational............. 32.4 40.4 33.9 0.8 0.8 0.6 0.5 0.6 0.4 Industrial..................... 63.3 66.8 55.7 2.8 2.5 2.8 2.7 9.8 4.5 ------ ------ ------ ----- ----- ----- ----- ----- ----- Total segment data........... 442.6 408.5 373.2 13.5 12.6 11.5 16.2 17.3 19.4 Corporate...................... 20.6 17.0 14.3 0.2 0.1 0.1 ------ ------ ------ ----- ----- ----- Total continuing operations................. 463.2 425.5 387.5 13.7 12.7 11.6 16.2 17.3 19.4 ------ ------ ------ ----- ----- ----- ----- ----- ----- Discontinued operations........ 24.7 27.5 31.9 2.9 2.8 2.7 2.6 3.4 4.3 ------ ------ ------ ----- ----- ----- ----- ----- ----- Total........................ $487.9 $453.0 $419.4 $16.6 $15.5 $14.3 $18.8 $20.7 $23.7 ====== ====== ====== ===== ===== ===== ===== ===== =====
42 K2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 NOTE 13--SEGMENT DATA (CONTINUED)
1999 1998 1997 -------- -------- -------- (MILLIONS) NET SALES BY LOCATION United States..................................... $408.1 $381.4 $406.7 Europe............................................ 170.1 153.0 125.0 Asia.............................................. 56.9 40.1 27.3 ------ ------ ------ Total net sales................................. $635.1 $574.5 $559.0 ====== ====== ====== ASSETS United States..................................... $348.0 $320.9 $315.0 Europe............................................ 94.8 97.3 91.1 Asia.............................................. 45.1 34.8 13.3 ------ ------ ------ Total assets.................................... $487.9 $453.0 $419.4 ====== ====== ====== LONG-LIVED ASSETS United States..................................... $ 99.2 $ 75.4 $ 69.3 Europe............................................ 8.3 8.3 7.4 Asia.............................................. 4.0 2.5 2.6 ------ ------ ------ Total long-lived assets......................... $111.5 $ 86.2 $ 79.3 ====== ====== ======
43 K2 INC. REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders: K2 Inc. We have audited the accompanying consolidated balance sheets of K2 Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of K2 Inc. and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. Los Angeles, California February 21, 2000 44 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Except as noted in the following paragraph the information called for by Items 10, 11, 12 and 13 have been omitted because on or before April 29, 2000, Registrant will file with the Commission pursuant to Regulation 14A a definitive proxy statement. The information called for by these items set forth in that proxy statement is incorporated herein by reference. The information called for by Item 10 with respect to executive officers of the Registrant appears following Item 4 under Part I of the Report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as part of this report. (a-1) Financial Statements (for the three years ended December 31, 1999 unless otherwise stated):
PAGE REFERENCE FORM 10-K -------------- Statements of consolidated income........................... 20 Consolidated balance sheets at December 31, 1999 and 1998... 21 Statements of consolidated shareholders' equity............. 22 Statements of consolidated cash flows....................... 23 Notes to consolidated financial statements.................. 24-43 Report of Ernst & Young LLP, Independent Auditors........... 44 (a-2) Consolidated financial statement schedule: II--Valuation and qualifying accounts....................... F-1
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes. (a-3) Exhibits (3)(a)(i) Restated Certificate of Incorporation dated May 4, 1989, filed as Exhibit (3)(a) to Form 10-K for the year ended December 31, 1989 and incorporated herein by reference. (a)(ii) Certificate of Amendment of Restated Certificate of Incorporation dated May 31, 1995, filed as Exhibit 3(a)(ii) to Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. 45 (a)(iii) Certificate of Amendment of Restated Certificate of Incorporation, filed as Exhibit (3)(i) to Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference. (b)(i) By-Laws of K2 Inc., as amended and restated, filed as Exhibit 3 to Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference. (b)(ii) By-Laws of K2 Inc., as amended, filed as Exhibit 3 to Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference. (4)(a) Rights Agreement dated as of July 1, 1999 between K2 Inc. and Harris Trust Company of California, as Rights Agent, which includes thereto the Form of Rights Certificate to be distributed to holders of Rights after the Distribution, filed as Item 2, Exhibit 1 to Form 8-A filed August 9, 1999 and incorporated herein by reference. (10) Material contracts (a) Note Agreement Re: $40,000,000 8.39% Senior Notes due November 20, 2004 dated as of October 15, 1992, filed as Exhibit (10)(b) to Form 10-K for the year ended December 31, 1992 and incorporated herein by reference. (1) First Amendment to the Note Agreements, dated May 1, 1996, and filed as Exhibit 10.04 to Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference. (2) Second Amendment to the Note Agreements, dated December 1, 1999. Guaranty Agreement Re: $40,000,000 8.39% Senior Notes due November 30, 2004 of K2 Inc. dated as of December 1, 1999. (3) Guaranty Agreement Re: $40,000,000 8.39% Senior Notes due November 30, 2004 of K2 Inc. dated as of December 1, 1999. (b) Transfer and Administration Agreement among Enterprise Funding Corp. as the Company, K2 Inc. (formerly Anthony Industries, Inc.) as the Transferor and Master Servicer, and NationsBank, N.A. as the Administrative Agent and the Collateral Agent effective May 21, 1996, filed as Exhibit 10.03 to Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference. (1) First Amendment to Receivables Purchase Agreements and Transfer and Administration Agreement dated as of March 15, 1997, filed as Exhibit 10.01 to Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference. (2) Second Amendment to Transfer and Administration Agreement dated as of May 20, 1998 filed as Exhibit (10)(c)(2) to Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. (3) Seventh Amendment to Transfer and Administration Agreement dated as of February 18, 2000. (c) Note Agreement Re: $50,000,000 8.41% Series 1999-A Senior Notes due December 1, 2009, dated as of December 1, 1999. (d) Credit Agreement dated as of December 21, 1999 among K2 Inc., Bank of America, N.A., as Administrative Agent, Swing Line Lender and Letter of Credit Issuing Lender and the Other Financial Institutions Party Hereto. 46 (e) Executive compensation plans and arrangements: (1)(i) Retirement agreement dated November 20, 1995 between K2 Inc. and B.I. Forester, filed as Exhibit (10)(d)(1)(i) to Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. (ii) Trust for Anthony Industries, Inc. Supplemental Employee Retirement Plan for the Benefit of B.I. Forester between K2 Inc. and Wells Fargo Bank N.A., as Trustee, dated November 20, 1995, filed as Exhibit (10)(d)(1)(ii) to Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. (2)(i) Special Supplemental Benefit Agreement between K2 Inc. and Bernard I. Forester dated December 9, 1986, filed as Exhibit (10)(g) to Form 10-K for the year ended December 31, 1986 and incorporated herein by reference. (3) 1988 Incentive Stock Option Plan filed as Exhibit A to the Proxy Statement for the Annual Meeting of Shareholders held on May 5, 1988 and incorporated herein by reference. (4) Anthony Industries, Inc. Non-Employee Directors' Benefit Plan effective May 1, 1992, filed as Item 6, Exhibit (a)(28) of Form 10-Q for the quarter ended March 31, 1992 and incorporated herein by reference. (5) Anthony Industries, Inc. Corporate Officers' Medical Expense Reimbursement Plan, as amended through October 22, 1993, effective August 15, 1974, filed as Exhibit (10)(c)(5) to Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (6) Anthony Industries, Inc. Directors' Medical Expense Reimbursement Plan, as amended through October 22, 1993, effective January 1, 1993, filed as Exhibit (10)(c)(6) to Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (7) K2 Inc. Executive Officers' Incentive Compensation Plan adopted August 5, 1993 as amended December 17, 1996, filed as Exhibit 10(d)(7) to Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. (8) 1994 Incentive Stock Option Plan, filed as Exhibit A to the Proxy Statement for the Annual Meeting of Shareholders held on May 5, 1994 and incorporated herein by reference. (9) Employment agreement dated May 8, 1998 between K2 Inc. and Richard M. Rodstein, filed as Item 6, Exhibit 10.01 of Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. (10) Employment agreement dated May 8, 1998 between K2 Inc. and John J. Rangel, filed as Item 6, Exhibit 10.02 of Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. (11) 1999 Incentive Stock Option Plan, filed as Exhibit A to the Proxy Statement for the Annual Meeting of Shareholders held on May 6, 1999 and incorporated herein by reference. (f) (1) Asset Purchase Agreement dated February 16, 1996 among General Aquatics, Inc., KDI Sylvan Pools, Inc. as Buyer, and Anthony Industries, Inc., as Seller, filed as Item 7, Exhibit 99(A) to Form 8-K filed March 21, 1996 and incorporated herein by reference. 47 (2) Amended and Restated Agreement and Plan of Merger dated as of July 22, 1999 among K2 Inc., Ride, Inc. and KT Acquisition, Inc. included as Appendix A to Form S-4 Registration No. 333-84791, filed August 9, 1999 and incorporated herein by reference. (3) Asset Purchase Agreement dated August 4, 1999 by and between Simplex Products Inc., as Buyer, and K2 Inc., as Seller, filed as Item 6, Exhibit 10 of Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference. (21) Subsidiaries (23) Consent of Independent Auditors (27) Financial Data Schedule (b) Reports on Form 8-K: Report on Form 8-K dated December 23, 1999, amending the Report of Form 8-K dated October 22, 1999, to include the filing of financial statements and pro forma financial information relative to the completion of K2 Inc.'s acquisition of the issued and outstanding shares of common stock of Ride, Inc. on October 7, 1999. (c) Refer to (a-3) above. (d) Refer to (a-2) above. 48 SIGNATURES Pursuant to the requirements of Section 13 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. K2 INC. By: /s/ RICHARD M. RODSTEIN ----------------------------------------- Richard M. Rodstein PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: March 24, 2000 --------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RICHARD M. RODSTEIN Director, President and Chief ------------------------------------------- Executive Officer (Principal March 24, 2000 Richard M. Rodstein Executive Officer) /s/ JOHN J. RANGEL Senior Vice President--Finance ------------------------------------------- (Principal Financial and March 24, 2000 John J. Rangel Accounting Officer) /s/ B.I. FORESTER ------------------------------------------- Director, Chairman of the March 24, 2000 B.I. Forester Board /s/ SUSAN E. ENGEL ------------------------------------------- Director March 24, 2000 Susan E. Engel /s/ JERRY E. GOLDRESS ------------------------------------------- Director March 24, 2000 Jerry E. Goldress /s/ WILFORD D. GODBOLD, JR. ------------------------------------------- Director March 24, 2000 Wilford D. Godbold, Jr. /s/ RICHARD J. HECKMANN ------------------------------------------- Director March 24, 2000 Richard J. Heckmann
II-1
SIGNATURE TITLE DATE --------- ----- ---- /s/ STEWART M. KASEN ------------------------------------------- Director March 24, 2000 Stewart M. Kasen /s/ JOHN H. OFFERMANS ------------------------------------------- Director March 24, 2000 John H. Offermans /s/ ALFRED E. OSBORNE, JR. ------------------------------------------- Director March 24, 2000 Alfred E. Osborne, Jr.
II-2 K2 INC SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (THOUSANDS)
ADDITIONS -------------------------------------- DEDUCTIONS CHARGED -------------- CHARGED ACQUISITIONS TO OTHER AMOUNTS BALANCE AT TO COSTS ACCOUNTED ACCOUNTS CHARGED TO BALANCE BEGINNING AND FOR AS A (PRIMARILY RESERVE NET OF AT END DESCRIPTION OF YEAR EXPENSES PURCHASE GROSS SALES) REINSTATEMENTS OF YEAR - ----------- ---------- -------- ------------ ------------ -------------- -------- Year ended December 31, 1999 Allowance for doubtful items...... $5,798 $2,594 $1,687 $-- $3,507 $6,572 ------ ------ ------ ---- ------ ------ $5,798 $2,594 $1,687 $-- $3,507 $6,572 ====== ====== ====== ==== ====== ====== Year ended December 31, 1998 Allowance for doubtful items...... $6,590 $2,061 $ -- $-- $2,853 $5,798 ------ ------ ------ ---- ------ ------ $6,590 $2,061 $ -- $-- $2,853 $5,798 ====== ====== ====== ==== ====== ====== Year ended December 31, 1997 Allowance for doubtful items...... $5,351 $2,289 $ -- $-- $1,050 $6,590 Other (primarily sales discounts)...................... 1,062 331 1,393 ------ ------ ------ ---- ------ ------ $6,413 $2,289 $ -- $331 $2,443 $6,590 ====== ====== ====== ==== ====== ======
F-1 EX-10.(A)(2) 2 EXHIBIT 10(A)(2) EXHIBIT (10)(A)(2) =============================================================================== K2, INC. Second Amendment to Note Agreements Dated as of December 1, 1999 Re: Note Agreements dated as of October 15, 1992 and $40,000,000 8.39% Senior Notes due November 30, 2004 =============================================================================== TABLE OF CONTENTS
SECTION HEADING PAGE SECTION 1. AMENDMENTS .........................................................1 Section 1.1. Amendment of Section 5.9 ...........................................1 Section 1.2. Amendment of Section 5.11(d) .......................................2 Section 1.3. Amendment of Section 5.12 ..........................................2 Section 1.4. Amendment of Section 8.1 ...........................................3 SECTION 2. REPRESENTATIONS AND WARRANTIES .....................................5 SECTION 3. CONDITIONS PRECEDENT ...............................................5 Section 3.1. Payment of Special Counsel Fees ....................................5 Section 3.2. Consent of Requisite Holders .......................................5 Section 3.3. Intercreditor Agreement ............................................5 Section 3.4. Guaranty Agreement .................................................5 Section 3.5. Opinion of Counsel .................................................5 SECTION 4. MISCELLANEOUS ......................................................5 Section 4.1. Effective Date .....................................................5 Section 4.2. Counterparts .......................................................5 Section 4.3. Headings ...........................................................6 Section 4.4. Governing Law ......................................................6 Section 4.5. References to Note Agreements ......................................6 Section 4.6. Ratification .......................................................6 Section 4.7. Fees and Expenses ..................................................6 Signatures................................................................................7 EXHIBIT A -- Form of Representations and Warranties EXHIBIT B -- Form of Intercreditor Agreement EXHIBIT C -- Form of Guaranty Agreement EXHIBIT D -- Form of Opinion of Company Counsel
-i- K2, INC. SECOND AMENDMENT TO NOTE AGREEMENTS Dated as of December 1, 1999 Re: Note Agreements dated as of October 15, 1992 and $40,000,000 8.39% Senior Notes Due November 30, 2004 To the Holders Named in Schedule I Ladies and Gentlemen: Reference is made to those separate Note Agreements, each dated as of October 15, 1992, as amended by that certain First Amendment dated as of May 1, 1996 (collectively referred to herein as the "NOTE AGREEMENTS"), pursuant to which K2, Inc. (formerly known as Anthony Industries, Inc.), a Delaware corporation (the "COMPANY"), issued $40,000,000 aggregate principal amount of its 8.39% Senior Notes due November 30, 2004. You and the other Institutional Holders named in Schedule I are hereinafter sometimes referred to as the "HOLDERS". Capitalized terms used herein and not otherwise defined shall have the meanings given thereto in the Note Agreements. The Company requests the amendment of certain provisions of the Note Agreements to read as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, the Company agrees with you as follows: SECTION 1. AMENDMENTS. SECTION 1.1. AMENDMENT OF SECTION 5.9. Section 5.9 of each of the Note Agreements is hereby amended as follows: (a) Clause (h) of Section 5.9 is hereby amended by deleting "and" where it appears at the end of said clause (h). (b) Clause (i) of Section 5.9 is hereby amended by inserting ";and" at the end of said clause (i). (c) Clause (j) is hereby added to Section 5.9 as follows: K2, Inc. Second Amendment to Note Agreements "(j) Liens arising out of an Accounts Receivable Financing Facility." SECTION 1.2. AMENDMENT OF SECTION 5.11(d). Section 5.11(d) of each of the Note Agreements is hereby amended as follows: "(d) Neither the Company nor any Restricted Subsidiary will sell, transfer or otherwise dispose of any receivables other than any sale, lease or other disposition of receivables pursuant to the Accounts Receivable Financing Facility, PROVIDED that at all times the Accounts Receivable Financing Facility has a Deemed Principal Amount not exceeding (i) $75,000,000 for such Accounts Receivable Financing Facility originating within the United States or (ii) $20,000,000 for such Accounts Receivable Financing Facility originating outside of the United States; PROVIDED FURTHER that the net proceeds from any such Accounts Receivable Financing Facility shall be applied to the prepayment of Funded Debt of the Company or any Restricted Subsidiary which for purposed of this Section 5.11(d) and Section 5.11(e), shall include a temporary reduction in Indebtedness outstanding under the Bank Credit Facility." SECTION 1.3. AMENDMENT OF SECTION 5.12. Section 5.12 of each of the Note Agreements is hereby amended as follows: "SECTION 5.12. GUARANTIES. (a) The Company will not, and will not permit any Restricted Subsidiary to, become or be liable in respect of any Guaranty except (i) Guaranties by the Company which are limited in amount to a stated maximum dollar exposure or which constitute Guaranties of obligations incurred by any Restricted Subsidiary in compliance with the provisions of this Agreement and (ii) Guaranties which constitute Excluded Subsidiary Obligations. (b) The Company will cause any Person which becomes a Subsidiary after December 1, 1999 and which is required by the terms of the Bank Credit Agreement to become a party to, or otherwise Guaranty, Indebtedness outstanding under the Bank Credit Agreement to enter into the Guaranty Agreement, and deliver within three Business Days thereafter to each of the holders of the Notes the following items: (i) a joinder agreement in respect of the Guaranty Agreement; -2- K2, Inc. Second Amendment to Note Agreements (ii) a certificate signed by the President, a Vice President or another authorized Responsible Officer of the Company making representations and warranties to the effect of those contained in Exhibit A to the Second Amendment, with respect to such Subsidiary and the Guaranty Agreement, as applicable; (iii) such documents and evidence with respect to such Subsidiary as any holder of the Notes may reasonably request in order to establish the existence and good standing of such Subsidiary; (iv) an opinion of counsel addressed to each of the holders of the Notes satisfactory to the holders of 66 2/3% in aggregate principal amount of the Notes, to the effect that the Guaranty Agreement has been duly authorized, executed and delivered and constitutes the legal, valid and binding contract and agreement of such Subsidiary enforceable in accordance with its terms, except as an enforcement of such terms may be limited by bankruptcy, insolvency, fraudulent conveyance and similar laws affecting the enforcement of creditors' rights generally and by general equitable principles; and (v) If at any time one or more Subsidiaries which shall have guaranteed the Indebtedness outstanding under the Bank Credit Agreement shall have been released from its obligations under such Guaranty, then upon delivery to the holders of the Notes of evidence of such release (which evidence shall be reasonably satisfactory to holders of 66 2/3% aggregate principal amount of the Notes), such Subsidiary shall be released from its obligations under the Guaranty Agreement." SECTION 1.4. AMENDMENT OF SECTION 8.1. Section 8.1 of each of the Note Agreements is hereby amended as follows: (a) The definitions of "Accounts Receivable Financing Facility" and "Priority Debt" are hereby deleted in their entirety and the following inserted in lieu thereof: "ACCOUNTS RECEIVABLE FINANCING FACILITY" shall mean the facility or facilities as amended, extended or renewed from time to time, providing for the sale, encumbrance or other disposition to a Person or Persons other than the Company or a Restricted Subsidiary, at any time or from time to time, of all or a portion of the accounts receivable of the Company or its Restricted Subsidiaries, whether now existing or hereafter created; but only so -3- K2, Inc. Second Amendment to Note Agreements long as the obligations of the Company and its Restricted Subsidiaries thereunder shall not be deemed to be liabilities on the balance sheet of the Company or any Restricted Subsidiary prepared in accordance with GAAP. "'PRIORITY DEBT' shall mean shall mean (x) any Funded Debt of the Company secured by Liens permitted by paragraphs (f), (g), (h) and (i) of Section 5.9 and (y) any Funded Debt of a Restricted Subsidiary; PROVIDED, however that Funded Debt in respect of Excluded Subsidiary Obligations shall not be considered Priority Debt." (b) The following definitions are hereby incorporated into Section 8.1 in their correct alphabetical order: "'BANK CREDIT AGREEMENT' shall mean the credit agreement between the Company and its bank lenders dated as of December __, 1999, as amended, restated, refinanced, replaced, increased or reduced from time to time and any successor bank credit agreement." "'EXCLUDED SUBSIDIARY OBLIGATIONS' shall mean (a) the Guaranty Agreement and any other Guaranty of Debt of the Company by a Subsidiary Guarantor which shall be a party to the Guaranty Agreement and (b) obligations of Subsidiary Guarantors as Co-obligors with the Company on Debt; PROVIDED that each creditor which is a beneficiary of an Excluded Subsidiary Obligation shall have become a party to the Intercreditor Agreement." "'GUARANTY AGREEMENT' that certain Guaranty Agreement dated as of December 1, 1999 from certain Subsidiaries of the Company." "'INTERCREDITOR AGREEMENT' shall mean that certain Intercreditor Agreement dated as of December 17, 1999 among the Purchasers and the banks which are parties to the Bank Credit Agreement and certain other creditors which are beneficiaries of Excluded Subsidiary Obligations." "'SECOND AMENDMENT' shall mean that certain Second Amendment dated as of December 1, 1999 among the Company and the Purchasers named therein." -4- K2, Inc. Second Amendment to Note Agreements "SUBSIDIARY GUARANTOR' shall mean each Subsidiary of the Company which shall be a party to the Guaranty Agreement. SECTION 2. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants that all representations and warranties set forth in Exhibit A hereto are true and correct as of the Effective Date. SECTION 3. CONDITIONS PRECEDENT. The Effective Date for this Second Amendment shall be subject to the fulfillment by the Company of the following conditions precedent: SECTION 3.1. PAYMENT OF SPECIAL COUNSEL FEES. The Company shall have paid the reasonable fees and disbursements of your special counsel for which the Company shall have received an invoice at least one business day prior to the Closing Date. SECTION 3.2. CONSENT OF REQUISITE HOLDERS. The Company shall have obtained the written consent of the Holders at least 66-2/3% in aggregate principal amount of the Notes, as evidenced by their signatures at the foot of this Second Amendment. SECTION 3.3. INTERCREDITOR AGREEMENT. The Intercreditor Agreement, substantially in the form of Exhibit B hereto, shall have been executed and delivered by the parties thereto. SECTION 3.4. GUARANTY AGREEMENT. The Guaranty Agreement shall have been duly authorized, executed and delivered by each of Subsidiary, shall constitute the legal, valid and binding contract and agreement of each such Subsidiary and shall be enforceable against each such Subsidiary in accordance with its terms and shall be substantially in the form of Exhibit C hereto. SECTION 3.5. OPINION OF COUNSEL. The Holders shall have received from Gibson, Dunn & Crutcher LLP, counsel for the Company, their opinion dated the Closing Date, in form and substance satisfactory to the Holders, and covering the matters set forth in Exhibit D hereto. SECTION 4. MISCELLANEOUS. SECTION 4.1. EFFECTIVE DATE. This Second Amendment shall become effective on December 17, 1999 (the "EFFECTIVE DATE"). SECTION 4.2. COUNTERPARTS. This Second Amendment may be executed in any number of counterparts, each executed counterpart constituting an original, but all together only one Second Amendment. -5- K2, Inc. Second Amendment to Note Agreements SECTION 4.3. HEADINGS. The headings of the sections of this Second Amendment are for purposes of convenience only and shall not be construed to affect the meaning or construction of any of the provisions hereof. SECTION 4.4. GOVERNING LAW. This Second Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 4.5. REFERENCES TO NOTE AGREEMENTS. Any and all notices, requests, certificates and other instruments executed and delivered concurrently with or after the execution of the Second Amendment may refer to the Note Agreements without making specific reference to this Second Amendment, but nevertheless all such references shall be deemed to include this Second Amendment unless the context shall otherwise require. SECTION 4.6. RATIFICATION. Except to the extent hereby modified or amended, the Note Agreements are in all respects hereby ratified, confirmed and approved by the parties hereto. SECTION 4.7. FEES AND EXPENSES. All fees and expenses relating to the subject matter of this Second Amendment, including, without limitation, all fees and expenses of special counsel to the Holders, shall be paid by the Company. -6- K2, Inc. Second Amendment to Note Agreements Please signify your consent to the amendment of the Note Agreements between you and the Company by signing and returning this Second Amendment. K2, INC. By Name: ------------------------------ Title: ------------------------------ Accepted as of the date first above written. PRINCIPAL LIFE INSURANCE COMPANY By: Principal Capital Management, LLC, a Delaware limited liability company, its authorized signatory By ------------------------------ Name: Title: By ------------------------------ Name: Title: Holder of $20,000,000 in aggregate original principal amount of the Notes Accepted as of the date first above written. MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By ------------------------------------- Name: ------------------------------- Title: ------------------------------- Holder of $10,000,000 in aggregate original principal amount of the Notes -7- K2, Inc. Second Amendment to Note Agreements Accepted as of the date first above written. LIFE INVESTORS INSURANCE COMPANY OF AMERICA By ------------------------------------- Name: ------------------------------- Title: ------------------------------- Holder of $3,000,000 in aggregate original principal amount of the Notes Accepted as of the date first above written. MONUMENTAL LIFE INSURANCE COMPANY By ------------------------------------- Name: ------------------------------- Title: ------------------------------- Holder of $7,000,000 in aggregate original principal amount of the Notes -8- SCHEDULE I Principal Life Insurance Company c/o Principal Capital Management, LLC 801 Grand Avenue Des Moines, Iowa 50392-0800 Massachusetts Mutual Life Insurance Company 1295 State Street Springfield, Massachusetts 01111 Life Investors Insurance Company of America c/o AEGON USA Investment Management, Inc. 4333 Edgewood Road, N.E. Cedar Rapids, Iowa 52499 Monumental Life Insurance Company c/o AEGON USA Investment Management, Inc. 4333 Edgewood Road, N.E. Cedar Rapids, Iowa 52499 REPRESENTATIONS AND WARRANTIES The Company hereby represent and warrants to you as follows: 1. ORGANIZATION; POWER AND AUTHORITY. The Company and each Restricted Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company and each Restricted Subsidiary has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver the Second Amendment or the Guaranty Agreement, as the case may be, and to perform the provisions thereof. 2. AUTHORIZATION, ETC. The Second Amendment has been duly authorized by all necessary corporate action on the part of the Company, and constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). The Guaranty Agreement has been duly authorized by all necessary corporate action on the part of each Subsidiary, and constitutes a legal, valid and binding obligation of the such Subsidiary enforceable against such Subsidiary in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3. COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC. Neither the execution, delivery and performance by the Company of the Second Amendment nor the execution, delivery and performance by the Subsidiaries of the Guaranty Agreement will (a) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Restricted Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other agreement or instrument to which the Company or any Restricted Subsidiary is bound or by which the Company or any Restricted Subsidiary or any of their respective properties may be bound or affected, (b) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or governmental authority or agency, Federal, State or local, applicable to the Company or any Restricted Subsidiary or (c) violate any provision of any statute or other rule or regulation of any EXHIBIT A (to Second Amendment) K2, Inc. Second Amendment to Note Agreements governmental authority or agency, Federal, State or local, applicable to the Company or any Restricted Subsidiary. 4. GOVERNMENTAL AUTHORIZATIONS, ETC.. No consent, approval or authorization of, or registration, filing or declaration with, any governmental authority or agency, Federal, State or local is required in connection with the execution, delivery or performance by the Company of this Agreement or the Notes or by the Subsidiaries of the Guaranty Agreement. 5. GOVERNMENTAL CONSENT. No consent, approval or authorization of, or registration, filing or declaration with, any governmental authority or agency, Federal, State or local, is required in connection with the execution, delivery or performance by the Subsidiaries of the Guaranty Agreement. 6. NO DEFAULTS. No Default or Event of Default has occurred and is continuing. -2- FORM OF INTERCREDITOR AGREEMENT EXHIBIT B (to Second Amendment) FORM OF GUARANTY AGREEMENT EXHIBIT C (to Second Amendment) FORM OF OPINION OF COMPANY COUNSEL The closing opinion of Gibson, Dunn & Crutcher LLP, counsel for the Company, which is called for by Section 3.5 of the Second Amendment, shall be dated the Closing Date and addressed to the Holders, shall be satisfactory in scope and form to the Holders and shall be to the effect that: 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has the corporate power and authority and is duly authorized to enter into the Second Amendment and perform the Note Agreements, as amended by the Second Amendment, and has full corporate power and authority to conduct the activities in which, to such counsel's knowledge, it is now engaged. 2. The Second Amendment has been duly authorized, executed and delivered by the Company and the Note Agreements, as amended by the Second Amendment, constitute the legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance or similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or law). 3. No approval, consent, filing, registration or qualification with any governmental authority or agency, Federal, State or local, is necessary on the part of the Company in connection with the execution and delivery of the Second Amendment. 4. The execution, delivery and performance by the Company of the Second Amendment will not conflict with or result in any breach of any of the provisions of or constitute a default under or result in the creation or imposition of any Lien upon any property of the Company pursuant to the provisions of the Articles of Incorporation or By-laws of the Company or any agreement or other instrument for borrowed money known to such counsel to which the Company is a party or by which the Company may be bound. The opinion of Gibson, Dunn & Crutcher LLP shall cover such other matters relating to the sale of the Notes as the Holders may reasonably request. With respect to matters of fact on which such opinion is based, such counsel shall be entitled to rely on appropriate certificates of public officials and officers of the Company. The opinion of Gibson, Dunn & Crutcher LLP may be relied upon by the Holders and its assignees and transferees. EXHIBIT D (to Second Amendment) EX-10.(A)(3) 3 EXHIBIT 10(A)(3) EXHIBIT 10 (A)(3) ================================================================================ GUARANTY AGREEMENT Dated as of December 1, 1999 Re: $40,000,000 8.39% Senior Notes due November 30, 2004 of K2 Inc. ================================================================================ TABLE OF CONTENTS (Not a part of the Agreement)
SECTION HEADING PAGE Parties...........................................................................................................1 Recitals..........................................................................................................1 SECTION 1. DEFINITIONS......................................................................................2 SECTION 2. GUARANTY OF NOTES AND NOTE PURCHASE AGREEMENTS...................................................2 SECTION 3. GUARANTY OF PAYMENT AND PERFORMANCE..............................................................2 SECTION 4. GENERAL PROVISIONS RELATING TO THE GUARANTY......................................................3 SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE GUARANTORS.................................................8 SECTION 6. AMENDMENTS, WAIVERS AND CONSENTS.................................................................9 SECTION 7. SUBMISSION TO JURISDICTION......................................................................10 SECTION 8. NOTICES.........................................................................................10 SECTION 9. MISCELLANEOUS...................................................................................10 Signature........................................................................................................12
ATTACHMENTS TO GUARANTY AGREEMENT: EXHIBIT A -- Guaranty Supplement GUARANTY AGREEMENT Re: Senior Notes of K2 Inc. -------------------------------------- This GUARANTY AGREEMENT dated as of December 1, 1999 (the or this "GUARANTY") is entered into on a joint and several basis by each of the undersigned (which parties are hereinafter referred to individually as a "GUARANTOR" and collectively as the "GUARANTORS"). R E C I T A L S A. Each Guarantor, is presently a Subsidiary of K2 Inc., a Delaware corporation (the "COMPANY"). B. The Company entered into separate Note Purchase Agreements dated as of October 15, 1992 (collectively, the "NOTE PURCHASE AGREEMENTS") between the Company and each of the Purchasers named on Schedule I attached to said Note Purchase Agreements (the "NOTE PURCHASERS") providing for, among other things, the issue and sale by the Company to the Note Purchasers of the Company's 8.39% Senior Notes, due November 30, 2004 in the aggregate principal amount of $40,000,000 (the "NOTES"). The Note Purchasers together with their successors and assigns, are hereinafter collectively referred to as the "HOLDERS". C. The Company desires to amend the Note Purchase Agreements to provide more flexibility for its Accounts Receivable Financing Facility and to that end desires that the Note Purchasers consent to that certain Second Amendment to Note Agreements dated as of December 1, 1999 (the "SECOND AMENDMENT"). D. The Note Purchasers have required as a condition of their consent to the Second Amendment that the Company cause each of the undersigned to enter into this Guaranty and to cause each Person which hereafter at any time becomes a Subsidiary and also becomes a party to the Bank Credit Agreement or otherwise becomes guarantor of the Debt outstanding under the Bank Credit Agreement to enter into a Guaranty Supplement in substantially the form set forth as Exhibit A hereto (a "GUARANTY SUPPLEMENT"), in each case as security for the Notes, and the Company has agreed to cause each of the undersigned to execute this Guaranty and to cause each such Subsidiary to execute a Guaranty Supplement, in each case in order to induce the Note Purchasers to consent to the Second Amendment and thereby benefit the Company and its Subsidiaries. NOW, THEREFORE, as required by the Note Purchase Agreements and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency whereof are hereby acknowledged, each Guarantor does hereby covenant and agree, jointly and severally, as follows: SECTION 1. DEFINITIONS. Capitalized terms used herein shall have the meanings set forth in the Note Purchase Agreements unless herein defined or the context shall otherwise require. SECTION 2. GUARANTY OF NOTES AND NOTE PURCHASE AGREEMENTS. (a) Each Guarantor jointly and severally does hereby irrevocably, absolutely and unconditionally guarantee unto the Holders: (1) the full and prompt payment of the principal of, premium, if any, and interest on the Notes from time to time outstanding, as and when such payments shall become due and payable, whether by lapse of time, upon redemption or prepayment, by extension or by acceleration or declaration or otherwise (including (to the extent legally enforceable) interest due on overdue payments of principal, premium, if any, or interest at the rate set forth in the Notes and interest accruing at the then applicable rate provided in the Notes after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Company, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) in Federal or other immediately available funds of the United States of America which at the time of payment or demand therefor shall be legal tender for the payment of public and private debts, (2) the full and prompt performance and observance by the Company of each and all of the obligations, covenants and agreements required to be performed or owed by the Company under the terms of the Notes and the Note Purchase Agreements and (3) the full and prompt payment, upon demand by any Holder, of all costs and expenses, legal or otherwise (including reasonable attorneys' fees), if any, as shall have been expended or incurred in the protection or enforcement of any rights, privileges or liabilities in favor of the Holders under or in respect of the Notes, the Note Purchase Agreements or under this Guaranty or in any action in connection therewith or herewith and in each and every case irrespective of the validity, regularity, or enforcement of any of the Notes or Note Purchase Agreements or any of the terms thereof or any other like circumstance or circumstances. (b) The liability of each Guarantor under this Guaranty shall not exceed an amount equal to a maximum amount as will, after giving effect to such maximum amount and all other liabilities of such Guarantor, contingent or otherwise, result in the obligations of such Guarantor hereunder not constituting a fraudulent transfer, obligation or conveyance. SECTION 3. GUARANTY OF PAYMENT AND PERFORMANCE. This is a guarantee of payment and performance and each Guarantor hereby waives, to the fullest extent permitted by law, any right to require that any action on or in respect of any Note or the Note Purchase Agreements be brought against the Company or any other Person or that resort be had to any direct or indirect security for the Notes or for this Guaranty or any other remedy. Any Holder may, at its option, proceed hereunder against any Guarantor in the first instance to collect monies when due, the payment of which is guaranteed hereby, without first proceeding against the Company or any other Person and without first resorting to any direct or indirect security for the Notes or for this Guaranty or any other remedy. The liability of each Guarantor hereunder shall in no way be affected or impaired by any acceptance by any Holder -2- of any direct or indirect security for, or other guaranties of, any Debt, liability or obligation of the Company or any other Person to any Holder or by any failure, delay, neglect or omission by any Holder to realize upon or protect any such guarantees, Debt, liability or obligation or any notes or other instruments evidencing the same or any direct or indirect security therefor or by any approval, consent, waiver, or other action taken, or omitted to be taken by any such Holder. The covenants and agreements on the part of the Guarantors herein contained shall be joint and several covenants and agreements, and references to the Guarantors shall be deemed references to each of them and none of them shall be released from liability hereunder by reason of the guarantee ceasing to be binding as a continuing security on any other of them. SECTION 4. GENERAL PROVISIONS RELATING TO THE GUARANTY. (a) Each Guarantor hereby consents and agrees that any Holder or Holders from time to time, with or without any further notice to or assent from any other Guarantor may, without in any manner affecting the liability of any Guarantor under this Guaranty, and upon such terms and conditions as any such Holder or Holders may deem advisable: (1) extend in whole or in part (by renewal or otherwise), modify, change, compromise, release or extend the duration of the time for the performance or payment of any Debt, liability or obligation of the Company or of any other Person secondarily or otherwise liable for any Debt, liability or obligations of the Company on the Notes, or waive any Default with respect thereto, or waive, modify, amend or change any provision of any other agreement or this Guaranty; or (2) sell, release, surrender, modify, impair, exchange or substitute any and all property, of any nature and from whomsoever received, held by, or for the benefit of, any such Holder as direct or indirect security for the payment or performance of any Debt, liability or obligation of the Company or of any other Person secondarily or otherwise liable for any Debt, liability or obligation of the Company on the Notes; or (3) settle, adjust or compromise any claim of the Company against any other Person secondarily or otherwise liable for any Debt, liability or obligation of the Company on the Notes. Each Guarantor hereby ratifies and confirms any such extension, renewal, change, sale, release, waiver, surrender, exchange, modification, amendment, impairment, substitution, settlement, adjustment or compromise and that the same shall be binding upon it, and hereby waives, to the fullest extent permitted by law, any and all defenses, counterclaims or offsets which it might or could have by reason thereof, it being understood that such Guarantor shall at all times be bound by this Guaranty and remain liable hereunder. (b) Each Guarantor hereby waives, to the fullest extent permitted by law: (1) notice of acceptance of this Guaranty by the Holders or of the creation, renewal or accrual of any liability of the Company, present or future, or of the reliance of -3- such Holders upon this Guaranty (it being understood that every Debt, liability and obligation described in Section 2 hereof shall conclusively be presumed to have been created, contracted or incurred in reliance upon the execution of this Guaranty); (2) demand of payment by any Holder from the Company or any other Person indebted in any manner on or for any of the Debt, liabilities or obligations hereby guaranteed; and (3) presentment for the payment by any Holder or any other Person of the Notes or any other instrument, protest thereof and notice of its dishonor to any party thereto and to such Guarantor. The obligations of each Guarantor under this Guaranty and the rights of any Holder to enforce such obligations by any proceedings, whether by action at law, suit in equity or otherwise, shall not be subject to any reduction, limitation, impairment or termination, whether by reason of any claim of any character whatsoever or otherwise and shall not be subject to any defense, set-off, counterclaim (other than any compulsory counterclaim), recoupment or termination whatsoever. (c) The obligations of each Guarantor hereunder shall be binding upon such Guarantor and its successors and assigns, and shall remain in full force and effect irrespective of: (1) the genuineness, validity, regularity or enforceability of the Notes, the Note Purchase Agreements or any other agreement or any of the terms of any thereof, the continuance of any obligation on the part of the Company, any other Guarantor or any other Person on or in respect of the Notes or under the Note Purchase Agreements or any other agreement or the power or authority or the lack of power or authority of the Company to issue the Notes or the Company to execute and deliver the Note Purchase Agreements or any other agreement or of any other Guarantor to execute and deliver this Guaranty or to perform any of its obligations hereunder or the existence or continuance of the Company, any other Guarantor or any other Person as a legal entity; or (2) any default, failure or delay, willful or otherwise, in the performance by the Company, any other Guarantor or any other Person of any obligations of any kind or character whatsoever under the Notes, the Note Purchase Agreements, this Guaranty or any other agreement; or (3) any creditors' rights, bankruptcy, receivership or other insolvency proceeding of the Company, any other Guarantor or any other Person or in respect of the property of the Company, any other Guarantor or any other Person or any merger, consolidation, reorganization, dissolution, liquidation, the sale of all or substantially all of the assets of or winding up of the Company, any other Guarantor or any other Person; or (4) impossibility or illegality of performance on the part of the Company, any other Guarantor or any other Person of its obligations under the Notes, the Note Purchase Agreements, this Guaranty or any other agreements; or -4- (5) in respect of the Company, any other Guarantor or any other Person, any change of circumstances, whether or not foreseen or foreseeable, whether or not imputable to the Company, any other Guarantor or any other Person, or other impossibility of performance through fire, explosion, accident, labor disturbance, floods, droughts, embargoes, wars (whether or not declared), civil commotion, acts of God or the public enemy, delays or failure of suppliers or carriers, inability to obtain materials, action of any federal or state regulatory body or agency, change of law or any other causes affecting performance, or any other FORCE MAJEURE, whether or not beyond the control of the Company, any other Guarantor or any other Person and whether or not of the kind hereinbefore specified; or (6) any attachment, claim, demand, charge, Lien, order, process, encumbrance or any other happening or event or reason, similar or dissimilar to the foregoing, or any withholding or diminution at the source, by reason of any taxes, assessments, expenses, Debt, obligations or liabilities of any character, foreseen or unforeseen, and whether or not valid, incurred by or against the Company, any Guarantor or any other Person or any claims, demands, charges or Liens of any nature, foreseen or unforeseen, incurred by any Person, or against any sums payable in respect of the Notes or under the Note Purchase Agreements or this Guaranty, so that such sums would be rendered inadequate or would be unavailable to make the payments herein provided; or (7) any order, judgment, decree, ruling or regulation (whether or not valid) of any court of any nation or of any political subdivision thereof or any body, agency, department, official or administrative or regulatory agency of any thereof or any other action, happening, event or reason whatsoever which shall delay, interfere with, hinder or prevent, or in any way adversely affect, the performance by the Company, any Guarantor or any other Person of its respective obligations under or in respect of the Notes, the Note Purchase Agreements, this Guaranty or any other agreement; or (8) the failure of any Guarantor to receive any benefit from or as a result of its execution, delivery and performance of this Guaranty; or (9) any failure or lack of diligence in collection or protection, failure in presentment or demand for payment, protest, notice of protest, notice of default and of nonpayment, any failure to give notice to any Guarantor of failure of the Company, any other Guarantor or any other Person to keep and perform any obligation, covenant or agreement under the terms of the Notes, the Note Purchase Agreements, this Guaranty or any other agreement or failure to resort for payment to the Company, any other Guarantor or to any other Person or to any other guaranty or to any property, security, Liens or other rights or remedies; or (10) the acceptance of any additional security or other guaranty, the advance of additional money to the Company (including the issuance of Additional Notes in accordance with the terms of the Note Purchase Agreements) or any other Person, the renewal or extension of the Notes or amendments, modifications, consents or waivers -5- with respect to the Notes, the Note Purchase Agreements or any other agreement, or the sale, release, substitution or exchange of any security for the Notes; or (11) any change in the ownership of any shares of the Company, any Guarantor or any other Person; or (12) any defense whatsoever that: (i) the Company or any other Person might have to the payment of the Notes (principal, premium, if any, or interest), other than payment thereof in Federal or other immediately available funds, or (ii) the Company or any other Person might have to the performance or observance of any of the provisions of the Notes, the Note Purchase Agreements or any other agreement, whether through the satisfaction or purported satisfaction by the Company, any other Guarantor or any other Person of its debts due to any cause such as bankruptcy, insolvency, receivership, merger, consolidation, reorganization, dissolution, liquidation, winding-up or otherwise; or (13) any act or failure to act with regard to the Notes, the Note Purchase Agreements, this Guaranty or any other agreement or anything which might vary the risk of any Guarantor or any other Person; or (14) any other circumstance which might otherwise constitute a defense available to, or a discharge of, any Guarantor or any other Person in respect of the obligations of any Guarantor or other Person under this Guaranty or any other agreement; PROVIDED that the specific enumeration of the above-mentioned acts, failures or omissions shall not be deemed to exclude any other acts, failures or omissions, though not specifically mentioned above, it being the purpose and intent of this Guaranty that the obligations of each Guarantor shall be absolute and unconditional and shall not be discharged, impaired or varied except by the payment of the principal of, premium, if any, and interest on the Notes in accordance with their respective terms whenever the same shall become due and payable as in the Notes provided and all other sums due and payable under the Note Purchase Agreements at the place specified in and all in the manner and with the effect provided in the Notes and the Note Purchase Agreements, as each may be amended or modified from time to time. Without limiting the foregoing, it is understood that repeated and successive demands may be made and recoveries may be had hereunder as and when, from time to time, the Company shall default under or in respect of the terms of the Notes or the Note Purchase Agreements and that notwithstanding recovery hereunder for or in respect of any given default or defaults by the Company under the Notes or the Note Purchase Agreements, this Guaranty shall remain in full force and effect and shall apply to each and every subsequent default. (d) All rights of any Holder hereunder may be transferred or assigned at any time and shall be considered to be transferred or assigned at any time or from time to time upon the transfer of any Note whether with or without the consent of or notice to the Guarantors under this Guaranty or to the Company. (e) To the extent of any payments made under this Guaranty, each Guarantor shall be subrogated to the rights of the Holder upon whose Notes such payment was made, but such -6- Guarantor covenants and agrees that such right of subrogation shall be subordinate in right of payment to the prior indefeasible final payment in cash in full of all amounts due and owing by the Company with respect to the Notes and the Note Purchase Agreements and by the Guarantors under this Guaranty, and the Guarantors shall not take any action to enforce such right of subrogation, and the Guarantors shall not accept any payment in respect of such right of subrogation, until all amounts due and owing by the Company under or in respect of the Notes and the Note Purchase Agreements and all amounts due and owing by the Guarantors hereunder have indefeasibly been finally paid in cash in full. If any amount shall be paid to any Guarantor in violation of the preceding sentence at any time prior to the later of the indefeasible payment in cash in full of the Notes and all other amounts payable under the Notes, the Note Purchase Agreements and this Guaranty, such amount shall be held in trust for the benefit of the Holders and shall forthwith be paid to the Holders to be credited and applied to the amounts due or to become due with respect to the Notes and all other amounts payable under the Note Purchase Agreements and this Guaranty, whether matured or unmatured. Each Guarantor acknowledges that it has received direct and indirect benefits from the financing arrangements contemplated by the Note Purchase Agreements and that the waiver set forth in this paragraph (e) is knowingly made as a result of the receipt of such benefits. (f) Each Guarantor agrees that to the extent the Company, any other Guarantor or any other Person makes any payment on any Note, which payment or any part thereof is subsequently invalidated, voided, declared to be fraudulent or preferential, set aside, recovered, rescinded or is required to be retained by or repaid to a trustee, receiver, or any other Person under any bankruptcy code, common law, or equitable cause, then and to the extent of such payment, the obligation or the part thereof intended to be satisfied shall be revived and continued in full force and effect with respect to the Guarantors' obligations hereunder, as if said payment had not been made. The liability of the Guarantors hereunder shall not be reduced or discharged, in whole or in part, by any payment to any Holder from any source that is thereafter paid, returned or refunded in whole or in part by reason of the assertion of a claim of any kind relating thereto, including, but not limited to, any claim for breach of contract, breach of warranty, preference, illegality, invalidity, or fraud asserted by any account debtor or by any other Person. (g) No Holder shall be under any obligation: (1) to marshall any assets in favor of the Guarantors or in payment of any or all of the liabilities of the Company under or in respect of the Notes or the obligations of the Guarantors hereunder or (2) to pursue any other remedy that the Guarantors may or may not be able to pursue themselves and that may lighten the Guarantors' burden, any right to which each Guarantor hereby expressly waives. (h) The obligations of each Guarantor under this Guaranty rank PARI PASSU in right of payment with all other Debt of such Guarantor which is not secured or which is not expressly subordinated in right of payment to any other Debt of such Guarantor. -7- SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE GUARANTORS. Each Guarantor represents and warrants to each Holder that: (a) Such Guarantor is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on (1) the ability of such Guarantor to perform its obligations under this Guaranty, or (2) the validity or enforceability of this Guaranty (herein in this Section 5, a "MATERIAL ADVERSE EFFECT"). Such Guarantor has the power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Guaranty and to perform the provisions hereof. (b) This Guaranty has been duly authorized by all necessary action on the part of such Guarantor, and this Guaranty constitutes a legal, valid and binding obligation of such Guarantor enforceable against such Guarantor in accordance with its terms, except as such enforceability may be limited by (1) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer, obligation or conveyance or other similar laws affecting the enforcement of creditors' rights generally and (2) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (c) The execution, delivery and performance by such Guarantor of this Guaranty will not (1) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of such Guarantor or any of its subsidiaries under its corporate charter or by-laws, or except for contraventions, breaches or defaults which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, under any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, or any other agreement or instrument to which such Guarantor or any of its subsidiaries is bound or by which such Guarantor or any of its subsidiaries or any of their respective properties may be bound or affected, (2) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to such Guarantor or any of its subsidiaries or (3) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the such Guarantor or any of its subsidiaries. (d) No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by such Guarantor of this Guaranty. (e) Such Guarantor is solvent, has capital not unreasonably small in relation to its business or any contemplated or undertaken transaction and has assets having a value both at fair valuation and at present fair salable value greater than the amount required to pay its debts as they become due and greater than the amount that will be required to pay its probable liability on -8- its existing debts as they become absolute and matured. Such Guarantor does not intend to incur, or believe that it will incur, debts beyond its ability to pay such debts as they become due. Such Guarantor will not be rendered insolvent by the execution and delivery of, and performance of its obligations under, this Guaranty. Such Guarantor does not intend to hinder, delay or defraud its creditors by or through the execution and delivery of, or performance of its obligations under, this Guaranty. SECTION 6. AMENDMENTS, WAIVERS AND CONSENTS. (a) This Guaranty may be amended, and the observance of any term hereof may be waived (either retroactively or prospectively), with (and only with) the written consent of each Guarantor and the Required Holders, except that (1) no amendment or waiver of any of the provisions of Sections 2, 3 or 4, or any defined term (as it is used therein), will be effective as to any Holder unless consented to by such Holder in writing, (2) no such amendment or waiver may, without the written consent of each Holder, (i) change the percentage of the principal amount of the Notes the Holders of which are required to consent to any such amendment or waiver, or (ii) amend this Section 6, and (3) this Guaranty may be amended by the addition of additional Guarantors pursuant to a Guaranty Supplement. (b) The Guarantors will provide each Holder (irrespective of the amount of Notes then owned by it) with sufficient information, and shall be afforded the opportunity of considering the same for a period of not less than 30 days and shall be supplied by such Guarantors with a brief statement regarding the reasons for any such proposed waiver or amendment, a copy of the proposed waiver or amendment and such other information regarding such amendment as any Holder shall reasonably request to enable it to make an informed decision with respect thereto. The Guarantors will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 6 to each Holder promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite Holders. (c) Each Guarantor agrees it will not directly or indirectly pay or cause to be paid any remuneration, whether by way of fee or otherwise, or grant any security, to any Holder as consideration for or as an inducement to the entering into by any Holder of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each Holder even if such Holder did not consent to such waiver or amendment. (d) Any amendment or waiver consented to as provided in this Section 6 applies equally to all Holders and is binding upon them and upon each future holder and upon the Guarantors. No such amendment or waiver will extend to or affect any obligation, covenant or agreement not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Guarantors and any Holder nor any delay in exercising any rights hereunder shall operate as a waiver of any rights of any Holder. As used herein, the term "this Guaranty" and references thereto shall mean this Guaranty as it may from time to time be amended or supplemented. -9- SECTION 7. SUBMISSION TO JURISDICTION. Any legal action or proceeding with respect to this Guaranty or any document relating thereto shall be brought in the courts of the State of New York or of the United States of America for the Southern District of New York and in no other courts, and, by execution and delivery of this Guaranty, each Guarantor hereby accepts for itself and in respect of its property generally and unconditionally, the jurisdiction of the aforesaid courts. Each Guarantor hereby irrevocably and unconditionally waives any objection, including, without limitation, any objection to the laying of venue or based on the grounds of FORUM NON CONVENIENS which it may now or hereafter have to the bringing of any action or proceeding in such respective jurisdiction and waives personal service of any and all process upon it, and consents that all such service of process be made by delivery to it at the address set forth in Section 8 and that service so made shall be deemed to be completed upon actual receipt. SECTION 8. NOTICES. All notices and communications provided for hereunder shall be in writing and sent (a) by telefacsimile if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent: (1) if to Note Purchasers, to such Note Purchasers at the address specified for such communications on Schedule A to the Note Purchase Agreements, thereto, as the case may be, or at such other address as such Note Purchasers shall have specified to any Guarantor or the Company in writing, (2) if to any other Holder, to such Holder at such address as such Holder shall have specified to any Guarantor or the Company in writing, or (3) if to any Guarantor, to such Guarantor c/o the Company at 4900 South Eastern Avenue, Los Angeles, California 90040, or at such other address as such Guarantor shall have specified to the Holders in writing. Notices under this Section 8 will be deemed given only when actually received. SECTION 9. MISCELLANEOUS. (a) No remedy herein conferred upon or reserved to any Holder is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Guaranty now or hereafter existing at law or in equity. No delay or omission to exercise any right or power accruing upon any default, omission or failure of performance hereunder shall impair any such right or power or shall be construed to be a waiver thereof but any such right or power may be exercised from time to time and as often as may be deemed expedient. In order to entitle any -10- Holder to exercise any remedy reserved to it under the Guaranty, it shall not be necessary for such Holder to physically produce its Note in any proceedings instituted by it or to give any notice, other than such notice as may be herein expressly required. (b) The Guarantors will pay all sums becoming due under this Guaranty by the method and at the address specified for such purpose in the Note Purchase Agreements, or by such other reasonable method or at such other address as any Holder shall have from time to time specified to the Guarantors in writing for such purpose, without the presentation or surrender of this Guaranty or any Note. (c) Any provision of this Guaranty that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. (d) If the whole or any part of this Guaranty shall be now or hereafter become unenforceable against any one or more of the Guarantors for any reason whatsoever or if it is not executed by any one or more of the Guarantors, this Guaranty shall nevertheless be and remain fully binding upon and enforceable against each other Guarantor as if it had been made and delivered only by such other Guarantors. (e) This Guaranty shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of each Holder and its successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not, so long as its Notes remain outstanding and unpaid. (f) This Guaranty may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto. (g) This Guaranty shall be construed and enforced in accordance with, and the rights of the parties shall be governed by the law of the State of New York. -11- IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly executed by an authorized representative as of this ______ day of December, 1999. [VARIATION] By Name: ------------------------------ Title: ------------------------------ -12- GUARANTY SUPPLEMENT Re: Senior Notes of K2 Inc. ---------------------------- This GUARANTY SUPPLEMENT dated as of _________, _____ (the or this "GUARANTY SUPPLEMENT") is entered into [on a joint and several basis] by [each of] the undersigned __________, a ____________ corporation [and ____________, a ___________ corporation] ([which parties are hereinafter referred to individually as] an "ADDITIONAL GUARANTOR" [and collectively as the "ADDITIONAL GUARANTORS"]). R E C I T A L S A. [Each] Guarantor, is presently a Subsidiary of K2 Inc., a Delaware corporation (the "COMPANY"). B. The Company entered into separate Note Purchase Agreements dated as of October 15, 1992 (collectively, the "NOTE PURCHASE AGREEMENTS") between the Company and each of the Purchasers named on Schedule I attached to said Note Purchase Agreements (the "NOTE PURCHASERS") providing for, among other things, the issue and sale by the Company to the Note Purchasers of the Company's 8.39% Senior Notes, due November 30, 2004 in the aggregate principal amount of $40,000,000 (the "NOTES"). The Note Purchasers together with their successors and assigns, are hereinafter collectively referred to as the "HOLDERS". C. The Company desires to amend the Note Purchase Agreements to provide more flexibility for its Accounts Receivable Financing Facility and to that end desires that the Note Purchasers consent to that certain Second Amendment to Note Agreements dated as of December 1, 1999 (the "SECOND AMENDMENT"). D. As a condition precedent to their consent to the Second Amendment, the Note Purchasers required that certain Subsidiaries of the Company enter into the Guaranty Agreement dated as of December 1, 1999 (the "GUARANTY") as security for the Notes. NOW, THEREFORE, as required by the Note Purchase Agreements and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency whereof are hereby acknowledged, [each/the] Guarantor does hereby covenant and agree, [jointly and severally,] as follows: In accordance with the requirements of the Guaranty, the Additional Guarantor[s] desire to amend the definition of Guarantor (as the same may have been heretofore amended) set forth in the Guaranty attached hereto so that at all times from and after the date hereof, the Additional Guarantor[s] shall be [jointly and severally] liable as set forth in the Guaranty for the obligations EXHIBIT A (to Guaranty Agreement) of the Company under the Note Purchase Agreements and Notes to the extent and in the manner set forth in the Guaranty. The undersigned is the duly elected ____________ of the Additional Guarantor[s] and is duly authorized to execute and deliver this Guaranty Supplement for the benefit of all Holders of the Notes. The execution by the undersigned of this Guaranty Supplement shall evidence its consent to and acknowledgment and approval of the terms set forth herein and in the Guaranty by such execution the Additional Guarantor[s] shall be deemed to have made the representations and warranties set forth in Section 5 of the Guaranty in favor of the Holders as of the date of this Guaranty Supplement]. Upon execution of this Guaranty Supplement, the Guaranty shall be deemed to be amended as set forth above. Except as amended herein, the terms and provisions of the Guaranty are hereby ratified, confirmed and approved in all respects. A-2 Any and all notices, requests, certificates and other instruments (including the Notes) may refer to the Guaranty without making specific reference to this Guaranty Supplement, but nevertheless all such references shall be deemed to include this Guaranty Supplement unless the context shall otherwise require. [NAME OF ADDITIONAL GUARANTOR] By Its ---------------------------------- A-3 EX-10.(B)(3) 4 EXHIBIT 10(B)(3) February 18, 2000 EXHIBIT (10)(b)(3) Enterprise Funding Corporation c/o Global Securitization Services, LLC 114 West 47th Street, Suite 1715 New York, NY 10036 Attention: Kevin P. Burns Bank of America, N.A Bank of America Corporate Center - 10th Floor Charlotte, NC 28255 Attention: Michelle M. Heath Dear Mr. Burns and Ms. Heath: We refer to the Transfer and Administration Agreement, dated as of January 24, 1996 among Enterprise Funding Corporation, K2 Funding, Inc., as Transferor, K2 Inc., as Master Servicer and Bank of America, N.A., as successor by merger to NationsBank, N.A., as amended (the "Agreement"). The undersigned hereby desire to amend the Agreement to extend the date referred to in clause (v) of the definition of "Termination Date" in the Agreement to March 31, 2000, subject to the execution of the Amended and Restated Fee Letter dated February 18, 2000. Each of the undersigned hereby represents and warrants to you that its representations and warranties set forth in the Agreement are true and correct as of the date hereof (except those representations and warranties set forth therein which specifically relate to an earlier date) and that no Termination Event exists on and as of the date hereof. All other terms and conditions of the Agreement not amended by this letter agreement shall remain unchanged and in full force and effect. This letter agreement may be executed in counterparts, all of which taken together shall constitute one and the same agreement. This letter agreement contains the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof superseding all prior oral or written understandings. Any provisions of this letter agreement may be amended if, but only if, such amendment is in writing and is signed by each of the parties hereto. This letter agreement shall be governed by and construed in accordance with, the internal laws (as opposed to conflicts of law provisions) of the State of New York. If you are in agreement with the above, kindly sign below and return a copy of this letter to the undersigned. K2 INC. as Master Servicer By: ------------------------------- Name: Title: K2 FUNDING, INC. as Transferor By: ------------------------------- Name: Title: Accepted as of the date first above written: ENTERPRISE FUNDING CORPORATION, as the Company By: --------------------------------- Name: Title: BANK OF AMERICA, N.A., as Administrative Agent By: --------------------------------- Name: Title: EX-10.(C) 5 EXHIBIT 10(C) EXHIBIT (10)(c) ================================================================================ K2 INC. $50,000,000 8.41% Series 1999-A Senior Notes due December 1, 2009 ---------------- NOTE PURCHASE AGREEMENT ---------------- DATED AS OF DECEMBER 1, 1999 ================================================================================ TABLE OF CONTENTS
SECTION HEADING PAGE SECTION 1 AUTHORIZATION OF NOTES; INTEREST RATE ADJUSTMENT................................... 1 SECTION 2 SALE AND PURCHASE OF NOTES......................................................... 2 Section 2.1. Series 1999-A Notes................................................................ 2 Section 2.2. Additional Series of Notes......................................................... 2 SECTION 3 CLOSING............................................................................ 3 SECTION 4 CONDITIONS TO CLOSING.............................................................. 3 Section 4.1. Representations and Warranties..................................................... 4 Section 4.2. Performance; No Default............................................................ 4 Section 4.3. Compliance Certificates............................................................ 4 Section 4.4. Opinions of Counsel................................................................ 4 Section 4.5. Purchase Permitted by Applicable Law, Etc.......................................... 4 Section 4.6. Related Transactions............................................................... 5 Section 4.7. Payment of Special Counsel Fees.................................................... 5 Section 4.8. Private Placement Number........................................................... 5 Section 4.9. Changes in Corporate Structure..................................................... 5 Section 4.10. Guaranty Agreement................................................................. 5 Section 4.11. Intercreditor Agreement............................................................ 5 Section 4.12. Proceedings and Documents.......................................................... 5 Section 4.13. Conditions to Issuance of Additional Notes......................................... 6 SECTION 5 REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................................... 6 Section 5.1. Organization; Power and Authority.................................................. 6 Section 5.2. Authorization, Etc................................................................. 6 Section 5.3. Disclosure......................................................................... 7 Section 5.4. Organization and Ownership of Shares of Subsidiaries; Affiliates................... 7 Section 5.5. Financial Statements............................................................... 8 Section 5.6. Compliance with Laws, Other Instruments, Etc....................................... 8 Section 5.7. Governmental Authorizations, Etc................................................... 8 Section 5.8. Litigation; Observance of Statutes and Orders...................................... 9 Section 5.9. Taxes.............................................................................. 9 Section 5.10. Title to Property; Leases.......................................................... 9 Section 5.11. Licenses, Permits, Etc............................................................. 10 Section 5.12. Compliance with ERISA.............................................................. 10 Section 5.13. Private Offering by the Company.................................................... 11 Section 5.14. Use of Proceeds; Margin Regulations................................................ 11 Section 5.15. Existing Debt; Future Liens........................................................ 11
Section 5.16. Foreign Assets Control Regulations, Etc............................................ 12 Section 5.17. Status under Certain Statutes...................................................... 12 Section 5.18. Environmental Matters.............................................................. 12 Section 5.19. Computer 2000 Compliant............................................................ 13 SECTION 6 REPRESENTATIONS OF THE PURCHASER................................................... 13 Section 6.1. Purchase for Investment............................................................ 12 Section 6.2. Source of Funds.................................................................... 12 SECTION 7 INFORMATION AS TO COMPANY.......................................................... 15 Section 7.1. Financial and Business Information................................................. 15 Section 7.2. Officer's Certificate.............................................................. 18 Section 7.3. Inspection......................................................................... 18 SECTION 8 PREPAYMENT OF THE NOTES............................................................ 19 Section 8.1. Required Prepayments............................................................... 19 Section 8.2. Optional Prepayments with Make-Whole Amount........................................ 20 Section 8.3. Allocation of Partial Prepayments.................................................. 20 Section 8.4. Maturity; Surrender, Etc........................................................... 20 Section 8.5. Purchase of Notes.................................................................. 20 Section 8.6. Make-Whole Amount for Series 1999-A Note........................................... 20 Section 8.7. Change in Control.................................................................. 22 SECTION 9 AFFIRMATIVE COVENANTS.............................................................. 24 Section 9.1. Compliance with Law................................................................ 24 Section 9.2. Insurance.......................................................................... 24 Section 9.3. Maintenance of Properties.......................................................... 24 Section 9.4. Payment of Taxes................................................................... 24 Section 9.5. Corporate Existence, Etc........................................................... 25 Section 9.6. Guaranty by Subsidiaries........................................................... 25 Section 9.7. Rating for the Notes............................................................... 25 SECTION 10 NEGATIVE COVENANTS................................................................. 26 Section 10.1. Consolidated Net Worth............................................................. 26 Section 10.2. Limitations on Funded Debt......................................................... 26 Section 10.3. Limitation on Priority Debt........................................................ 26 Section 10.4. Limitation on Current Debt......................................................... 26 Section 10.5. Fixed Charges Coverage Ratio....................................................... 27 Section 10.6. Limitation on Liens................................................................ 27 Section 10.7. Sales of Assets.................................................................... 29 Section 10.8. Merger, Consolidation and Sale of Stock............................................ 30 Section 10.9. Designation of Restricted and Unrestricted Subsidiaries............................ 30 Section 10.10. Nature of Business................................................................. 31 Section 10.11. Transactions with Affiliates....................................................... 31
-ii- SECTION 11 EVENTS OF DEFAULT.................................................................. 31 SECTION 12 REMEDIES ON DEFAULT, ETC........................................................... 34 Section 12.1. Acceleration....................................................................... 34 Section 12.2. Other Remedies..................................................................... 35 Section 12.3. Rescission......................................................................... 35 Section 12.4. No Waivers or Election of Remedies, Expenses, Etc.................................. 35 SECTION 13 REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES...................................... 35 Section 13.1. Registration of Notes.............................................................. 35 Section 13.2. Transfer and Exchange of Notes..................................................... 36 Section 13.3. Replacement of Notes............................................................... 36 SECTION 14 PAYMENTS ON NOTES.................................................................. 37 Section 14.1. Place of Payment................................................................... 37 Section 14.2. Home Office Payment................................................................ 37 SECTION 15 EXPENSES, ETC...................................................................... 37 Section 15.1. Transaction Expenses............................................................... 37 Section 15.2. Survival........................................................................... 38 SECTION 16 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT................................................................... 38 SECTION 17 AMENDMENT AND WAIVER............................................................... 38 Section 17.1. Requirements....................................................................... 38 Section 17.2. Solicitation of Holders of Notes................................................... 39 Section 17.3. Binding Effect, Etc................................................................ 39 Section 17.4. Notes Held by Company, Etc......................................................... 39 SECTION 18 NOTICES............................................................................ 40 SECTION 19 REPRODUCTION OF DOCUMENTS.......................................................... 40 SECTION 20 CONFIDENTIAL INFORMATION........................................................... 40 SECTION 21 SUBSTITUTION OF PURCHASER.......................................................... 41 SECTION 22 MISCELLANEOUS...................................................................... 42 Section 22.1. Successors and Assigns............................................................. 42 Section 22.2. Payments Due on Non-Business Days.................................................. 42
-iii- Section 22.3. Severability....................................................................... 42 Section 22.4. Construction....................................................................... 42 Section 22.5. Counterparts....................................................................... 42 Section 22.6. Submission to Jurisdiction......................................................... 42 Section 22.7. Governing Law...................................................................... 42 Signature............................................................................................ 44
-iv- SCHEDULE A -- INFORMATION RELATING TO PURCHASERS SCHEDULE B -- DEFINED TERMS SCHEDULE 4.9 -- Changes in Corporate Structure SCHEDULE 5.3 -- Disclosure Materials SCHEDULE 5.4 -- Subsidiaries of the Company and Ownership of Subsidiary Stock SCHEDULE 5.5 -- Financial Statements SCHEDULE 5.8 -- Certain Litigation SCHEDULE 5.11 -- Patents, etc. SCHEDULE 5.14 -- Use of Proceeds SCHEDULE 5.15 -- Existing Debt, Future Liens SCHEDULE 5.18 -- Environmental Liabilities SCHEDULE 10.6 -- Liens Existing as of the Date of Closing EXHIBIT 1 -- Form of 8.41% Series 1999-A Senior Note due December 1, 2009 EXHIBIT 2 -- Form of Guaranty Agreement EXHIBIT 3 -- Form of Intercreditor Agreement EXHIBIT 4.4(a) -- Form of Opinion of Special Counsel for the Company EXHIBIT 4.4(b) -- Form of Opinion of Special Counsel for the Purchasers EXHIBIT S -- Form of Supplement -v- K2 INC. 4900 SOUTH EASTERN AVENUE LOS ANGELES, CALIFORNIA 90040 8.41% Series 1999-A Senior Notes due December 1, 2009 Dated as of December 1, 1999 TO THE PURCHASERS LISTED IN THE ATTACHED SCHEDULE A: Ladies and Gentlemen: K2 Inc., a Delaware corporation (the "COMPANY"), agrees with the Purchasers listed in the attached Schedule A to this Note Purchase Agreement (this "AGREEMENT") as follows: SECTION 1. AUTHORIZATION OF NOTES; INTEREST RATE ADJUSTMENT. The Company will authorize the issue and sale of $50,000,000 aggregate principal amount of its 8.41% Series 1999-A Senior Notes due December 1, 2009 (the "SERIES 1999-A NOTES"). The Series 1999-A Notes together with each series of Additional Notes which may from time to time be issued pursuant to the provisions of Section 2.2 are collectively referred to as the "NOTES" (such term shall also include any such notes issued in substitution therefor pursuant to Section 13 of this Agreement). The Series 1999-A Notes shall be substantially in the form set out in Exhibit 1, with such changes therefrom, if any, as may be approved by the Purchasers and the Company. Certain capitalized terms used in this Agreement are defined in Schedule B; references to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement. If the Company shall not have consummated the Simplex Products Disposition on or prior to March 31, 2000, the interest rate on the Series 1999-A Notes shall be increased by 20 basis points to 8.61% per annum effective April 1, 2000. If the Company shall not have consummated the Simplex Products Disposition on or prior to March 31, 2000 but shall have consummated the Simplex Products Disposition on or prior to June 30, 2000, the interest rate on the Series 1999-A Notes shall be decreased by 10 basis points to 8.51% per annum effective as of the date of consummation of the Simplex Products Disposition. If the Company shall consummate the Simplex Products Disposition at any time after June 30, 2000, there shall be no adjustment to the interest rate on the Series 1999-A Notes and the Series 1999-A Notes shall continue to bear interest at the rate of 8.61% per annum. Upon the request of any holder of the Series 1999-A Notes the Company will issue new Series 1999-A Notes which have been modified to reflect the change in the interest rate for the Series 1999-A Notes required by this paragraph. Subject to the terms and conditions set forth in Section 9.6, the payment by the Company of all amounts due with respect to the Notes and the performance by the Company of its obligations under this Agreement described in Section 2 below will be unconditionally guaranteed by certain Subsidiaries of the Company under a Guaranty Agreement dated as of December 1, 1999 (the "GUARANTY AGREEMENT") from said Subsidiaries, which Guaranty Agreement shall be in substantially the form attached hereto as Exhibit 2. Pursuant to the Intercreditor Agreement dated as of December 17, 1999 (the "INTERCREDITOR AGREEMENT") among the Purchasers, the banks which are parties to the Bank Credit Agreement and certain other creditors of the Company which are beneficiaries of Subsidiary Guaranty Agreements, recoveries in respect of Excluded Subsidiary Obligations shall be shared among such creditors in accordance with the terms of the Intercreditor Agreement which shall be in substantially the form attached hereto as Exhibit 3. SECTION 2. SALE AND PURCHASE OF NOTES. SECTION 2.1. SERIES 1999-A NOTES. Subject to the terms and conditions of this Agreement, the Company will issue and sell to each Purchaser and each Purchaser will purchase from the Company, at the Closing provided for in Section 3, Series 1999-A Notes in the principal amount specified opposite such Purchaser's name in Schedule A at the purchase price of 100% of the principal amount thereof. The obligations of each Purchaser hereunder are several and not joint obligations and each Purchaser shall have no obligation and no liability to any Person for the performance or nonperformance by any other Purchaser hereunder. SECTION 2.2. ADDITIONAL SERIES OF NOTES. The Company may, from time to time, in its sole discretion but subject to the terms hereof, issue and sell one or more additional series of its unsecured promissory notes under the provisions of this Agreement pursuant to a supplement (a "SUPPLEMENT") substantially in the form of Exhibit S. Each additional series of Notes (the "ADDITIONAL NOTES") issued pursuant to a Supplement shall be subject to the following terms and conditions: (i) each series of Additional Notes, when so issued, shall be differentiated from all previous series by sequential alphabetical designation inscribed thereon; (ii) Additional Notes of the same series may consist of more than one different and separate tranches and may differ with respect to outstanding principal amounts, maturity dates, interest rates and premiums, if any, and price and terms of redemption or payment prior to maturity, but all such different and separate tranches of the same series shall vote as a single class and constitute one series; (iii) each series of Additional Notes shall be dated the date of issue, bear interest at such rate or rates, mature on such date or dates, be subject to such mandatory and optional prepayment on the dates and at the premiums, if any, have such additional or different conditions precedent to closing, such representations and warranties and such additional covenants as shall be specified in the Supplement under which such Additional -2- Notes are issued and upon execution of any such Supplement, this Agreement shall be amended to reflect such additional covenants without further action on the part of the holders of the Notes outstanding under this Agreement, PROVIDED, that any such additional covenants shall inure to the benefit of all holders of Notes so long as any Additional Notes issued pursuant to such Supplement remain outstanding; (iv) each series of Additional Notes issued under this Agreement shall be in substantially the form of Exhibit 1 to Exhibit S hereto with such variations, omissions and insertions as are necessary or permitted hereunder; (v) the minimum principal amount of any Note issued under a Supplement shall be $100,000, except as may be necessary to evidence the outstanding amount of any Note originally issued in a denomination of $100,000 or more; (vi) all Additional Notes shall constitute Senior Debt of the Company and shall rank PARI PASSU with all other outstanding Notes; and (vii) no Additional Notes shall be issued hereunder if at the time of issuance thereof and after giving effect to the application of the proceeds thereof, any Default or Event of Default shall have occurred and be continuing. SECTION 3. CLOSING. The sale and purchase of the Series 1999-A Notes to be purchased by each Purchaser shall occur at the offices of Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois 60603 at 10:00 A.M. Chicago time, at a closing (the "CLOSING") on December 17, 1999 or on such other Business Day thereafter on or prior to December 31, 1999 as may be agreed upon by the Company and the Purchasers. At the Closing the Company will deliver to each Purchaser the Series 1999-A Notes to be purchased by such Purchaser in the form of a single Series 1999-A Note (or such greater number of Series 1999-A Notes in denominations of at least $100,000 as such Purchaser may request) dated the date of the Closing and registered in such Purchaser's name (or in the name of such Purchaser's nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 12338-53579 at Bank of America 1850 Gateway Blvd., Concord, California 94520, ABA #121000358. If at the Closing the Company shall fail to tender such Notes to any Purchaser as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to any Purchaser's satisfaction, such Purchaser shall, at such Purchaser's election, be relieved of all further obligations under this Agreement, without thereby waiving any rights such Purchaser may have by reason of such failure or such nonfulfillment. SECTION 4. CONDITIONS TO CLOSING. The obligation of the Company to sell the Series 1999-A Notes to be sold to each Purchaser at the Closing is subject to the consummation of the sale of the entire aggregate -3- principal amount of the Series 1999-A Notes scheduled to be sold on the date of Closing pursuant to this Agreement. The obligation of each Purchaser to purchase and pay for the Notes to be sold to such Purchaser at the Closing is subject to the fulfillment to such Purchaser's satisfaction, prior to or at the Closing, of the following conditions: SECTION 4.1. REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing. SECTION 4.2. PERFORMANCE; NO DEFAULT. (a) The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing, and after giving effect to the issue and sale of the Series 1999-A Notes (and the application of the proceeds thereof as contemplated by Section 5.14), no Default or Event of Default shall have occurred and be continuing. (b) The Subsidiaries shall have performed all of their obligations under the Guaranty Agreement which are to be performed prior to the Closing. SECTION 4.3. COMPLIANCE CERTIFICATES. (a) OFFICER'S CERTIFICATE. The Company shall have delivered to such Purchaser an Officer's Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 4.1, 4.2 and 4.9 have been fulfilled. (b) SECRETARY'S CERTIFICATE. The Company shall have delivered to such Purchaser a certificate certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of (i) the Series 1999-A Notes and this Agreement by the Company and (ii) the Guaranty Agreement by the Subsidiaries. SECTION 4.4. OPINIONS OF COUNSEL. Such Purchaser shall have received opinions in form and substance satisfactory to such Purchaser, dated the date of the Closing (a) from Gibson, Dunn & Crutcher LLP counsel for the Company, covering the matters set forth in Exhibit 4.4(a) and covering such other matters incident to the transactions contemplated hereby as such Purchaser or such Purchaser's counsel may reasonably request (and the Company hereby instructs its counsel to deliver such opinion to such Purchaser) and (b) from Chapman and Cutler, the Purchasers' special counsel in connection with such transactions, substantially in the form set forth in Exhibit 4.4(b) and covering such other matters incident to such transactions as such Purchaser may reasonably request. SECTION 4.5. PURCHASE PERMITTED BY APPLICABLE LAW, ETC. On the date of the Closing each purchase of Series 1999-A Notes shall (a) be permitted by the laws and regulations of each jurisdiction to which each -4- Purchaser is subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (b) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (c) not subject any Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by any Purchaser, such Purchaser shall have received an Officer's Certificate certifying as to such matters of fact as such Purchaser may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted. SECTION 4.6. RELATED TRANSACTIONS. The Company shall have consummated the sale of the entire principal amount of the Series 1999-A Notes scheduled to be sold on the date of Closing pursuant to this Agreement. SECTION 4.7. PAYMENT OF SPECIAL COUNSEL FEES. Without limiting the provisions of Section 15.1, the Company shall have paid on or before the Closing, the fees, charges and disbursements of the Purchasers' special counsel referred to in Section 4.4 to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing. SECTION 4.8. PRIVATE PLACEMENT NUMBER. A Private Placement Number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Notes. SECTION 4.9. CHANGES IN CORPORATE STRUCTURE. Except as specified in Schedule 4.9, the Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5. SECTION 4.10. GUARANTY AGREEMENT. The Guaranty Agreement shall have been duly authorized, executed and delivered by each of the Subsidiary Guarantors, shall constitute the legal, valid and binding contract and agreement of each such Subsidiary Guarantor and shall be enforceable against each such Subsidiary Guarantor in accordance with its terms. SECTION 4.11. INTERCREDITOR AGREEMENT. The Intercreditor Agreement shall be duly authorized, executed and delivered by each of the Purchasers and the banks which are parties to the Bank Credit Agreement and any other creditor which shall have the benefit of the Subsidiary Guaranty Agreements. SECTION 4.12. PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to such Purchaser and such Purchaser's special counsel, and such Purchaser and such Purchaser's -5- special counsel shall have received all such counterpart originals or certified or other copies of such documents as such Purchaser or such Purchaser's special counsel may reasonably request. SECTION 4.13. CONDITIONS TO ISSUANCE OF ADDITIONAL NOTES. The obligations of the Additional Purchasers to purchase any Additional Notes shall be subject to the following conditions precedent, in addition to the conditions specified in the Supplement pursuant to which such Additional Notes may be issued: (a) COMPLIANCE CERTIFICATE. A duly authorized Senior Financial Officer shall execute and deliver to each Additional Purchaser and each holder of Notes an Officer's Certificate dated the date of issue of such series of Additional Notes stating that such officer has reviewed the provisions of this Agreement (including any Supplements hereto) and setting forth the information and computations (in sufficient detail) required in order to establish whether the Company is in compliance with the requirements of Section 10.2 on such date. (b) EXECUTION AND DELIVERY OF SUPPLEMENT. The Company and each such Additional Purchaser shall execute and deliver a Supplement substantially in the form of Exhibit S hereto. (c) REPRESENTATIONS OF ADDITIONAL PURCHASERS. Each Additional Purchaser shall have confirmed in the Supplement that the representations set forth in Section 6 are true with respect to such Additional Purchaser on and as of the date of issue of the Additional Notes. SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Purchaser that: SECTION 5.1. ORGANIZATION; POWER AND AUTHORITY. The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Notes and to perform the provisions hereof and thereof. SECTION 5.2. AUTHORIZATION, ETC. This Agreement and the Notes have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by -6- (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). SECTION 5.3. DISCLOSURE. The Company, through its agent, Bank of America Securities, LLC, has delivered to each Purchaser a copy of a private placement memorandum, dated September, 1999 (the "MEMORANDUM"), relating to the transactions contemplated hereby. The Memorandum fairly describes, in all material respects, the general nature of the business and principal properties of the Company and its Subsidiaries. Except as disclosed in Schedule 5.3, this Agreement, the Guaranty Agreement, the Memorandum, the documents, certificates or other writings delivered to the Purchasers by or on behalf of the Company in connection with the transactions contemplated hereby and the financial statements listed in Schedule 5.5, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Except as disclosed in the Memorandum or as expressly described in Schedule 5.3, or in one of the documents, certificates or other writings identified therein, or in the financial statements listed in Schedule 5.5, since December 31, 1998, there has been no change in the financial condition, operations, business, properties or prospects of the Company or any of its Subsidiaries except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Memorandum or in the other documents, certificates and other writings delivered to each Purchaser by or on behalf of the Company specifically for use in connection with the transactions contemplated hereby. SECTION 5.4. ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES; AFFILIATES. (a) Schedule 5.4 contains (except as noted therein) complete and correct lists (i) of the Company's Restricted and Unrestricted Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary, and all other Investments of the Company and its Restricted Subsidiaries (ii) of the Company's Affiliates known to the Company, other than Subsidiaries, and (iii) of the Company's directors and senior officers. (b) All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in Schedule 5.4 as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Subsidiary free and clear of any Lien (except as otherwise disclosed in Schedule 5.4). (c) Each Subsidiary identified in Schedule 5.4 is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Subsidiary has -7- the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact and to execute and deliver the Guaranty Agreement and perform its obligations under the Guaranty Agreement. (d) The Guaranty Agreement has been duly authorized by all necessary action on the part of each Subsidiary and the Guaranty Agreement constitutes a legal, valid and binding obligation of each such Subsidiary enforceable against such Subsidiary in accordance with its terms, except as such enforceability may be limited by (a) applicable bankruptcy, insolvency, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights generally and (b) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (e) No Subsidiary is a party to, or otherwise subject to, any legal restriction or any agreement (other than this Agreement, the agreements listed on Schedule 5.4 and customary limitations imposed by corporate law statutes) restricting the ability of such Subsidiary to pay dividends out of profits or make any other similar distributions of profits to the Company or any of its Subsidiaries that owns outstanding shares of capital stock or similar equity interests of such Subsidiary. SECTION 5.5. FINANCIAL STATEMENTS. The Company has delivered to each Purchaser copies of the financial statements of the Company and its Subsidiaries listed on Schedule 5.5. All of said financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of the respective dates specified in such financial statements and the consolidated results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). SECTION 5.6. COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC. Neither the execution, delivery and performance by the Company of this Agreement and the Notes nor the execution, delivery and performance by the Subsidiaries of the Guaranty Agreement will (a) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Restricted Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other agreement or instrument to which the Company or any Restricted Subsidiary is bound or by which the Company or any Restricted Subsidiary or any of their respective properties may be bound or affected, (b) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Restricted Subsidiary or (c) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Restricted Subsidiary. SECTION 5.7. GOVERNMENTAL AUTHORIZATIONS, ETC. No consent, approval or authorization of, or registration, filing or -8- declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement or the Notes or by the Subsidiaries of the Guaranty Agreement. SECTION 5.8. LITIGATION; OBSERVANCE OF STATUTES AND ORDERS. (a) Except as disclosed in Schedule 5.8, there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (b) Neither the Company nor any Subsidiary is in default under any term of any agreement or instrument to which it is a party or by which it is bound, or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. SECTION 5.9. TAXES. The Company and its Subsidiaries have filed all tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (a) the amount of which is not individually or in the aggregate Material or (b) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of Federal, state or other taxes for all fiscal periods are adequate in accordance with GAAP. The Federal income tax liabilities of the Company and its Subsidiaries have been determined by the Internal Revenue Service and paid for all fiscal years up to and including the calendar year ended December 31, 1994. SECTION 5.10. TITLE TO PROPERTY LEASES. The Company and its Subsidiaries have good and sufficient title to their respective properties that individually or in the aggregate are Material, including all such properties reflected as owned by the Company and its Subsidiaries in the most recent audited balance sheet referred to in Section 5.5 or purported to have been acquired by the Company or any Subsidiary after said date (except as sold or otherwise disposed of in the ordinary course of business and properties disposed of in connection with the Simplex Products Disposition), in each case free and clear of Liens prohibited by this Agreement. All leases that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all material respects. -9- SECTION 5.11. LICENSES, PERMITS, ETC. Except as disclosed in Schedule 5.11, (a) the Company and its Restricted Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material, without known conflict with the rights of others except for those conflicts, that, individually or in the aggregate, would not have a Material Adverse Effect; (b) to the best knowledge of the Company, no product of the Company or any of its Subsidiaries infringes in any material respect any license, permit, franchise, authorization, patent, copyright, service mark, trademark, trade name or other right owned by any other Person; and (c) to the best knowledge of the Company, there is no Material violation by any Person of any right of the Company or any of its Subsidiaries with respect to any patent, copyright, service mark, trademark, trade name or other right owned or used by the Company or any of its Subsidiaries. SECTION 5.12. COMPLIANCE WITH ERISA. (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to Aemployee benefit plans" (as defined in Section 3(3) of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than such liabilities or Liens as would not be individually or in the aggregate Material. (b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan's most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan's most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities by more than $5,000,000 in the case of any single Plan and by more than $10,000,000 in the aggregate for all Plans. The term "BENEFIT LIABILITIES" has the meaning specified in Section 4001 of ERISA and the terms "CURRENT VALUE" and "PRESENT VALUE" have the meanings specified in Section 3 of ERISA. (c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under Section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material. -10- (d) The expected post-retirement benefit obligation (determined as of the last day of the Company=s most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by Section 4980B of the Code) of the Company and its Subsidiaries is not Material. (e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of Section 406 of ERISA or in connection with which a tax could be imposed pursuant to Section 4975(c)(1)(A)-(D) of the Code. The representation by the Company in the first sentence of this Section 5.12(e) is made in reliance upon and subject to the accuracy of each Purchaser=s representation in Section 6.2 as to the sources of the funds to be used to pay the purchase price of the Notes to be purchased by such Purchaser. SECTION 5.13. PRIVATE OFFERING BY THE COMPANY. Neither the Company nor anyone acting on its behalf has offered the Series 1999-A Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any Person other than the Purchasers and not more than 60 other Institutional Investors, each of which has been offered the Series 1999-A Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act. SECTION 5.14. USE OF PROCEEDS; MARGIN REGULATIONS. The Company will apply the proceeds of the sale of the Notes as set forth in Schedule 5.14. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin stock does not constitute more than 1% of the value of the consolidated assets of the Company and its Subsidiaries and the Company does not have any present intention that margin stock will constitute more than 1% of the value of such assets. As used in this Section, the terms "MARGIN STOCK" and "PURPOSE OF BUYING OR CARRYING" shall have the meanings assigned to them in said Regulation U. SECTION 5.15. EXISTING DEBT; FUTURE LIENS. (a) Except as described therein, Schedule 5.15 sets forth a complete and correct list of all outstanding Debt of the Company and its Restricted Subsidiaries as of September 30, 1999, since which date there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Debt of the Company or its Restricted Subsidiaries. Neither the Company nor any Restricted Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Debt of the Company or such Restricted Subsidiary exceeding $5,000,000 and no event or condition exists with respect to any Debt of the Company or any Restricted Subsidiary exceeding $5,000,000 that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause -11- such Debt to become due and payable before its stated maturity or before its regularly scheduled dates of payment. (b) Except as disclosed in Schedule 5.15, neither the Company nor any Subsidiary has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by Section 10.6. SECTION 5.16. FOREIGN ASSETS CONTROL REGULATIONS, ETC. Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. SECTION 5.17. STATUS UNDER CERTAIN STATUTES. Neither the Company nor any Subsidiary is an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended, or is subject to regulation under the Public Utility Holding Company Act of 1935, as amended, the ICC Termination Act of 1995, as amended, or the Federal Power Act, as amended. SECTION 5.18. ENVIRONMENTAL MATTERS. Neither the Company nor any Subsidiary has knowledge of any claim or has received any notice of any claim, and no proceeding has been instituted raising any claim against the Company or any of its Subsidiaries or any of their respective real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect. Except as otherwise disclosed to each Purchaser in writing: (a) neither the Company nor any Subsidiary has knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by any of them or to other assets or their use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect; (b) neither the Company nor any of its Subsidiaries has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them or has disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and (c) all buildings on all real properties now owned, leased or operated by the Company or any of its Subsidiaries are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect. -12- SECTION 5.19. COMPUTER 2000 COMPLIANT. The Company and its Restricted Subsidiaries internal business and computer systems will be year 2000 compliant in a timely manner and the advent of the year 2000 and its impact on said internal business and computer systems are not expected to have a Material Adverse Effect. SECTION 6. REPRESENTATIONS OF THE PURCHASER. SECTION 6.1. PURCHASE FOR INVESTMENT. Each Purchaser represents that it is an "accredited investor" as defined in Regulation D under the Securities Act and is purchasing the Series 1999-A Notes for its own account or for one or more separate accounts maintained by it or for the account of one or more pension or trust funds and not with a view to the distribution thereof, PROVIDED that the disposition of such Purchaser's or such pension or trust funds' property shall at all times be within such Purchaser's or such pension or trust funds' control. Each Purchaser understands that the Series 1999-A Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Series 1999-A Notes. SECTION 6.2. SOURCE OF FUNDS. Each Purchaser represents that at least one of the following statements is an accurate representation as to each source of funds (a "SOURCE") to be used by it to pay the purchase price of the Series 1999-A Notes to be purchased by it hereunder: (a) the Source is an "insurance company general account" within the meaning of Department of Labor Prohibited Transaction Exemption ("PTE") 95-60 (issued July 12, 1995) and there is no employee benefit plan, treating as a single plan, all plans maintained by the same employer or employee organization, with respect to which the amount of the general account reserves and liabilities for all contracts held by or on behalf of such plan, exceeds ten percent (10%) of the total reserves and liabilities of such general account (exclusive of separate account liabilities) plus surplus, as set forth in the NAIC Annual Statement for such Purchaser most recently filed with such Purchaser's state of domicile; or (b) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 (issued January 29, 1990), or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and, except as such Purchaser has disclosed to the Company in writing pursuant to this paragraph (b), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or (c) the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee -13- benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (c); or (d) the Source is a governmental plan; or (e) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (e); or (f) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA; or (g) the Source is an insurance company separate account maintained solely in connection with the fixed contractual obligations of the insurance company under which the amounts payable, or credited, to any employee benefit plan (or its related trust) and to any participant or beneficiary of such plan (including any annuitant) are not affected in any manner by the investment performance of the separate account. If any Purchaser or any Additional Purchaser or any subsequent transferee of the Notes indicates that such Purchaser or any Additional Purchaser or such transferee is relying on any representation contained in paragraph (b), (c) or (e) above, the Company shall deliver on the date of issuance of such Notes and on the date of any applicable transfer a certificate, which shall either state that (i) it is neither a party in interest nor a "disqualified person" (as defined in Section 4975(e)(2) of the Code), with respect to any plan identified pursuant to paragraphs (b) or (e) above, or (ii) with respect to any plan, identified pursuant to paragraph (c) above, neither it nor any "affiliate" (as defined in Section V(c) of the QPAM Exemption) has at such time, and during the immediately preceding one year, exercised the authority to appoint or terminate said QPAM as manager of any plan identified in writing pursuant to paragraph (c) above or to negotiate the terms of said QPAM's management agreement on behalf of any such identified plan. As used in this Section 6.2, the terms "EMPLOYEE BENEFIT PLAN", "GOVERNMENTAL PLAN", "PARTY IN INTEREST" and "SEPARATE ACCOUNT" shall have the respective meanings assigned to such terms in Section 3 of ERISA. -14- SECTION 7. INFORMATION AS TO COMPANY. SECTION 7.1. FINANCIAL AND BUSINESS INFORMATION. The Company shall deliver to each holder of Notes that is an Institutional Investor: (a) QUARTERLY STATEMENTS - within 60 days after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of, (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and (ii) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from normal, recurring year-end adjustments, PROVIDED that delivery within the time period specified above of copies of the Company's Quarterly Report on Form 10-Q prepared in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 7.1(a); (b) ANNUAL STATEMENTS - within 105 days after the end of each fiscal year of the Company, duplicate copies of, (i) a consolidated balance sheet of the Company and its Subsidiaries, as at the end of such year, and (ii) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by (A) an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results -15- of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and (B) a certificate of such accountants stating that they have reviewed Sections 10.1, 10.2, 10.3, 10.4, 10.5 and 10.7 (with respect to calculations of the book value of asset dispositions, the Net Proceeds received from such dispositions and the book value of Consolidated Total Assets) of this Agreement and stating further whether, in making their audit, they have become aware of any condition or event under such Sections that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that such accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless such accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit), PROVIDED that the delivery within the time period specified above of the Company's Annual Report on Form 10-K for such fiscal year (together with the Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission, together with the accountant's certificate described in clause (B) above, shall be deemed to satisfy the requirements of this Section 7.1(b); (c) SEC AND OTHER REPORTS - promptly upon their becoming available, one copy of (i) each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to public securities holders generally, and (ii) each regular or periodic report, each registration statement (without exhibits except as expressly requested by such holder), and each prospectus and all amendments thereto filed by the Company or any Subsidiary with the Securities and Exchange Commission and of all press releases and other statements made available generally by the Company or any Subsidiary to the public concerning developments that are Material; (d) NOTICE OF DEFAULT OR EVENT OF DEFAULT - promptly, and in any event within five days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(f), a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto; -16- (e) ERISA MATTERS - promptly, and in any event within five days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto: (i) with respect to any Plan, any reportable event, as defined in section 4043(b) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or (ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or (iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect; (f) NOTICES FROM GOVERNMENTAL AUTHORITY - promptly, and in any event within 30 days of receipt thereof, copies of any notice to the Company or any Subsidiary from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect; (g) SUPPLEMENTS - promptly and in any event within 10 Business Days after the execution and delivery of any Supplement, a copy thereof; (h) SIMPLEX PRODUCTS DISPOSITION - promptly and in any event within 10 Business Days following the Simplex Products Disposition written notice of such disposition which shall include the date of such disposition and a brief description of the consideration received in connection with such disposition; and (i) REQUESTED INFORMATION - with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such holder of Notes. -17- Notwithstanding the foregoing, in the event that one or more Unrestricted Subsidiaries shall either (i) own more than 10% of the total consolidated assets of the Company and its Subsidiaries, or (ii) account for more than 10% of the consolidated gross revenues of the Company and its Subsidiaries, determined in each case in accordance with GAAP, then, within the respective periods provided in Sections 7.1(a) and (b), above, the Company shall deliver to each holder of Notes that is an Institutional Investor, financial statements of the character and for the dates and periods as in said Sections 7.1(a) and (b) covering the group of Unrestricted Subsidiaries (on a consolidated basis), together with a consolidating statement reflecting eliminations or adjustments required to reconcile the financial statements of such group of Unrestricted Subsidiaries to the financial statements delivered pursuant to Sections 7.1(a) and (b). SECTION 7.2. OFFICER'S CERTIFICATE. Each set of financial statements delivered to a holder of Notes pursuant to Section 7.1(a) or Section 7.1(b) hereof shall be accompanied by a certificate of a Senior Financial Officer setting forth: (a) COVENANT COMPLIANCE - the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Section 10.1 through Section 10.5 hereof, inclusive, and Sections 10.7 and 10.8 during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and (b) EVENT OF DEFAULT - a statement that such officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company or any Subsidiary to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto. SECTION 7.3. INSPECTION. The Company shall permit the representatives of each holder of Notes that is an Institutional Investor: (a) NO DEFAULT - if no Default or Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Company's officers, and (with the consent of the Company, which consent will not be -18- unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and (b) DEFAULT - if a Default or Event of Default then exists, at the expense of the Company, to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested. SECTION 8. PREPAYMENT OF THE NOTES. SECTION 8.1. REQUIRED PREPAYMENTS. On December 1, 2003 and on each December 1 thereafter to and including December 1, 2008, the Company will prepay $7,142,857 principal amount (or such lesser principal amount as shall then be outstanding) of the Series A Notes at par and without payment of the Make-Whole Amount or any premium. The entire unpaid principal amount of the Series A Notes shall become due and payable on December 1, 2009. Upon any partial prepayment of the Series A Notes pursuant to Section 8.2 or Section 8.7 or any purchase of less than all of the Series A Notes permitted by Section 8.5, the principal amount of each required prepayment of the Series A Notes becoming due under this Section 8.1 on and after the date of such prepayment or purchase shall be reduced in the same proportion as the aggregate unpaid principal amount of the Series A Notes is reduced as a result of such prepayment or purchase. SECTION 8.2. OPTIONAL PREPAYMENTS WITH MAKE-WHOLE AMOUNT. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes of any series, in an amount not less than 10% of the aggregate principal amount of the Notes of such series then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid, together with interest accrued thereon to the date of such prepayment, plus the Make-Whole Amount determined for the prepayment date with respect to such principal amount of each Note of the applicable series then outstanding. The Company will give each holder of Notes of the series to be prepaid written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date, the aggregate principal amount of the Notes and each series of Notes to be prepaid on such date, the principal amount of each Note held by such holder to be prepaid (determined in accordance with Section 8.3), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each holder of Notes of the Series to be prepaid a -19- certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date. SECTION 8.3. ALLOCATION OF PARTIAL PREPAYMENTS. In the case of each partial prepayment of the Notes pursuant to the provisions of Section 8.2, the principal amount of the Notes of the Series to be prepaid shall be allocated among all of the Notes of such Series at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof. All regularly scheduled partial prepayments made with respect to any Additional Series of Notes pursuant to any Supplement shall be allocated as provided therein. SECTION 8.4. MATURITY; SURRENDER, ETC. In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. SECTION 8.5. PURCHASE OF NOTES. The Company will not and will not permit any Affiliate that is subject to the control of the Company to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except upon the payment or prepayment of the Notes in accordance with the terms of this Agreement (including any Supplement hereto) and the Notes. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes. SECTION 8.6. MAKE-WHOLE AMOUNT FOR SERIES 1999-A NOTE. The term "MAKE-WHOLE AMOUNT" means, with respect to any Series 1999-A Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, PROVIDED that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings: "CALLED PRINCIPAL" means, with respect to any Series 1999-A Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. "DISCOUNTED VALUE" means, with respect to the Called Principal of any Series 1999-A Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted -20- financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Series 1999-A Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal. "REINVESTMENT YIELD" means, with respect to the Called Principal of any Note, 0.50% plus the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as "PX-1" on the Bloomberg Financial Market Screen (or such other display as may replace "PX-1" on the Bloomberg Financial Market Screen) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the maturity closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the maturity closest to and less than the Remaining Average Life. "REMAINING AVERAGE LIFE" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "REMAINING SCHEDULED PAYMENTS" means, with respect to the Called Principal of any Series 1999-A Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, PROVIDED that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Series 1999-A Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or 12.1. "SETTLEMENT DATE" means, with respect to the Called Principal of any Series 1999-A Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. -21- SECTION 8.7. CHANGE IN CONTROL. (a) NOTICE OF CHANGE IN CONTROL OR CONTROL EVENT. The Company will, within fifteen Business Days after any Responsible Officer has knowledge of the occurrence of any Change in Control or Control Event, give written notice of such Change in Control or Control Event to each holder of Notes UNLESS notice in respect of such Change in Control (or the Change in Control contemplated by such Control Event) shall have been given pursuant to subparagraph (b) of this Section 8.7. If a Change in Control has occurred, such notice shall contain and constitute an offer to prepay Notes as described in subparagraph (c) of this Section 8.7 and shall be accompanied by the certificate described in subparagraph (g) of this Section 8.7. (b) CONDITION TO COMPANY ACTION. The Company will not take any action that consummates or finalizes a Change in Control unless (i) at least 30 days prior to such action it shall have given to each holder of Notes written notice containing and constituting an offer to prepay Notes as described in subparagraph (c) of this Section 8.7, accompanied by the certificate described in subparagraph (g) of this Section 8.7, and (ii) contemporaneously with such action, it prepays all Notes required to be prepaid in accordance with this Section 8.7. (c) OFFER TO PREPAY NOTES. The offer to prepay Notes contemplated by subparagraphs (a) and (b) of this Section 8.7 shall be an offer to prepay, in accordance with and subject to this Section 8.7, all, but not less than all, the Notes held by each holder (in this case only, "holder" in respect of any Note registered in the name of a nominee for a disclosed beneficial owner shall mean such beneficial owner) on a date specified in such offer (the "PROPOSED PREPAYMENT DATE"). If such Proposed Prepayment Date is in connection with an offer contemplated by subparagraph (a) of this Section 8.7, such date shall be not less than 30 days and not more than 60 days after the date of such offer (if the Proposed Prepayment Date shall not be specified in such offer, the Proposed Prepayment Date shall be the 30th day after the date of such offer). (d) ACCEPTANCE. A holder of Notes may accept the offer to prepay made pursuant to this Section 8.7 by causing a notice of such acceptance to be delivered to the Company at least 15 days prior to the Proposed Prepayment Date. A failure by a holder of Notes to respond to an offer to prepay made pursuant to this Section 8.7 shall be deemed to constitute a rejection of such offer by such holder. (e) PREPAYMENT. Prepayment of the Notes to be prepaid pursuant to this Section 8.7 shall be at 100% of the principal amount of such Notes, together with interest on such Notes accrued to the date of prepayment. The prepayment shall be made on the Proposed Prepayment Date except as provided in subparagraph (f) of this Section 8.7. (f) DEFERRAL PENDING CHANGE IN CONTROL. The obligation of the Company to prepay Notes pursuant to the offers required by subparagraph (b) and accepted in accordance with subparagraph (d) of this Section 8.7 is subject to the occurrence of the Change in Control in respect of which such offers and acceptances shall have been made. In the event that such Change in Control does not occur on the Proposed Prepayment Date in respect thereof, the prepayment shall be deferred until, and shall be made on the date on which, such Change in Control occurs. The Company shall keep each holder of Notes reasonably and timely informed -22- of (i) any such deferral of the date of prepayment, (ii) the date on which such Change in Control and the prepayment are expected to occur, and (iii) any determination by the Company that efforts to effect such Change in Control have ceased or been abandoned (in which case the offers and acceptances made pursuant to this Section 8.7 in respect of such Change in Control shall be deemed rescinded); PROVIDED that in the event more than six months shall have elapsed since the initial notice of Change in Control or Control Event, the Company shall renew the offer to prepay the Notes in accordance with subparagraph (c) of this Section 8.7. (g) OFFICER'S CERTIFICATE. Each offer to prepay the Notes pursuant to this Section 8.7 shall be accompanied by a certificate, executed by a Senior Financial Officer of the Company and dated the date of such offer, specifying: (i) the Proposed Prepayment Date; (ii) that such offer is made pursuant to this Section 8.7; (iii) the principal amount of each Note offered to be prepaid; (iv) the interest that would be due on each Note offered to be prepaid, accrued to the Proposed Prepayment Date; (v) that the conditions of this Section 8.7 have been fulfilled; and (vi) in reasonable detail, the nature and date or proposed date of the Change in Control. (h) "CHANGE IN CONTROL" DEFINED. "CHANGE IN CONTROL" means each and every issue, sale or other disposition of shares of stock of the Company which results in any person (as such term is used in section 13(d) and section 14(d)(2) of the Exchange Act) or related persons constituting a group (as such term is used in Rule 13d-5 under the Exchange Act) (herein, an "ACQUIRING PERSON") becoming the "beneficial owners" (as such term is used in Rule 13d-3 under the Exchange Act as in effect on the date of the Closing), directly or indirectly, of more than 50% of the total voting power of all classes then outstanding of the Company's voting stock. (i) "CONTROL EVENT" DEFINED. "CONTROL EVENT" means: (i) the execution by the Company or any of its Subsidiaries or Affiliates of any agreement or letter of intent with respect to any proposed transaction or event or series of transactions or events which, individually or in the aggregate, may reasonably be expected to result in a Change in Control, (ii) the execution of any written agreement which, when fully performed by the parties thereto, would result in a Change in Control, (iii) at any time prior to a public offering of equity securities of the Company, the making of any written offer by any Acquiring Person to the holders of the common stock of the Company, which offer may reasonably be expected to result in a Change in Control, or (iv) at any time after a public offering of equity securities of the Company, the making of any written offer by any Acquiring Person to the holders of the common stock of the Company, which offer, if accepted by the requisite number of holders, would result in a Change in Control. -23- SECTION 9. AFFIRMATIVE COVENANTS The Company covenants that so long as any of the Notes are outstanding: SECTION 9.1. COMPLIANCE WITH LAW. The Company will, and will cause each of its Subsidiaries to, comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. SECTION 9.2. INSURANCE. The Company will, and will cause each of its Restricted Subsidiaries to, maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated. SECTION 9.3. MAINTENANCE OF PROPERTIES. The Company will, and will cause each of its Restricted Subsidiaries to, maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, PROVIDED that this Section shall not prevent the Company or any Restricted Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. SECTION 9.4. PAYMENT OF TAXES. The Company will, and will cause each of its Subsidiaries to, file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, PROVIDED that neither the Company nor any Subsidiary need pay any such tax or assessment or claims if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the nonpayment of all such taxes -24- and assessments in the aggregate could not reasonably be expected to have a Material Adverse Effect. SECTION 9.5. CORPORATE EXISTENCE, ETC. Subject to Sections 10.6 and 10.7 and as permitted by such Sections, the Company will at all times preserve and keep in full force and effect its corporate existence, and will at all times preserve and keep in full force and effect the corporate existence of each of its Restricted Subsidiaries (unless merged into the Company or a Wholly-Owned Restricted Subsidiary) and all rights and franchises of the Company and its Restricted Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. SECTION 9.6. GUARANTY BY SUBSIDIARIES. The Company will cause any Person which becomes a Subsidiary after the Closing and which is required by the terms of the Bank Credit Agreement to become a party to, or otherwise Guaranty, Debt outstanding under the Bank Credit Agreement to enter into the Guaranty Agreement, and deliver within three Business Days thereafter to each of the holders of the Notes the following items: (a) a joinder agreement in respect of the Guaranty Agreement; (b) a certificate signed by the President, a Vice President or another authorized Responsible Officer of the Company making representations and warranties to the effect of those contained in Sections 5.4, 5.6 and 5.7, with respect to such Subsidiary and the Guaranty Agreement, as applicable; (c) such documents and evidence with respect to such Subsidiary as any holder of the Notes may reasonably request in order to establish the existence and good standing of such Subsidiary; (d) an opinion of counsel addressed to each of the holders of the Notes satisfactory to the Required Holders, to the effect that the Guaranty Agreement has been duly authorized, executed and delivered and constitutes the legal, valid and binding contract and agreement of such Subsidiary enforceable in accordance with its terms, except as an enforcement of such terms may be limited by bankruptcy, insolvency, fraudulent conveyance and similar laws affecting the enforcement of creditors' rights generally and by general equitable principles; and (e) If at any time one or more Subsidiaries which shall have guaranteed the Debt outstanding under the Bank Credit Agreement shall have been released from its obligations under such Guaranty, then upon delivery to the holders of the Notes of evidence of such release (which evidence shall be reasonably satisfactory to the Required Holders), such Subsidiary shall be released from its obligations under the Guaranty Agreement. SECTION 9.7. RATING FOR THE NOTES. Promptly following a request by the holders of a majority in aggregate principal amount of the Series 1999-A Notes, the Company will obtain a -25- rating for the Notes from a Nationally Recognized Rating Agency; PROVIDED that the Company shall not have to obtain a rating pursuant to any such request on more than 2 occasions prior to the maturity of the Series 1999-A Notes. SECTION 10. NEGATIVE COVENANTS The Company covenants that so long as any of the Notes are outstanding: SECTION 10.1. CONSOLIDATED NET WORTH. The Company will not at any time permit Consolidated Net Worth to be less than the sum of (a) $150,000,000, plus (b) an aggregate amount equal to 40% of its Consolidated Net Income (but, in each case, only if a positive number) for each fiscal quarter beginning with the fiscal quarter ended September 30, 1999. SECTION 10.2. LIMITATIONS ON FUNDED DEBT. The Company will not and will not permit any Restricted Subsidiary to, create, assume or incur or in any manner be or become liable in respect of any Funded Debt, except: (a) Funded Debt evidenced by the Series 1999-A Notes; (b) Funded Debt of the Company and its Restricted Subsidiaries outstanding on the date of Closing and reflected on Schedule 5.15 hereto; (c) additional Funded Debt of the Company and its Restricted Subsidiaries, PROVIDED that at the time of issuance thereof and after giving effect thereto and to the application of the proceeds thereof: (i) no Default or Event of Default exists; (ii) the aggregate amount of Consolidated Funded Debt does not exceed 55% of Total Capitalization; and (iii) in the case any such Funded Debt is Priority Debt, such Funded Debt is permitted by Section 10.3; and (d) Funded Debt of a Restricted Subsidiary owed to the Company or a Wholly-owned Restricted Subsidiary. SECTION 10.3. LIMITATION ON PRIORITY DEBT. The Company will not at any time permit Priority Debt to exceed 20% of Consolidated Net Worth (determined as of the then most recently ended fiscal quarter of the Company). SECTION 10.4. LIMITATION ON CURRENT DEBT. The Company will not, and will not permit any Restricted Subsidiary to, incur any Consolidated Current Debt UNLESS there shall have been during the immediately preceding twelve months a period of at least 28 consecutive days on each of which the sum of (a) all outstanding Consolidated Current Debt, and (b) all outstanding Consolidated Funded Debt shall not have exceeded 55% of Total Capitalization. -26- SECTION 10.5. FIXED CHARGES COVERAGE RATIO. The Company will not permit the ratio of Consolidated Net Income Available for Fixed Charges to Fixed Charges for the period consisting of the four immediately preceding fiscal quarters ending on the last day of each fiscal quarter to be less than (i) 1.5 to 1.0 on or prior to December 31, 2000, and (ii) to be less than 1.75 to 1 for any such period thereafter. SECTION 10.6. LIMITATION ON LIENS. The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly create, incur, assume or permit to exist (upon the happening of a contingency or otherwise) any Lien on or with respect to any property or asset (including, without limitation, any document or instrument in respect of goods or accounts receivable) of the Company or any such Restricted Subsidiary, whether now owned or held or hereafter acquired, or any income or profits therefrom, or assign or otherwise convey any right to receive income or profits (unless it makes, or causes to be made, effective provision whereby the Notes will be equally and ratably secured with any and all other obligations thereby secured so long as such other Debt shall be so secured, such security to be pursuant to an agreement satisfactory to the holders of more than 50% in aggregate principal amount of the Notes of each series then outstanding and, in any such case, the Notes shall have the benefit, to the fullest extent that, and with such priority as, the holders of the Notes may be entitled under applicable law, of an equitable Lien on such property), except: (a) Liens for taxes, assessments or other governmental charges which are not yet due and payable or the payment of which is not at the time required by Section 9.4; (b) any attachment or judgment Lien, unless the judgment it secures shall not, within 60 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall not have been discharged within 60 days after the expiration of any such stay; (c) Liens incidental to the conduct of business or the ownership of properties and assets (including landlords', carriers', warehousemen's, mechanics', materialmen's and other similar Liens) and Liens to secure the performance of bids, tenders, leases, or trade contracts, or to secure statutory obligations (including obligations under workers compensation, unemployment insurance and other social security legislation), surety or appeal bonds or other Liens incurred in the ordinary course of business and not in connection with the borrowing of money; (d) leases or subleases granted to others, easements, rights-of-way, restrictions and other similar charges or encumbrances, in each case incidental to the ownership of property or assets or the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries, PROVIDED that such Liens do not, in the aggregate, materially detract from the value of such property; (e) Liens incidental to minor survey exceptions and similar Liens, PROVIDED that such Liens do not, in the aggregate, materially detract from the value of such Property; -27- (f) Liens securing Debt of a Restricted Subsidiary to the Company or to another Wholly-Owned Restricted Subsidiary; (g) Liens existing as of the date of Closing and reflected in Schedule 10.6; (h) Liens incurred after the date of Closing given to secure the payment of the purchase price incurred in connection with the acquisition or construction of property (other than accounts receivable or inventory) useful and intended to be used in carrying on the business of the Company or a Restricted Subsidiary, including Liens existing on such property at the time of acquisition or construction thereof, or Liens incurred within 365 days of such acquisition or the completion of such construction, PROVIDED that (i) the Lien shall attach solely to the property acquired, purchased or constructed, (ii) at the time of acquisition or construction of such property, the aggregate amount remaining unpaid on all Debt secured by Liens on such property, whether or not assumed by the Company or a Restricted Subsidiary, shall not exceed an amount equal to the lesser of the total purchase price (or cost of construction) or Fair Market Value at the time of acquisition or construction of such property (as determined in good faith by one or more officers to whom authority to enter into the transaction has been delegated by the Board of Directors of the Company), and (iii) the aggregate principal amount of all Debt secured by such Liens shall be permitted by the limitations set forth in Sections 10.2(c); (i) any Lien existing on property of a Person immediately prior to its being consolidated with or merged into the Company or a Restricted Subsidiary or its becoming a Restricted Subsidiary (excluding Liens on Properties of an Unrestricted Subsidiary which was formerly a Restricted Subsidiary and which is being redesignated as a Restricted Subsidiary pursuant to Section 10.9), or any Lien existing on any property acquired by the Company or any Restricted Subsidiary at the time such property is so acquired (whether or not the Debt secured thereby shall have been assumed), PROVIDED that (i) no such Lien shall have been created or assumed in contemplation of such consolidation or merger or such Person's becoming a Restricted Subsidiary or such acquisition of property, (ii) each such Lien shall extend solely to the item or items of property so acquired and, if required by the terms of the instrument originally creating such Lien, other property which is an improvement to or is acquired for specific use in connection with such acquired property, (iii) at the time such Person is consolidated with or merged into the Company or a Restricted Subsidiary or such property is acquired, the aggregate amount remaining unpaid on all Debt secured by Liens on such property, whether or not assumed by the Company or a Restricted Subsidiary, shall not exceed an amount equal to the lesser of the total purchase price (or cost of construction) or Fair Market Value at the time of acquisition or construction of such property (as determined in good faith by one or more officers to whom authority to enter into the transaction has been delegated by the Board of Directors of the Company), and (iv) the aggregate principal amount of all Debt secured by such Liens shall be permitted by the limitations set forth in Section 10.2(c); (j) any extensions, renewals or replacements of any Lien permitted by the preceding subparagraphs (f), (g), (h) or (i) of this Section 10.6, PROVIDED that (i) no -28- additional property shall be encumbered by such Liens, (ii) the unpaid principal amount of the Debt secured thereby shall not be increased on or after the date of any extension, renewal or replacement, (iii) the weighted average life to maturity of the Debt secured by such Liens shall not be reduced, and (iv) at such time and immediately after giving effect thereto, no Default or Event of Default shall have occurred and be continuing; (k) Liens created in connection with Receivables Securitizations; and (l) in addition to the Liens permitted by the preceding subparagraphs (a) through (k), inclusive, of this Section 10.6, Liens securing Priority Debt of the Company or any Restricted Subsidiary, PROVIDED that such Priority Debt shall be permitted by the limitations set forth in Section 10.3. SECTION 10.7. SALES OF ASSETS. The Company will not, and will not permit any Restricted Subsidiary to, sell, lease or otherwise dispose of any substantial part (as defined below) of the assets of the Company and its Restricted Subsidiaries; PROVIDED, HOWEVER, that the Company or any Restricted Subsidiary may sell, lease or otherwise dispose of assets constituting a substantial part of the assets of the Company and its Restricted Subsidiaries if such assets are sold for Fair Market Value and, at such time and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing and an amount equal to the Net Proceeds received from such sale, lease or other disposition shall be used within one year of such sale, lease or disposition: (1) to acquire property (including Investments in capital stock of any entity which becomes a Restricted Subsidiary and/or a purchase of assets of another business, individually or substantially as an entity and in the same line of business as the Company), plant and equipment used or useful in carrying on the business of the Company and its Restricted Subsidiaries and having a Fair Market Value at least equal to the Fair Market Value of such assets sold, leased or otherwise disposed of; or (2) to prepay or retire Senior Debt (including temporary reductions of revolving credit facilities) of the Company and/or its Restricted Subsidiaries. Any amount prepaid on the Notes pursuant to this Section 10.6 will be prepaid, in compliance with Section 8.2. As used in this Section 10.7, a sale, lease or other disposition of assets shall be deemed to be a "SUBSTANTIAL PART" of the assets of the Company and its Restricted Subsidiaries if the book value of such assets, when added to the book value of all other assets sold, leased or otherwise disposed of by the Company and its Restricted Subsidiaries (other than in transactions (i) in the ordinary course of business, (ii) in which the purchaser is the Company or a Restricted Subsidiary, (iii) which are Excluded Sale and Leaseback Transactions, or (iv) which constitute the Simplex Asset Disposition) (i) during the immediately preceding 12-month period, exceeds 15% of the book value of Consolidated Total Assets, determined as of the end of the fiscal year -29- immediately preceding such sale, lease or other disposition, or (ii) during the period beginning on the date of Closing and ending on the date of such sale, lease or other disposition, exceeds 30% of the book value of Consolidated Total Assets, determined as of the fiscal year immediately preceding such sale lease or other disposition. For purposes of determining whether assets sold by the Company and its Restricted Subsidiaries during any period constitute a "substantial part" of the assets of the Company, to the extent that the Net Proceeds from the disposition of such assets shall be applied in accordance with the terms of the preceding paragraph, the book value of such assets shall be excluded from the calculation of a "substantial part" of the assets of the Company. In addition, if the disposition of any assets (after giving effect to the disposition of all other assets previously disposed of during the applicable period and the application of the Net Proceeds from such disposition in accordance with the previous sentence) would cause the Company to exceed the limitation on the sale of assets set forth herein, only the Net Proceeds from the most recent asset disposition or dispositions which would cause such limitation to be exceeded shall be required to be applied in accordance with the preceding paragraph. SECTION 10.8. MERGER, CONSOLIDATION AND SALE OF STOCK. (a) The Company will not, and will not permit any Restricted Subsidiary to, consolidate with or be a party to a merger with any other corporation; PROVIDED, HOWEVER, that: (1) any Restricted Subsidiary may merge or consolidate with or into the Company or any other Person, so long as in any merger or consolidation involving the Company, the Company shall be the surviving or continuing corporation and in any merger involving a Restricted Subsidiary, such Restricted Subsidiary or another Restricted Subsidiary is the surviving or continuing entity; and (2) the Company may consolidate or merge with any other Person if (i) either (x) the Company shall be the surviving or continuing corporation, or (y) if the surviving or continuing entity is other than the Company, (A) such entity is organized under the laws of the United States or any jurisdiction thereof, (B) such entity expressly assumes, by written agreement satisfactory in scope and form to the Required Holders in aggregate principal amount of the outstanding Notes, all obligations of the Company under the Notes and this Agreement, (C) such entity shall cause to be delivered to each holder of Notes an opinion of independent counsel to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the provisions of this Section 10.8 and otherwise satisfactory in scope and form to the Required Holders in aggregate principal amount of the outstanding Notes, (ii) at the time of such consolidation or merger and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing, and (iii) at the time of such consolidation or merger and after giving effect thereto, the Company could incur $1.00 of additional Consolidated Funded Debt pursuant to Section 10.2(c). (b) The Company will not permit any Restricted Subsidiary to issue or sell any shares of stock of any class (including as Astock@ for the purposes of this Section 10.8(b), any warrants, rights or options to purchase or otherwise acquire stock or other securities exchangeable for or convertible into stock) of such Restricted Subsidiary to any Person other than the Company or Wholly-Owned Restricted Subsidiary, except for the purpose of qualifying directors, or except in satisfaction of the validly pre-existing preemptive rights of minority shareholders in connection with the simultaneous issuance of stock to the Company and/or a Restricted Subsidiary whereby -30- the Company and/or such Restricted Subsidiary maintain their same proportionate interest in such Restricted Subsidiary. (c) The Company will not sell, transfer or otherwise dispose of any shares of stock of any Restricted Subsidiary (except to qualify directors), and will not permit any Restricted Subsidiary to sell, transfer or otherwise dispose of (except to the Company or another Restricted Subsidiary) any shares of stock of any other Restricted Subsidiary, unless such sale or other disposition can be made within the limitations of Section 10.7. SECTION 10.9. DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES. (a) The Board of Directors of the Company may designate any Unrestricted Subsidiary as a Restricted Subsidiary and may designate any Restricted Subsidiary as an Unrestricted Subsidiary, PROVIDED that (i) at such time and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing, and (ii) the designation of such Subsidiary as Restricted or Unrestricted shall not be changed pursuant to this Section 10.9 on more than two occasions. The Company shall give written notice of such action to each holder of a Note within 10 days after the designation of any Subsidiary as Restricted or Unrestricted. Any Subsidiary acquired or created by the Company after the date of this Agreement will be a Restricted Subsidiary unless such Subsidiary shall be designated an Unrestricted Subsidiary in accordance with this Section 10.9. (b) The Company acknowledges and agrees that if, after the date hereof, any Person becomes a Restricted Subsidiary, all Debt, leases and other obligations and all Liens and Investments of such Person existing as of the date such Person becomes a Restricted Subsidiary shall be deemed, for all purposes of this Agreement, to have been incurred, entered into, made or created at the same time such Person so becomes a Restricted Subsidiary. SECTION 10.10. NATURE OF BUSINESS. Neither the Company nor any Restricted Subsidiary will engage in any business if, as a result, the general nature of the business, taken on a consolidated basis, which would then be engaged in by the Company and its Restricted Subsidiaries would be substantially changed from the general nature of the business engaged in by the Company and its Restricted Subsidiaries on the date of this Agreement. SECTION 10.11. TRANSACTIONS WITH AFFILIATES. The Company will not and will not permit any Restricted Subsidiary to enter into directly or indirectly any Material transaction or Material group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Restricted Subsidiary), except pursuant to the reasonable conduct of the Company's or such Restricted Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than would be obtainable in a comparable arm's-length transaction with a Person not an Affiliate. SECTION 11. EVENTS OF DEFAULT An "EVENT OF DEFAULT" shall exist if any of the following conditions or events shall occur and be continuing: -31- (a) the Company defaults in the payment of any principal or Make-Whole Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or (b) the Company defaults in the payment of any interest on any Note for more than five Business Days after the same becomes due and payable; or (c) the Company defaults in the performance of or compliance with any term contained in Section 10 and such default is not remedied within 10 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a "notice of default" and to refer specifically to this paragraph (c) of Section 11); or (d) the Company defaults in the performance of or compliance with any term contained herein or in any Supplement (other than those referred to in paragraphs (a), (b) and (c) of this Section 11) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a "notice of default" and to refer specifically to this paragraph (d) of Section 11); or (e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or any Supplement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any Material respect on the date as of which made; or (f) (i) the Company or any Restricted Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest in an amount of at least $100,000 on any Debt that is outstanding in an aggregate principal amount of at least $5,000,000 beyond any period of grace provided with respect thereto, or (ii) the Company or any Restricted Subsidiary is in default in the performance of or compliance with any term of any evidence of any Debt in an aggregate outstanding principal amount of at least $5,000,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition (which default or condition shall be continuing and unwaived by the holders of such Debt) such Debt has become, or has been declared (or one or more Persons are entitled to declare such Debt to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Debt to convert such Debt into equity interests), (x) the Company or any Restricted Subsidiary has become obligated to purchase or repay Debt before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $5,000,000, or (y) one or more Persons have the right to require the Company or any Restricted Subsidiary so to purchase or repay such Debt; or -32- (g) the Company or any Significant Subsidiary (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or (h) a court or governmental authority of competent jurisdiction enters an order appointing, without consent by the Company or any Significant Subsidiary, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any of its Significant Subsidiaries, or any such petition shall be filed against the Company or any of its Significant Subsidiaries and such petition shall not be dismissed within 60 days; or (i) a final judgment or judgments for the payment of money aggregating in excess of $5,000,000 are rendered against one or more of the Company or any Restricted Subsidiary and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days (or such lesser period of time as applicable law or rules of court allow a judgment creditor to levy on such judgments) after the expiration of such stay; or (j) If (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under Section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under Section 4042 of ERISA to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) the aggregate "amount of unfunded benefit liabilities" (within the meaning of Section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall exceed $5,000,000, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either -33- individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect. As used in Section 11(j), the terms "EMPLOYEE BENEFIT PLAN" and "EMPLOYEE WELFARE BENEFIT PLAN" shall have the respective meanings assigned to such terms in Section 3 of ERISA; or (k) Default shall occur in the observance or performance of any provision of the Guaranty Agreement or the Guaranty Agreement shall cease to be in full force and effect for any reason whatsoever, including, without limitation, a final and nonappealable determination by any governmental body or court that the Guaranty Agreement is invalid, void or unenforceable as to one or more Restricted Subsidiaries, or any Restricted Subsidiary shall contest or deny in writing the validity or enforceability of any provision of, or obligation under, the Guaranty Agreement. SECTION 12. REMEDIES ON DEFAULT, ETC. SECTION 12.1. ACCELERATION. (a) If an Event of Default with respect to the Company described in paragraph (g) or (h) of Section 11 (other than an Event of Default described in clause (i) of paragraph (g) or described in clause (vi) of paragraph (g) by virtue of the fact that such clause encompasses clause (i) of paragraph (g)) has occurred, all the Notes of every series then outstanding shall automatically become immediately due and payable. (b) If any other Event of Default has occurred and is continuing, any holder or holders of more than 50% in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable. (c) If any Event of Default described in paragraph (a) or (b) of Section 11 has occurred and is continuing with respect to any series of Notes, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes of such series held by it or them to be immediately due and payable. Upon any Note's becoming due and payable under this Section 12.1, whether automatically or by declaration, such Note will forthwith mature and the entire unpaid principal amount of such Note, plus (i) all accrued and unpaid interest thereon and (ii) the Make-Whole Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances. -34- SECTION 12.2. OTHER REMEDIES. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. SECTION 12.3. RESCISSION. At any time after any Notes of any series have been declared due and payable pursuant to clause (b) or (c) of Section 12.1, the holders of more than 50% in principal amount of the Notes of all series then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes of such series, all principal of and Make-Whole Amount, if any, on any Notes of such series that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Make-Whole Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes of such series, at the Default Rate, (b) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17, and (c) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to any Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon. SECTION 12.4. NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15, the Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section 12, including, without limitation, reasonable attorneys' fees, expenses and disbursements. SECTION 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES. SECTION 13.1. REGISTRATION OF NOTES. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the -35- contrary. The Company shall give to any holder of a Note that is an Institutional Investor promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes. SECTION 13.2. TRANSFER AND EXCHANGE OF NOTES. Upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or its attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Notes (as requested by the holder thereof) of an identical series (and of an identical tranche if such series has separate tranches) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of the Note of such series originally issued hereunder or pursuant to any Supplement. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $100,000, PROVIDED that if necessary to enable the registration of transfer by a holder of its entire holding of Notes, one Note may be in a denomination of less than $100,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Section 6.2, PROVIDED that such holder may (in reliance upon information provided by the Company, which shall not be unreasonably withheld) make a representation to the effect that the purchase by such holder of any Note will not constitute a non-exempt prohibited transaction under Section 406(a) of ERISA. SECTION 13.3. REPLACEMENT OF NOTES. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (PROVIDED that if the holder of such Note is, or is a nominee for, an original Purchaser or another holder of a Note with a minimum net worth of at least $10,000,000, such Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note of an identical series (and of an identical tranche if such series has separate tranches), dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, -36- destroyed or mutilated Note if no interest shall have been paid thereon. SECTION 14. PAYMENTS ON NOTES. SECTION 14.1. PLACE OF PAYMENT. Subject to Section 14.2, payments of principal, Make-Whole Amount, if any, and interest becoming due and payable on the Notes shall be made in New York, New York at the principal office of Bank of America National Trust and Savings Association in such jurisdiction. The Company may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction. SECTION 14.2. HOME OFFICE PAYMENT. So long as any Purchaser or such Purchaser's nominee shall be the holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose for such Purchaser on Schedule A hereto or Schedule A attached to any Supplement, or by such other method or at such other address as such Purchaser shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, such Purchaser shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1. Prior to any sale or other disposition of any Note held by any Purchaser or such Purchaser's nominee such Purchaser will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes of the same series pursuant to Section 13.2. The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note. SECTION 15. EXPENSES, ETC. SECTION 15.1. TRANSACTION EXPENSES. Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys' fees of a special counsel and, if reasonably required, local or other counsel) incurred by each Purchaser and each other holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement (including any Supplement), the Guaranty Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement (including any Supplement), the Guaranty Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement (including any Supplement), the Guaranty or the Notes, or by reason of being a holder of any Note, and (b) the -37- costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes. The Company will pay, and will save each Purchaser and each other holder of a Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by the Purchasers). SECTION 15.2. SURVIVAL. The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement, any Supplement or the Notes, and the termination of this Agreement or any Supplement. SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein or in any Supplement shall survive the execution and delivery of this Agreement, such Supplement and the Notes, the purchase or transfer by any Purchaser or any Additional Purchaser of any Note or portion thereof or interest therein and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of any Purchaser or any Additional Purchaser or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement or any Supplement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement (including every Supplement) and the Notes embody the entire agreement and understanding between the Purchasers and the Additional Purchasers and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. SECTION 17. AMENDMENT AND WAIVER. SECTION 17.1. REQUIREMENTS. (a) This Agreement (including any Supplement) and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the holders of Notes holding more than 50% in aggregate principal amount of the Notes of each series at the time outstanding, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to any Purchaser unless consented to by such Purchaser in writing, and (b) no such amendment or waiver may, without the written consent of the all of the holders of Notes of all series at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Make-Whole Amount on, the Notes of such series, (ii) change the percentage of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Sections 8, 11(a), 11(b), 12, 17 or 20. -38- (b) SUPPLEMENTS. Notwithstanding anything to the contrary contained herein, the Company may enter into any Supplement providing for the issuance of one or more series of Additional Notes consistent with Sections 2.2 and 4.11 hereof without obtaining the consent of any holder of any other series of Notes. SECTION 17.2. SOLICITATION OF HOLDERS OF NOTES. (a) SOLICITATION. The Company will provide each holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof, any Supplement or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes. (b) PAYMENT. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes as consideration for or as an inducement to the entering into by any holder of Notes of any waiver or amendment of any of the terms and provisions hereof or any Supplement unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each holder of Notes then outstanding even if such holder did not consent to such waiver or amendment. SECTION 17.3. BINDING EFFECT, ETC. Any amendment or waiver consented to as provided in this Section 17 applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein, the term "this Agreement" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. SECTION 17.4. NOTES HELD BY COMPANY, ETC. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding. -39- SECTION 18. NOTICES. All notices and communications provided for hereunder shall be in writing and sent (a) by telefacsimile if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent: (i) if to a Purchaser or such Purchaser's nominee, to such Purchaser or such Purchaser's nominee at the address specified for such communications in Schedule A to this Agreement or any Supplement, or at such other address as such Purchaser or such Purchaser's nominee shall have specified to the Company in writing, (ii) if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Company in writing, or (iii) if to the Company, to the Company at its address set forth at the beginning hereof to the attention of Chief Financial Officer, or at such other address as the Company shall have specified to the holder of each Note in writing. Notices under this Section 18 will be deemed given only when actually received. SECTION 19. REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by each Purchaser at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to each Purchaser, may be reproduced by such Purchaser by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and such Purchaser may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such Purchaser in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction. SECTION 20. CONFIDENTIAL INFORMATION. For the purposes of this Section 20, "CONFIDENTIAL INFORMATION" means information delivered to any Purchaser by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in -40- nature and that was clearly marked or labeled or otherwise adequately identified when received by such Purchaser as being confidential information of the Company or such Subsidiary, PROVIDED that such term does not include information that (a) was publicly known or otherwise known to such Purchaser prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by such Purchaser or any Person acting on such Purchaser's behalf, (c) otherwise becomes known to such Purchaser other than through disclosure by the Company or any Subsidiary or (d) constitutes financial statements delivered to such Purchaser under Section 7.1 that are otherwise publicly available. Each Purchaser will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by such Purchaser in good faith to protect confidential information of third parties delivered to such Purchaser, provided that such Purchaser may deliver or disclose Confidential Information to (i) such Purchaser's directors, trustees, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by such Purchaser's Notes), (ii) such Purchaser's financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20, (iii) any other holder of any Note, (iv) any Institutional Investor to which such Purchaser sells or offers to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (v) any Person from which such Purchaser offers to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (vi) any federal or state regulatory authority having jurisdiction over such Purchaser, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about such Purchaser's investment portfolio, or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, Rule, regulation or order applicable to such Purchaser, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which such Purchaser is a party or (z) if an Event of Default has occurred and is continuing, to the extent such Purchaser may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under such Purchaser's Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this Section 20. SECTION 21. SUBSTITUTION OF PURCHASER. Each Purchaser shall have the right to substitute any one of such Purchaser's Affiliates as the purchaser of the Notes that such Purchaser has agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both such Purchaser and such Purchaser's Affiliate, shall contain such Affiliate's agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the -41- representations set forth in Section 6. Upon receipt of such notice, wherever the word "Purchaser" is used in this Agreement (other than in this Section 21), such word shall be deemed to refer to such Affiliate in lieu of such Purchaser. In the event that such Affiliate is so substituted as a purchaser hereunder and such Affiliate thereafter transfers to such Purchaser all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, wherever the word "Purchaser" is used in this Agreement (other than in this Section 21), such word shall no longer be deemed to refer to such Affiliate, but shall refer to such Purchaser, and such Purchaser shall have all the rights of an original holder of the Notes under this Agreement. SECTION 22. MISCELLANEOUS. SECTION 22.1. SUCCESSORS AND ASSIGNS. All covenants and other agreements contained in this Agreement (including all covenants and other agreements contained in any Supplement) by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not. SECTION 22.2. PAYMENTS DUE ON NON-BUSINESS DAYS. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or Make-Whole Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day. SECTION 22.3. SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 22.4. CONSTRUCTION. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. SECTION 22.5. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto. SECTION 22.6. SUBMISSION TO JURISDICTION. The Company hereby irrevocably submits and consents to the jurisdiction of the federal court located within the County of New York, State of -42- New York (or if such court lacks jurisdictions, the State courts located therein), and irrevocably agrees that all actions or proceedings relating to this Agreement and the Notes may be litigated in such courts, and the Company waives any objection which it may have based on improper venue or FORUM NON CONVENIENS to the conduct of any proceeding in any such court and waives personal service of any and all process upon it, and consents that all such service of process be made by delivery to it at the address of the Company set forth in Section 18 above. SECTION 22.7. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. * * * * * -43- The execution hereof by the Purchasers shall constitute a contract among the Company and the Purchasers for the uses and purposes hereinabove set forth. This Agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together only one agreement. Signature Very truly yours, K2 INC. By Name: ------------------------- Title: ------------------------- -44- Accepted as of December 1, 1999 [VARIATION] By Name: ------------------------- Title: ------------------------- -45- PRINCIPAL AMOUNT OF NAME AND ADDRESS SERIES 1999-A NOTES OF PURCHASERS TO BE PURCHASED CONNECTICUT GENERAL LIFE INSURANCE COMPANY $11,700,000 c/o CIGNA Investments, Inc. 900 Cottage Grove Road Hartford, Connecticut 06152-2307 Attention: Private Securities Division - S-307 Fax: 860-726-7203 Payments All payments on or in respect of the Note to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "K2 Inc., 8.41% Series 1999-A Senior Note due December 1, 2009, PPN 482732 A* 5, principal or interest") to: Chase NYC/CTR/ BNF=CIGNA Private Placements/AC=9009001802 ABA #021000021 Address for Notices Related to Payments: CIG & Co. c/o CIGNA Investments, Inc. Attention: Securities Processing S-309 900 Cottage Grove Road Hartford, Connecticut 06152-2309 CIG & Co. c/o CIGNA Investments, Inc. Attention: Private Securities - S-307 Operations Group 900 Cottage Grove Road Hartford, Connecticut 06152-2307 Fax: 860-726-7203 with a copy to: Chase Manhattan Bank, N.A. Private Placement Servicing P. O. Box 1508 Bowling Green Station New York, New York 10081 Attention: CIGNA Private Placements Fax: 212-552-3107/1005 SCHEDULE A (to Note Purchase Agreement) Address for All Other Notices: CIG & Co. c/o CIGNA Investments, Inc. Attention: Private Securities Division - S-307 900 Cottage Grove Road Hartford, Connecticut 06152-2307 Fax: 860-726-7203 Name of Nominee in which Notes are to be issued: CIG & Co. Taxpayer I.D. Number for CIG & Co.: 13-3574027 -2- PRINCIPAL AMOUNT OF NAME AND ADDRESS SERIES 1999-A NOTES OF PURCHASERS TO BE PURCHASED CONNECTICUT GENERAL LIFE INSURANCE COMPANY $5,800,000 c/o CIGNA Investments, Inc. 900 Cottage Grove Road Hartford, Connecticut 06152-2307 Attention: Private Securities Division - S-307 Fax: 860-726-7203 Payments All payments on or in respect of the Note to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "K2 Inc., 8.41% Series 1999-A Senior Note due December 1, 2009, PPN 482732 A* 5, principal or interest") to: Chase NYC/CTR/ BNF=CIGNA Private Placements/AC=9009001802 ABA #021000021 Address for Notices Related to Payments: CIG & Co. c/o CIGNA Investments, Inc. Attention: Securities Processing S-309 900 Cottage Grove Road Hartford, Connecticut 06152-2309 CIG & Co. c/o CIGNA Investments, Inc. Attention: Private Securities - S-307 Operations Group 900 Cottage Grove Road Hartford, Connecticut 06152-2307 Fax: 860-726-7203 -3- with a copy to: Chase Manhattan Bank, N.A. Private Placement Servicing P. O. Box 1508 Bowling Green Station New York, New York 10081 Attention: CIGNA Private Placements Fax: 212-552-3107/1005 Address for All Other Notices: CIG & Co. c/o CIGNA Investments, Inc. Attention: Private Securities Division - S-307 900 Cottage Grove Road Hartford, Connecticut 06152-2307 Fax: 860-726-7203 Name of Nominee in which Notes are to be issued: CIG & Co. Taxpayer I.D. Number for CIG & Co.: 13-3574027 -4- PRINCIPAL AMOUNT OF NAME AND ADDRESS SERIES 1999-A NOTES OF PURCHASERS TO BE PURCHASED CONNECTICUT GENERAL LIFE INSURANCE COMPANY $1,000,000 c/o CIGNA Investments, Inc. 900 Cottage Grove Road Hartford, Connecticut 06152-2307 Attention: Private Securities Division - S-307 Fax: 860-726-7203 Payments All payments on or in respect of the Note to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "K2 Inc., 8.41% Series 1999-A Senior Note due December 1, 2009, PPN 482732 A* 5, principal or interest") to: Chase NYC/CTR/ BNF=CIGNA Private Placements/AC=9009001802 ABA #021000021 Address for Notices Related to Payments: CIG & Co. c/o CIGNA Investments, Inc. Attention: Securities Processing S-309 900 Cottage Grove Road Hartford, Connecticut 06152-2309 CIG & Co. c/o CIGNA Investments, Inc. Attention: Private Securities - S-307 Operations Group 900 Cottage Grove Road Hartford, Connecticut 06152-2307 Fax: 860-726-7203 -5- with a copy to: Chase Manhattan Bank, N.A. Private Placement Servicing P. O. Box 1508 Bowling Green Station New York, New York 10081 Attention: CIGNA Private Placements Fax: 212-552-3107/1005 Address for All Other Notices: CIG & Co. c/o CIGNA Investments, Inc. Attention: Private Securities Division - S-307 900 Cottage Grove Road Hartford, Connecticut 06152-2307 Fax: 860-726-7203 Name of Nominee in which Notes are to be issued: CIG & Co. Taxpayer I.D. Number for CIG & Co.: 13-3574027 -6- PRINCIPAL AMOUNT OF NAME AND ADDRESS SERIES 1999-A NOTES OF PURCHASERS TO BE PURCHASED THE NORTHWESTERN MUTUAL LIFE $22,500,000 INSURANCE COMPANY 720 East Wisconsin Avenue Milwaukee, Wisconsin 53202 Attention: Securities Department Telecopier Number: (414) 299-7124 Payments All payments on or in respect of the Note to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "K2 Inc., 8.41% Series 1999-A Senior Note due December 1, 2009, PPN 482732 A* 5, principal or interest") to: Bankers Trust Company 16 Wall Street Insurance Unit, 4th Floor New York, New York 10005 ABA #0210-0103-3 For the account of: The Northwestern Mutual Life Insurance Company Account Number 00-000-027 Notices All notices of payment, on or in respect of the Notes and written confirmation of each such payment to: The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, Wisconsin 53202 Attention: Investment Operations Telecopier Number: (414) 299-7124 All other notices and communications to be addressed as first provided above. Name of Nominee in which Notes are to be issued: None Taxpayer I.D. Number: 39-0509570 -7- PRINCIPAL AMOUNT OF NAME AND ADDRESS SERIES 1999-A NOTES OF PURCHASERS TO BE PURCHASED THE CANADA LIFE ASSURANCE COMPANY $9,000,000 U.S. Private Placements, SP-11 330 University Avenue Toronto, Ontario, Canada M5G 1R8 Attention: Paul English, Treasurer, U.S. Payments All payments on or in respect of the Note to be by bank wire transfer of Federal or other immediately available funds (identifying each payment as "K2 Inc., 8.41% Series 1999-A Senior Note due December 1, 2009, PPN 482732 A* 5, principal or interest, and due date or if call or maturity, date thereof and due date or, if call or maturity, effective date thereof") to: Chase Manhattan Bank ABA #021-000-021 Acct. No. 900-9-000200 (in the case of call or maturity: Acct. No. 900-9-000192) Attention: Doll Balbadar Trust Account No. G52708, The Canada Life Assurance Company Attention: Doll Balbadar Notices All notices and communications (including financial statements) to be addressed as first provided above, except notices with respect to payments and written confirmation of each such payment, to be addressed: Chase Manhattan Bank North America Insurance 3 Chase MetroTech Centre - 6th Floor Brooklyn, New York 11245 Attention: Ms. Doll Balbadar with a copy to: The Canada Life Assurance Company 330 University Avenue, SP-12 Toronto, Ontario, Canada M5G 1R8 Attention: Supervisor, Securities Accounting Name of Nominee in which Notes are to be issued: J. Romeo & Co. -8- Taxpayer I.D. Number: 38-0397420 -9- DEFINED TERMS As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term: "ADDITIONAL NOTES" is defined in Section 2.2. "ADDITIONAL PURCHASERS" means purchasers of Additional Notes. "AFFILIATE" means, at any time, and with respect to any Person, (a) any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person, and (b) any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interests of the Company or any Subsidiary or any corporation of which the Company and its Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests. As used in this definition, "CONTROL" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an "AFFILIATE" is a reference to an Affiliate of the Company. "BANK CREDIT AGREEMENT" means the credit agreement between the Company and its bank lenders, dated as of December ___, 1999, as amended, restated, refinanced, replaced, increased or reduced from time to time and any successor bank credit agreement. "BUSINESS DAY" means (a) for the purposes of Section 8.6 only, any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed, and (b) for the purposes of any other provision of this Agreement, any day other than a Saturday, a Sunday or a day on which commercial banks in New York City, New York or Los Angeles, California are required or authorized to be closed. "CAPITAL LEASE" means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP. "CAPITAL LEASE OBLIGATION" means, with respect to any Person and a Capital Lease, the amount of the obligation of such Person, as the lessee under the Capital Lease, which would appear as a liability on a balance sheet of such Person in accordance with GAAP. "CHANGE IN CONTROL" has the meaning set forth in Section 8.7. "CLOSING" is defined in Section 3. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. SCHEDULE B (to Note Purchase Agreement) "COMPANY" means K2 Inc., a Delaware corporation. "CONFIDENTIAL INFORMATION" is defined in Section 20. "CONSOLIDATED DEBT" means as of any date of determination, the total of all Debt of the Company and its Restricted Subsidiaries determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED FUNDED DEBT" means as of any date of determination, the total of all Funded Debt of the Company and its Restricted Subsidiaries determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED CURRENT DEBT" means as of any date of determination, the total of all Current Debt of the Company and its Restricted Subsidiaries determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED INCOME AVAILABLE FOR FIXED CHARGES" means for any period the sum of (i) Consolidated Net Income, (ii) income tax expense, determined in accordance with GAAP, (iii) non-cash, non-recurring charges deducted from Consolidated Net Income during such period, and (iv) Fixed Charges. "CONSOLIDATED NET INCOME" for any period shall mean the net income of the Company and its Restricted Subsidiaries for such period, determined in accordance with GAAP, but excluding in any event: (a) any extraordinary gains or losses as defined in APBO Nos. 11, 16 and 30 and FASB Statement No. 4; (b) net earnings and losses of any Restricted Subsidiary accrued prior to the date it became a Restricted Subsidiary; (c) net earnings and losses of any corporation (other than a Restricted Subsidiary), substantially all the assets of which have been acquired in any manner by the Company or any Restricted Subsidiary, realized by such corporation prior to the date of such acquisition; (d) net earnings and losses of any corporation (other than a Restricted Subsidiary) with which the Company or a Restricted Subsidiary shall have consolidated or which shall have merged into or with the Company or a Restricted Subsidiary prior to the date of such consolidation or merger; (e) net earnings of any business entity (other than a Restricted Subsidiary) in which the Company or any Restricted Subsidiary has an ownership interest unless such net earnings shall have actually been received or are receivable by the Company or such Restricted Subsidiary in the form of cash distributions; B-2 (f) any portion of the net earnings of any Restricted Subsidiary which for any reason is unavailable for payment of dividends to the Company or any other Restricted Subsidiary except to the extent applied to the repayment of Debt of such Restricted Subsidiary to the Company or any other Restricted Subsidiary; (g) earnings or amortization resulting from any reappraisal, revaluation or write-up of assets; (h) to the extent not otherwise excluded pursuant to clause (a) above, any aggregate net gain (or any aggregate net loss) during such period arising from the sale, conversion, exchange or other disposition of capital assets (such term to include, without limitation, (i) all non-current assets and, without duplication, (ii) the following, whether or not current: all fixed assets, whether tangible or intangible, all inventory sold in conjunction with the disposition of fixed assets, and all securities); (i) any deferred or other credit or amortization thereof representing any excess of the equity in any Subsidiary at the date of acquisition thereof over the amount invested in such Subsidiary; and (j) any gain arising from the acquisition of any securities of the Company or any Restricted Subsidiary. "CONSOLIDATED NET WORTH" means the consolidated stockholders' equity of the Company and its Restricted Subsidiaries, as defined according to GAAP, less the sum of (i) minority interests and (ii) Restricted Investments in excess of 20% of consolidated stockholders' equity. "CONSOLIDATED TOTAL ASSETS" means, as of the date of any determination thereof, the total amount of all assets of the Company and its Restricted Subsidiaries, determined on a consolidated basis in accordance with GAAP. "CURRENT DEBT" means, without duplication, all Debt other than Funded Debt. "DEBT" means, with respect to any Person, without duplication, (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorially redeemable Preferred Stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including, without limitation, all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c) its Capital Lease Obligations; B-3 (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) Guarantees of such Person with respect to liabilities of a type described in any of clauses (a) through (d) hereof; and (f) recourse obligations related to Receivables Securitization transactions. Debt of any Person shall include all obligations of such Person of the character described in clauses (a) through (f) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. "DEFAULT" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "DEFAULT RATE" means that rate of interest that is the greater of (i) 2% per annum above the rate of interest stated in clause (a) of the first paragraph of any series of Notes or (ii) 2% over the rate of interest publicly announced by Bank of America National Trust and Savings Association in New York, New York as its "base" or "prime" rate. "ENVIRONMENTAL LAWS" means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. "ERISA AFFILIATE" means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under Section 414 of the Code. "EVENT OF DEFAULT" is defined in Section 11. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXCLUDED SALE AND LEASEBACK TRANSACTION" shall mean any sale or transfer of property acquired by the Company or any Restricted Subsidiary after the date of this Agreement to any Person within 365 days following the acquisition or construction of such property by the Company or any Restricted Subsidiary if the Company or a Restricted Subsidiary shall concurrently with such sale or transfer, lease such property, as lessee. B-4 "EXCLUDED SUBSIDIARY OBLIGATIONS" shall mean (a) the Guaranty Agreement and any other Guaranty of Debt of the Company by a Subsidiary Guarantor which shall be a party to the Guaranty Agreement and (b) obligations of Subsidiary Guarantors as co-obligors with the Company on Debt; PROVIDED that each creditor which is a beneficiary of an Excluded Subsidiary Obligation shall have become a party to the Intercreditor Agreement. "FAIR MARKET VALUE" means, at any time and with respect to any Property, the sale value of such Property that would be realized in an arm's-length sale at such time between an informed and willing buyer and an informed and willing seller (neither being under a compulsion to buy or sell). "FIXED CHARGES" means, with respect to any period, the sum of (i) Interest Expense and (ii) Lease Rentals for such period. "FUNDED DEBT" means, with respect to any Person, (i) all Debt of such Person which by its terms or the terms of any instrument or agreement matures one year or more from, or is directly renewable or extendible at the option of the obligor to a date one year or more from the date of the creation, (ii) current maturities of Funded Debt, and (iii) all amounts outstanding under the Bank Credit Agreement. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "GOVERNMENTAL AUTHORITY" means (a) the government of (i) the United States of America or any State or other political subdivision thereof, or (ii) any jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government. "GUARANTY" means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Debt, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such Debt or obligation or any property constituting security therefor; B-5 (b) to advance or supply funds (i) for the purchase or payment of such Debt or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Debt or obligation; (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Debt or obligation of the ability of any other Person to make payment of the Debt or obligation; or (d) otherwise to assure the owner of such Debt or obligation against loss in respect thereof. In any computation of the Debt or other liabilities of the obligor under any Guaranty, the Debt or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor. "GUARANTY AGREEMENT" is defined in Section 1. "HAZARDOUS MATERIAL" means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is or shall be restricted, prohibited or penalized by any applicable law (including, without limitation, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls). "HOLDER" means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1. "INSTITUTIONAL INVESTOR" means (a) any original purchaser of a Note, (b) any holder of a Note holding more than $2,000,000 of the aggregate principal amount of the Notes then outstanding, and (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form. "INTERCREDITOR AGREEMENT" is defined in Section 1. "INTEREST EXPENSE" means, with respect to any period, the sum (without duplication) of the following: (i) all interest expense in respect of Debt of the Company and its Restricted Subsidiaries (including imputed interest on Capital Leases) deducted in determining Consolidated Net Income for such period and (ii) all debt discount and expense amortized in such period. "INVESTMENTS" shall mean all investments, in cash or by delivery of property made, directly or indirectly in any Person, whether by acquisition of shares of capital stock, indebtedness or other obligations or securities or by loan, advance, capital contribution or otherwise. B-6 "LEASE RENTALS" means, with respect to any period, the sum of the minimum amount of rental and other obligations required to be paid during such period by the Company or its Restricted Subsidiaries as lessee under all leases of real or personal property (other than Capital Leases), excluding any amounts required to be paid by the lessee (whether or not designated as rental) which are (i) on account of maintenance and repairs, insurance, taxes, assessments, water rates and similar charges, or (ii) which are based on profits, revenues or sales realized by the lessee from all leased property or otherwise based on the performance of the lessee. "LIEN" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). "MAKE-WHOLE AMOUNT" shall have the meaning (i) set forth in Section 8.6 with respect to any Series 1999-A Note and (ii) set forth in the applicable Supplement with respect to any other series of Notes. "MATERIAL" means material in relation to the business, operations, affairs, financial condition, assets or properties of the Company and its Restricted Subsidiaries taken as a whole. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Restricted Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement (including any Supplement) and the Notes, or (c) the validity or enforceability of this Agreement (including any Supplement) or the Notes. "MEMORANDUM" is defined in Section 5.3. "MULTIEMPLOYER PLAN" means any Plan that is a "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA). "NATIONALLY RECOGNIZED RATING AGENCY" means any of Standard & Poor's Ratings Group, Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors Service, Inc. "NET PROCEEDS" means, with respect to any sale, lease or other disposition of any property by any Person, an amount equal to the DIFFERENCE of (a) the aggregate amount of the consideration (valued at the Fair Market Value of such consideration at the time of the consummation of such sale, lease or other disposition but net of applicable taxes) received by such Person in respect of such disposition, MINUS (b) all ordinary and reasonable out-of-pocket costs and expenses actually incurred by such Person in connection with such disposition. B-7 "NOTES" is defined in Section 1. "OFFICER'S CERTIFICATE" means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "PERSON" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "PLAN" means an "employee benefit plan" (as defined in Section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability. "PREFERRED STOCK" means any class of capital stock of a corporation that is preferred over any other class of capital stock of such corporation as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such corporation. "PRIORITY DEBT" means (without duplication) the sum of (a) all unsecured Funded Debt of Restricted Subsidiaries other than (i) Funded Debt owed to the Company or any Wholly-Owned Restricted Subsidiary, (ii) Funded Debt outstanding at the time such Person becomes a Restricted Subsidiary; PROVIDED that (x) such Funded Debt shall not have been incurred in contemplation of the acquisition of such Restricted Subsidiary, (y) such Funded Debt has not been extended, renewed or refunded, and (z) such Funded Debt shall not have been incurred by an Unrestricted Subsidiary which was formerly a Restricted Subsidiary and which is being redesignated as a Restricted Subsidiary, and (iii) Funded Debt outstanding pursuant to Excluded Subsidiary Obligations, and (b) Debt of the Company and its Restricted Subsidiaries secured by Liens other than Liens permitted by Section 10.6(a) through (k). "PROPERTY" or "PROPERTIES" means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate. "QPAM EXEMPTION" means Prohibited Transaction Class Exemption 84-14 issued by the United States Department of Labor. "RECEIVABLES SECURITIZATION" shall mean any transaction pursuant to which (i) accounts receivables are sold or transferred and (ii) the seller (a) retains directly or indirectly an interest in the accounts receivables sold or transferred or (b) assumes any liability on account of any representation or warranty, Guaranty or other agreement in connection with such sale or transfer. B-8 "REQUIRED HOLDERS" means, at any time, the holders of at least 50% in principal amount of the Notes of each series at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates). "RESPONSIBLE OFFICER" means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement. "RESTRICTED INVESTMENTS" shall mean all Investments except any of the following: (i) property to be used in the ordinary course of business; (ii) assets arising from the sale of goods and services in the ordinary course of business; (iii) Investments in one or more Restricted Subsidiaries or any person that becomes a Restricted Subsidiary; (iv) Investments existing at the date of closing; (v) Investments in obligations, maturing within one year, issued by or guaranteed by the United States of America, or an agency thereof, or Canada, or any province thereof; (vi) Investments in tax-exempt obligations, maturing within one year, which are rated in one of the top two rating classifications by at least one national rating agency; (vii) Investments in certificates of deposit or banker's acceptances maturing within one year issued by Bank of America or other commercial banks which are rated in one of the top two rating classifications by at least one national rating agency; (viii) Investments in commercial paper, maturing within 270 days, rated in one of the top two rating classifications by at least one national rating agency; (ix) Investments in repurchase agreements (x) treasury stock; or (xi) Investments in money market instrument programs which are classified as current assets in accordance with GAAP. "RESTRICTED SUBSIDIARY" means any Subsidiary which (i) at least a majority of the voting securities of such Subsidiary are owned by the Company and/or one or more Wholly-Owned Restricted Subsidiaries, and (ii) has been designated as a Restricted Subsidiary by the Company as reflected in Schedule 5.4 or by written notice given to the holders of all Notes in accordance with Section 10.9. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time. "SENIOR DEBT" means, as of the date of any determination thereof, all Consolidated Debt, other than Subordinated Debt. "SENIOR FINANCIAL OFFICER" means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company. "SIGNIFICANT SUBSIDIARY" means at any time any Restricted Subsidiary that accounts for more than (i) 10% of the Consolidated Total Assets or (ii) 10% of consolidated revenue of the Company and its Restricted Subsidiaries. "SIMPLEX PRODUCTS DISPOSITION" means any sale or transfer of assets of the Simplex Products Division of the Company or refinancing or recapitalization of the assets or operation of the Simplex Products Division, whether in the form of a sale of stock, borrowing, issuance of debt or equity securities or otherwise, as a result of which (i) the Company ceases to own directly substantially all of the assets of the Simplex Products Division, (ii) the Company ceases to be liable directly or indirectly for any Debt or trade payables of the Simplex Products Division B-9 (other than pursuant to any indemnification provision for the benefit of the transferee of the assets of the Simplex Products Division or any affiliate of such transferee contained in the agreements memorializing such transaction), and (iii) the Company receives in such transaction, by way of sale proceeds, refinancing proceeds, dividend proceeds, proceeds of the issuance of securities or otherwise, at least $20 million in cash. "SUBORDINATED DEBT" means, as of the date of any determination thereof, all unsecured Debt of the Company which shall contain or have applicable thereto subordination provisions providing for the subordination thereof to other Debt of the Company (including, without limitation, the Notes). "SUBSIDIARY" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company. "SUBSIDIARY GUARANTOR" shall mean each Subsidiary of the Company which shall be a party to the Guaranty Agreement. "SUBSIDIARY GUARANTY AGREEMENTS" shall mean the Guaranty Agreement and any other Guaranty of Debt of the Company by a Restricted Subsidiary which shall be a party to the Guaranty Agreement; PROVIDED that each creditor which is a beneficiary of a Subsidiary Guaranty Agreement shall have become a party to the Intercreditor Agreement. "SUPPLEMENT" is defined in Section 2.2. "TOTAL CAPITALIZATION" means, at any time, the sum of (i) Consolidated Net Worth and (ii) Consolidated Funded Debt. "UNRESTRICTED SUBSIDIARY" means any Subsidiary which is not a Restricted Subsidiary. "WHOLLY-OWNED RESTRICTED SUBSIDIARY" means, at any time, any Restricted Subsidiary one hundred percent (100%) of all of the equity interests (except directors' qualifying shares) and voting interests of which are owned by any one or more of the Company and the Company's other Wholly-Owned Restricted Subsidiaries at such time. B-10 SCHEDULE 4.9 CHANGES IN CORPORATE STRUCTURE Subsequent to the financial statements referred to in Schedule 5.5, the Company completed the acquisition of Ride, Inc., a designer and manufacturer of snowboard equipment, apparel and accessories through the merger of one of the Company's wholly-owned Subsidiaries, KT Acquisitions, Inc., with and into Ride, Inc. on October 7, 1999. SCHEDULE 5.3 DISCLOSURE MATERIALS None SCHEDULE 5. 4(A) (i) RESTRICTED SUBSIDIARIES AS OF CLOSING DATE
JURISDICTION PERCENTAGE OF VOTING STOCK OF OWNED BY COMPANY AND EACH NAME OF SUBSIDIARY INCORPORATION OTHER SUBSIDIARY STATUS ------------------ ------------- ---------------- -------- Ride, Inc. Washington 100% Active Dana Design, Ltd. Montana 100% Inactive Anthony Sales (Barbados) Ltd. Barbados 100% Active K2 Bike Inc. Delaware 100% Inactive K2 Funding, Inc. Delaware 100% Active Shakespeare Company Delaware 100% Active SUBSIDIARIES OF SHAKESPEARE COMPANY: Shakespeare (Hong Kong) Ltd. Hong Kong 100% Active SUBSIDIARY OF SHAKESPEARE (HONG KONG) LTD.: Pacific Rim Metallic Products Ltd. Hong Kong 100% Active Shakespeare International Ltd. U.K. 100% Active SUBSIDIARIES OF SHAKESPEARE INTERNATIONAL LTD.: Shakespeare Company (UK) Ltd. U.K. 100% Active Shakespeare Monofilament U.K.Ltd. U.K. 100% Active Shakespeare Hengelsport, B.V. Netherlands 100% Active Shakespeare (Australia) Pty. Ltd. Australia 100% Active K2 Ski Sport und Mode GmbH Germany 100% Active Shakespeare Industries, Inc. Delaware 100% Inactive Sitca Corporation Washington 100% Active SUBSIDIARY OF SITCA CORPORATION: K-2 Corporation Indiana 100% Active SUBSIDIARIES OF K2 CORPORATION: Katin, Inc. Delaware 100% Inactive Planet Earth Skateboards, Inc. California 100% Active K-2 International, Inc. Indiana 100% Inactive K2 Japan Corporation Japan 100% Active Morrow Snowboards Inc. Delaware 100% Inactive Madshus A.S. Norway 100% Active SMCA, Inc. Minnesota 100% 100% SUBSIDIARY OF SMCA, INC.: Stearns Inc. Minnesota 100% Active
UNRESTRICTED SUBSIDIARIES AS OF CLOSING DATE NONE INVESTMENTS OF THE COMPANY AND ITS SUBSIDIARIES
COMMON STOCK INVESTMENTS NUMBER OF SHARES ------------------------ ---------------- Albany International Corporation 10 Bell Sports Company 10 Brunswick Corporation 20 Cascade Industries, Incorporated 10 Centuri, Inc. 100 Champion International Corporation 2 Coleco Industries 4 Coleman Company, Inc. 10 Escalade, Inc. 120 Figgie International 16 First Team Sports 15 Glassmaster 10 Hallwood Industries Incorporated 2,760 Huffy 10 Johnson Worldwide Associates 10 Major Pool Equipment Corp. 11 Metromedia International Group 10 Mossimo Inc. 10 Nike, Inc. 40 Pro-Group 10 Quiksilver 10 Reebok International, Ltd. 10 Seatrain Lines, Inc. 3 Skis Rossignol 10 Starter Corporation 10 The Mead Corporation 4
(ii) KNOWN AFFILIATES Trust under the Company's Employee Stock Ownership Plan owns approximately 10% of the Company's outstanding Common Stock. (iii) COMPANY DIRECTORS DIRECTORS:
NAME POSITION ---- -------- B. I. Forester Director, Chairman of the Board Richard M. Rodstein Director Susan E. Engel Director Jerry E. Goldress Director Wilford D. Godbold, Jr. Director Richard J. Heckmann Director Stewart M. Kasen Director John H. Offermans Director Alfred E. Osborne, Ph. D. Director
COMPANY OFFICERS:
NAME POSITION ---- -------- Richard M. Rodstein President and Chief Executive Officer of K2 Inc.; President of K2 John J. Rangel Senior Vice President B Finance Tony H. Chow Vice President and Director of Taxes Susan E. McConnell Secretary Marie Browne Vice President, K2 Business Operations Amy Buckalter Vice President and General Manager, K2 North America In-Line Skates Anthony DeRocco Vice President, K2 Research and Development Darren Jones Vice President and General Counsel of K2 John Rauvola Vice President and General Manager, K2 International Operations, Bikes Stuart N. Rempel Vice President and General Manager, K2 Skis Brent Turner Vice President and General Manager, K2 Snowboards James A. Vandergrift Vice President, K2 Research and Development Kurt Wolf Senior Vice President, K2 International Operations Europe Koji Matsunaga General Manager, K2 Japan Scott Hogsett Vice President and General Manager, Shakespeare Fishing Tackle Domestic Bruce Brown Vice President Worldwide Sourcing, Shakespeare Fishing Tackle Domestic John L. Tomsett Vice President and Managing Director, Shakespeare Fishing Tackle United Kingdom Robert G. Hughes Managing Director, Shakespeare Fishing Tackle Holland Robert Ni General Manager, Shakespeare Fishing Tackle Hong Kong Christopher Miller President, Planet Earth and Katin David G. Cook Vice President; President of Stearns Paul Ebnet Vice President Sales and Marketing, Stearns Charles Hall Vice President Product Development, Stearns Michael J. Krmpotich Vice President Finance, Stearns
Joel Lindmeier Vice President Manufacturing, Stearns Timothy C. Cronin Vice President; President of Hilton Corporate Casuals Hilton R. Leibow Chairman Emeritus, Hilton Corporate Casuals David H. Herzberg Vice President; President of Shakespeare Monofilament Peter J. Brissette Vice President Research and Development, Shakespeare Monofilament R. Ray Bryson Vice President Finance, Shakespeare Monofilament Timothy N. Dell Vice President Sales and Marketing, Shakespeare Monofilament Barry D. Johns Vice President Manufacturing, Shakespeare Monofilament J. Wayne Merck Vice President; President of Shakespeare Composites and Electronics Edward C. Blair Vice President and Controller, Shakespeare Composites and Electronics James W. Davidson Vice President Research and Development, Shakespeare Composites and Electronics Charles R. Jeffords Vice President Manufacturing, Shakespeare Composites and Electronics Robert E. Doyle Senior Vice President; President of Simplex Products Jeffrey W. Baskett Vice President International Sales and Market Development, Simplex Products Leonard L. Cannon Vice President Finance, Simplex Products Mohamed Fahmy Vice President and General Manager, Simplex Products Besty J. Mossing Monday Vice President and General Manager, Simplex Products
SCHEDULE 5.4(B) None SCHEDULE 5.4(C) None SCHEDULE 5.5 FINANCIAL STATEMENTS The Company's Form 10-K Annual Report for the year ending December 31, 1998 and the Form 10-Q for the quarter ending September 30, 1999. SCHEDULE 5.8 CERTAIN LITIGATION K2 Inc. is one of several potentially responsible parties ("PRP") named in an Environmental Protection Agency matter involving discharge of hazardous materials at an old waste site in South Carolina. The extent of K2 Inc.'s required financial contribution to the cleanup of the site is expected to be limited based upon the number and financial strength of the other named PRPs and the volume and types of waste involved which might be attributable to K2 Inc. Although environmental and related remediation costs are difficult to quantify, K2 Inc.'s environmental engineers, consultants and legal counsel have developed estimates based upon cost analyses and other available information. K2 Inc. accrues for these costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. At December 31, 1998 and 1997, K2 Inc. accrued approximately $963,000 and $930,000, respectively, with no provision for expected insurance recovery. SCHEDULE 5. 11 PATENTS None SCHEDULE 5.14 USE OF PROCEEDS The $50,000,000 of proceeds received will be used entirely to pay down the Company's existing $100 million revolving credit facility with Bank of America, Agent, which has an outstanding balance of $88,500,000 as of December 17, 1999. SCHEDULE 5.15 EXISTING DEBT / FUTURE LIENS
AMOUNT OUTSTANDING AS OF SUBSIDIARY DESCRIPTION SEPTEMBER 30, 1999 (US$) ---------- ----------- ------------------------ K2 Inc. Bank of America revolver 71,500,000 K2 Inc. Private Placement 26,668,000 K2 Corp. Flow International Equipment Capital Lease 118,000 K2 Japan Union Bank 15,253,000 K2 GmbH Bank of America 24,437,000 Shakespeare Hong Kong Norwest Bank 1,967,000 Shakespeare Australia National Australia Bank 437,000 Capitalized Leases: AMOUNT OUTSTANDING AS OF SUBSIDIARY DESCRIPTION DECEMBER 8, 1999 (US$) K2 Corp. Bank of America $142,000
SCHEDULE 5.18 ENVIRONMENTAL LIABILITIES Please see Schedule 5.08 Certain Litigation.
SCHEDULE 10.6 LIENS EXISTING AS OF CLOSING DATE SUBSIDIARY/DIVISION DESCRIPTION LIENHOLDER LIEN AMOUNT K2 Inc./K2 Corp. Accounts Receivable Asset K2 Funding, Inc./Nations Securitization Bank 50,000,000 K2 Corp. Dark Room Supplies Prime Source 11,000 K2 Corp. Factory Safety Supplies Magid Glove & Safety 12,000 Shakespeare Monofilament Forklifts Associated Leasing 26,092 Shakespeare Monofilament Forklifts Hyster Credit 11,534 Shakespeare Monofilament Telephone Equipment NEC America 41,886 Shakespeare Monofilament Welder Equipment Industrial Credit 250 Shakespeare Monofilament Copiers IBM 57,120 Stearns Inc. Computer Equipment IBM 142,296 Simplex Products Division Lift Trucks Old Kent Leasing 7,478 Simplex Products Division Copiers GE Capital 87,468 Planet Earth Skateboards, Inc. Forklifts Hawthorne Machinery 13,825 Ride, Inc. Secured Line of Credit CIT Group Credit Finance, 10,367,000 Inc. Ride, Inc. Misc. Computer and other Keycorp Leasing 315,000 equipment
[FORM OF NOTE] K2 INC. 8.41% Series 1999-A Senior Note due December 1, 2009 No. [_______] [Date] $[__________] PPN 482732 A* 5 FOR VALUE RECEIVED, the undersigned, K2 INC. (herein called the "COMPANY"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to [_____________________] or registered assigns, the principal sum of [______________] DOLLARS on December 1, 2009 with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 8.41% per annum from the date hereof, payable semi-annually, on the first day of June and December in each year, commencing with the June 1 or December 1 next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreement referred to below), payable semi-annually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 10.41% or (ii) 2% over the rate of interest publicly announced by Bank of America National Trust and Savings Association from time to time in New York, New York as its "base" or "prime" rate. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal office of Bank of America National Trust and Savings Association in New York, New York or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreement referred to below. This Note is one of a series of Senior Notes (herein called the "NOTES") issued pursuant to separate Note Purchase Agreement, dated as of December 1, 1999 (as from time to time amended, supplemented or modified, the "NOTE PURCHASE AGREEMENT"), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) to have made the representation set forth in Section 6.2 of the Note Purchase Agreement. This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. EXHIBIT 1 (to Note Purchase Agreement) The Company will make required prepayments of principal on the dates and in the amounts specified in the Note Purchase Agreement. This Note is also subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. The interest rate borne by this Note and the other Notes issued pursuant to the Note Purchase Agreement may be changed upon the terms and conditions set forth in Section 1 of the Note Purchase Agreement. If an Event of Default, as defined in the Note Purchase Agreement, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreement. All amounts of principal, interest and Make-Whole Amount payable with respect to the Notes are unconditionally guaranteed by all Subsidiaries under and pursuant to that certain Guaranty Agreement dated as of December 1, 1999 from said Subsidiaries. This Note shall be construed and enforced in accordance with, and the rights of the issuer and holder hereof shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. K2 INC. By Name:________________________ Title:_______________________ E-1-2 FORM OF GUARANTY AGREEMENT EXHIBIT 2 (to Note Purchase Agreement) FORM OF OPINION OF SPECIAL COUNSEL The closing opinion of Gibson, Dunn & Crutcher LLP, counsel to the Company, which is called for by Section 4.4 of the Note Purchase Agreement, shall be dated the date of Closing and addressed to the Purchasers, shall be satisfactory in scope and form to each Purchaser and shall be to the effect that: 1. The Company is a validly existing corporation, in good standing under the laws of its jurisdiction of incorporation, has the corporate power and the corporate authority to execute and perform the Note Purchase Agreement and to issue the Notes and has the full corporate power and the corporate authority to conduct the activities in which it is now engaged. 2. Each Subsidiary is a validly existing corporation in good standing under the laws of its jurisdiction of incorporation. 3. The Note Purchase Agreement has been duly authorized by all necessary corporate action on the part of the Company, has been duly executed and delivered by the Company and constitutes the legal, valid and binding contract of the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors= rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 4. The Series 1999-A Notes issued to the Purchasers on the Closing Date have been duly authorized by all necessary corporate action on the part of the Company, have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 5. Assuming the accuracy of the Purchasers' representations and warranties and compliance by the Purchasers with their covenants and agreements contained in the Note Purchase Agreement, no approval, consent or withholding of objection on the part of, or filing, registration or qualification with, any Federal governmental body or any governmental body organized under the laws of the states of New York or California, is necessary in connection with the execution and delivery of the Note Purchase Agreement or the Series 1999-A Notes or insofar as the Restricted Subsidiaries are concerned, the Guaranty Agreement. 6. Each of the Subsidiaries has the corporate power and authority and is duly authorized to enter into and perform all of its obligations under the Guaranty Agreement and the Guaranty Agreement has been duly authorized, executed and delivered by each of the Subsidiaries and constitutes the legal, valid and binding contract of each of the Subsidiaries enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity EXHIBIT 4.4(a) (to Note Purchase Agreement) (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 7. The issuance and sale of the Series 1999-A Notes and the execution, delivery and performance by the Company of the Note Purchase Agreement do not conflict with or result in any breach of any of the provisions of or constitute a default under or result in the creation or imposition of any Lien upon any of the property of the Company pursuant to the provisions of the Articles of Incorporation or By-laws of the Company or any agreement or other instrument disclosed on Schedule ___ to such opinion to which the Company is a party or by which the Company may be bound. 8. Assuming the accuracy of the Purchasers' representations and warranties and compliance by the Purchasers with their covenants and agreements contained in the Note Purchase Agreement, the issuance, sale and delivery of the Series 1999-A Notes under the circumstances contemplated by the Note Purchase Agreement do not, under existing law, require the registration of the 1999-A Notes or the Guaranty Agreement under the Securities Act of 1933, as amended, or the qualification of an indenture under the Trust Indenture Act of 1939, as amended. 9. Neither the issuance of the Series 1999-A Notes nor the application of the proceeds of the sale of the Notes will violate or result in a violation of Section 7 of the Securities Exchange Act of 1934, as amended, or any regulation issued pursuant thereto, including, without limitation, Regulation U, T or X of the Board of Governors of the Federal Reserve System. 10. Except as disclosed in Schedule 5.8 of the Note Purchase Agreement or in Schedule ___ to this opinion, there are no actions, suits or proceedings, to the knowledge of such counsel pending or threatened against the Company or any Subsidiary in any court or before any governmental authority or arbitration board or tribunal which, seeks to restrain the transactions contemplated by the Note Purchase Agreement or which if adversely determined, would call into question the ability of the Company to perform its obligations under the Note Purchase Agreement and the Series 1999-A Notes or on the legality, validity or enforceability of the Company=s obligations under the Note Purchase Agreement or the Series 1999-A Notes or of the Restricted Subsidiaries to comply with the provisions of the Guaranty Agreement. To the knowledge of such counsel, neither the Company nor any Subsidiary is in default with respect to any order, judgment or decree of any court or governmental authority, or arbitration board or tribunal. 11. The Company is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. The opinion of Gibson, Dunn & Crutcher LLP shall cover such other matters relating to the sale of the Series 1999-A Notes as each Purchaser may reasonably request and shall be subject to such customary qualifications, limitations and exceptions as shall be reasonably satisfactory to the Purchasers. With respect to matters of fact on which such opinion is based, EXHIBIT 4.4(a)-2 such counsel shall be entitled to rely on appropriate certificates of public officials and other officers of the Company. EXHIBIT 4.4(a)-3 FORM OF OPINION OF SPECIAL COUNSEL TO THE PURCHASERS The closing opinion of Chapman and Cutler, special counsel to the Purchasers, called for by Section 4.4 of the Note Purchase Agreement, shall be dated the date of Closing and addressed to each Purchaser, shall be satisfactory in form and substance to each Purchaser and shall be to the effect that: 1. The Company is a corporation, validly existing and in good standing under the laws of its jurisdiction of incorporation and has the corporate power and the corporate authority to execute and deliver the Note Purchase Agreement and to issue the Series 1999-A Notes. 2. The Note Purchase Agreement has been duly authorized by all necessary corporate action on the part of the Company, has been duly executed and delivered by the Company and constitutes the legal, valid and binding contract of the Company enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 3. The Series 1999-A Notes have been duly authorized by all necessary corporate action on the part of the Company, and the Notes being delivered on the date hereof have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally, and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law). 4. The issuance, sale and delivery of the Series 1999-A Notes under the circumstances contemplated by the Note Purchase Agreement do not, under existing law, require the registration of the Series 1999-A Notes under the Securities Act of 1933, as amended, or the qualification of an indenture under the Trust Indenture Act of 1939, as amended. The opinion of Chapman and Cutler shall also state that the opinion of Gibson, Dunn & Crutcher LLP, counsel to the Company, is satisfactory in scope and form to Chapman and Cutler and that, in their opinion, the Purchasers are justified in relying thereon. With respect to matters of fact upon which such opinion is based, Chapman and Cutler may rely on appropriate certificates of public officials and officers of the Company and upon representations of the Company and the Purchasers delivered in connection with the issuance and sale of the Series 1999-A Notes. EXHIBIT 4.4(b) (to Note Purchase Agreement) In rendering the opinion set forth in paragraph 1 above, Chapman and Cutler may rely, as to matters referred to in paragraph 1, solely upon an examination of the Articles of Incorporation certified by, and a certificate of good standing of the Company from, the Secretary of State of the State of Delaware, the Bylaws of the Company and the general business corporation law of the State of Delaware. The opinion of Chapman and Cutler is limited to the laws of the State of New York, the general business corporation law of the State of Delaware and the Federal laws of the United States. EXHIBIT 4.4(b)-2 =============================================================================== K2 INC. [NUMBER] SUPPLEMENT TO NOTE PURCHASE AGREEMENT Dated as of ______________________ Re: $____________ _____% Series __ Senior Notes DUE _____________________ =============================================================================== EXHIBIT S (to Note Purchase Agreement) K2 INC. 4900 SOUTH EASTERN AVENUE LOS ANGELES, CALIFORNIA 90040 Dated as of --------------------, ---- To the Purchaser(s) named in Schedule A hereto Ladies and Gentlemen: This [Number] Supplement to Note Purchase Agreement (the "SUPPLEMENT") is between K2 Inc., a Delaware corporation (the "COMPANY"), and the institutional investors named on Schedule A attached hereto (the "Purchasers"). Reference is hereby made to that certain Note Purchase Agreement dated as of December 1, 1999 (the "NOTE PURCHASE AGREEMENT") between the Company and the purchasers listed on Schedule A thereto. All capitalized terms not otherwise defined herein shall have the same meaning as specified in the Note Purchase Agreement. Reference is further made to Section 4.12 of the Note Purchase Agreement which requires that, prior to the delivery of any Additional Notes, the Company and each Additional Purchaser shall execute and deliver a Supplement. The Company hereby agrees with the Purchaser(s) as follows: 1. The Company has authorized the issue and sale of $__________ aggregate principal amount of its _____% Series ___ Senior Notes due _________, ____ (the "SERIES ___ NOTES"). The Series ___ Notes, together with the Series 1999-A Notes [and the Series __ Notes] initially issued pursuant to the Note Purchase Agreement and each series of Additional Notes which may from time to time hereafter be issued pursuant to the provisions of Section 2.2 of the Note Purchase Agreement, are collectively referred to as the "Notes" (such term shall also include any such notes issued in substitution therefor pursuant to Section 13 of the Note Purchase Agreement). The Series ___ Notes shall be substantially in the form set out in Exhibit 1 hereto with such changes therefrom, if any, as may be approved by the Purchaser(s) and the Company. 2. Subject to the terms and conditions hereof and as set forth in the Note Purchase Agreement and on the basis of the representations and warranties hereinafter set forth, the Company agrees to issue and sell to each Purchaser, and each Purchaser agrees to purchase from the Company, Series __ Notes in the principal amount set forth opposite such Purchaser's name on Schedule A hereto at a price of 100% of the principal amount thereof on the closing date hereafter mentioned. 3. The sale and purchase of the Series __ Notes to be purchased by each Purchaser shall occur at the offices of [Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois 60603,] at 11:00 A.M. Chicago time, at a closing (the "CLOSING") on ______, ____ or on such other Business Day thereafter on or prior to _______, ____ as may be agreed upon by the Company and the Purchasers. At the Closing, the Company will deliver to each Purchaser the Series __ Notes to be purchased by such Purchaser in the form of a single Series __ Note (or such greater number of Series __ Notes in denominations of at least $100,000 as such Purchaser may request) dated the date of the Closing and registered in such Purchaser's name (or in the name of such Purchaser's nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number [__________________________] at ____________ Bank, [INSERT BANK ADDRESS, ABA NUMBER FOR WIRE TRANSFERS, AND ANY OTHER RELEVANT WIRE TRANSFER INFORMATION]. If, at the Closing, the Company shall fail to tender such Series __ Notes to any Purchaser as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to any Purchaser's satisfaction, such Purchaser shall, at such Purchaser's election, be relieved of all further obligations under this Agreement, without thereby waiving any rights such Purchaser may have by reason of such failure or such nonfulfillment. 4. The obligation of each Purchaser to purchase and pay for the Series __ Notes to be sold to such Purchaser at the Closing is subject to the fulfillment to such Purchaser's satisfaction, prior to the Closing, of the conditions set forth in Section 4 of the Note Purchase Agreement with respect to the Series __ Notes to be purchased at the Closing, and to the following additional conditions: (a) Except as supplemented, amended or superceded by the representations and warranties set forth in Exhibit A hereto, each of the representations and warranties of the Company set forth in Section 5 of the Note Purchase Agreement shall be correct as of the date of Closing and the Company shall have delivered to each Purchaser an Officer's Certificate, dated the date of the Closing certifying that such condition has been fulfilled. (b) Contemporaneously with the Closing, the Company shall sell to each Purchaser, and each Purchaser shall purchase, the Series __ Notes to be purchased by such Purchaser at the Closing as specified in Schedule A. 5. [Here insert special provisions for Series __ Notes including prepayment provisions applicable to Series __ Notes (including Make-Whole Amount) and closing conditions applicable to Series ___ Notes]. 6. Each Purchaser represents and warrants that the representations and warranties set forth in Section 6 of the Note Purchase Agreement are true and correct on the date hereof with respect to the purchase of the Series __ Notes by such Purchaser. 7. The Company and each Purchaser agree to be bound by and comply with the terms and provisions of the Note Purchase Agreement as fully and completely as if such Purchaser were an original signatory to the Note Purchase Agreement. The execution hereof shall constitute a contract between the Company and the Purchaser(s) for the uses and purposes hereinabove set forth, and this agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together only one agreement. K2 INC. By _______________________________ Name:__________________________ Title:_________________________ Accepted as of __________, _____ [VARIATION] By________________________________ Name:___________________________ Title:__________________________ -3- INFORMATION RELATING TO PURCHASERS PRINCIPAL NAME AND ADDRESS OF PURCHASER AMOUNT OF SERIES __ NOTES TO BE PURCHASED [NAME OF PURCHASER] $ (1) All payments by wire transfer of immediately available funds to: with sufficient information to identify the source and application of such funds. (2) All notices of payments and written confirmations of such wire transfers: (3) All other communications: SCHEDULE A (to Supplement) SUPPLEMENTAL REPRESENTATIONS The Company represents and warrants to each Purchaser that except as hereinafter set forth in this Exhibit A, each of the representations and warranties set forth in Section 5 of the Note Purchase Agreement is true and correct as of the date hereof with respect to the Series __ Notes with the same force and effect as if each reference to "Series 1999-A Notes" set forth therein was modified to refer the "Series __ Notes" and each reference to "this Agreement" therein was modified to refer to the Note Purchase Agreement as supplemented by the _______ Supplement. The Section references hereinafter set forth correspond to the similar sections of the Note Purchase Agreement which are supplemented hereby: SECTION 5.3. DISCLOSURE. The Company, through its agent, Banc of America Securities LLC, has delivered to each Purchaser a copy of a Private Placement Memorandum, dated ____________ (the "MEMORANDUM"), relating to the transactions contemplated by the ______ Supplement. The Note Purchase Agreement, the Memorandum, the documents, certificates or other writings delivered to each Purchaser by or on behalf of the Company in connection with the transactions contemplated by the Note Purchase Agreement and the _______ Supplement and the financial statements listed in Schedule 5.5 to the _____ Supplement, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Since ____________, there has been no change in the financial condition, operations, business, properties or prospects of the Company or any Restricted Subsidiary except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. SECTION 5.4. ORGANIZATION AND OWNERSHIP OF SHARES OF RESTRICTED SUBSIDIARIES. (a) Schedule 5.4 to the ______ Supplement contains (except as noted therein) complete and correct lists of the Company's Restricted and Unrestricted Subsidiaries, and showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary. SECTION 5.13. PRIVATE OFFERING BY THE COMPANY. Neither the Company nor anyone acting on its behalf has offered the Series __ Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any Person other than the Purchasers and not more than [_] other Institutional Investors, each of which has been offered the Series __ Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act. SECTION 5.14. USE OF PROCEEDS; MARGIN REGULATIONS. The Company will apply the proceeds of the sale of the Series __ Notes to ______________________________ and for general corporate purposes. No part of the proceeds from the sale of the Series __ Notes pursuant to the _____ Supplement will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the EXHIBIT A (to Supplement) Federal Reserve System (12 CFR 222), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). As used in this Section, the terms "margin stock" and "purpose of buying or carrying" shall have the meanings assigned to them in said Regulation U. SECTION 5.15. EXISTING DEBT; FUTURE LIENS. (a) Schedule 5.15 to the _________ Supplement sets forth a complete and correct list of all outstanding Debt of the Company and its Restricted Subsidiaries as of _____________, since which date there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Debt of the Company or its Restricted Subsidiaries. Neither the Company nor any Restricted Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Debt of the Company or such Restricted Subsidiary and no event or condition exists with respect to any Debt of the Company or any Restricted Subsidiary that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Debt to become due and payable before its stated maturity or before its regularly scheduled dates of payment. [Add any additional Sections as appropriate at the time the Series ___ Notes are issued] -2- [FORM OF SERIES __ NOTE] K2 INC. ___% SERIES __ SENIOR NOTE DUE ______________ No. [_________] [Date] $[____________] PPN [____________] FOR VALUE RECEIVED, the undersigned, K2 Inc. (herein called the ACOMPANY"), a corporation organized and existing under the laws of the State of Delaware hereby promises to pay to [________________], or registered assigns, the principal sum of [________________] DOLLARS on _______________, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of ____% per annum from the date hereof, payable semiannually, on the _____ day of ______ and ______ in each year, commencing on the first of such dates after the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreement referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) [coupon + 2%]% or (ii) 2% over the rate of interest publicly announced by _________________ from time to time in ____________________ as its "base" or "prime" rate. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at ______________________, in ______________________, or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreement referred to below. This Note is one of a series of Senior Notes (the "NOTES") issued pursuant to a Supplement to the Note Purchase Agreement dated as of December 1, 1999 (as from time to time amended, supplemented or modified, the "NOTE PURCHASE AGREEMENT"), between the Company, the Purchasers named therein and Additional Purchasers of Notes from time to time issued pursuant to any Supplement to the Note Purchase Agreement. This Note and the holder hereof are entitled equally and ratably with the holders of all other Notes of all series from time to time outstanding under the Note Purchase Agreement to all the benefits provided for thereby or referred to therein. Each holder of this Note will be deemed, by its acceptance hereof, to have made the representation set forth in Section 6.2 of the Note Purchase Agreement, PROVIDED that such holder may (in reliance upon information provided by the Company, which shall not be unreasonably withheld) make a representation to the effect that the purchase by such holder of any Note will not constitute a non-exempt prohibited transaction under Section 406(a) of ERISA. EXHIBIT A (to Supplement) This Note is registered with the Company and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note of an identical series for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. [The Company will make required prepayments of principal on the dates and in the amounts specified in the Note Purchase Agreement.] [This Note is not subject to regularly scheduled prepayments of principal.] This Note is [also] subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. If an Event of Default, as defined in the Note Purchase Agreement, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreement. All amounts of principal, interest and Make-Whole Amount payable with respect to the Notes are unconditionally guaranteed by all Subsidiaries under and pursuant to that certain Guaranty Agreement dated as of December 1, 1999 from said Subsidiaries. This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. K2 INC. By Name:_____________________ Title:____________________ EX-10.(D) 6 EXHIBIT 10(D) EXHIBIT (10)(d) =============================================================================== Credit Agreement Dated as of December 21, 1999 among K2 Inc., Bank of America, N.A., as Administrative Agent, Swing Line Lender and Letter of Credit Issuing Lender and The Other Financial Institutions Party Hereto Banc of America Securities LLC, as Sole Lead Arranger and Sole Book Manager [BANK OF AMERICA LOGO] =============================================================================== TABLE OF CONTENTS
SECTION PAGE - ------- ---- SECTION 1. DEFINITIONS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.01 Certain Defined Terms.. . . . . . . . . . . . . . . . . . . . . . . . .1 1.02 Use of Certain Terms. . . . . . . . . . . . . . . . . . . . . . . . . 23 1.03 Accounting Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . 24 1.04 Rounding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 1.05 Exhibits and Schedules. . . . . . . . . . . . . . . . . . . . . . . . 24 1.06 References to Agreements and Laws.. . . . . . . . . . . . . . . . . . 24 SECTION 2. THE COMMITMENTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.01 Amounts and Terms of Commitments. . . . . . . . . . . . . . . . . . . 24 2.02 Borrowings, Conversions and Continuations of Loans. . . . . . . . . . 25 2.03 Letters of Credit.. . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.04 The Swing Line. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2.05 Prepayments.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2.06 Reduction or Termination of Commitments.. . . . . . . . . . . . . . . 31 2.07 Principal and Interest. . . . . . . . . . . . . . . . . . . . . . . . 32 2.08 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2.09 Computation of Fees and Interest. . . . . . . . . . . . . . . . . . . 33 2.10 Making Payments.. . . . . . . . . . . . . . . . . . . . . . . . . . . 33 2.11 Funding Sources.. . . . . . . . . . . . . . . . . . . . . . . . . . . 34 2.12 Increase in Commitments.. . . . . . . . . . . . . . . . . . . . . . . 34 2.13 Master Subsidiary Guaranty. . . . . . . . . . . . . . . . . . . . . . 35 SECTION 3. TAXES, YIELD PROTECTION AND ILLEGALITY. . . . . . . . . . . . . . . . . 36 3.01 Taxes.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 3.02 Illegality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3.03 Inability to Determine Rates. . . . . . . . . . . . . . . . . . . . . 37 3.04 Increased Cost and Reduced Return; Capital Adequacy.. . . . . . . . . 37 3.05 Breakfunding Costs. . . . . . . . . . . . . . . . . . . . . . . . . . 38 3.06 Matters Applicable to all Requests for Compensation.. . . . . . . . . 38 3.07 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 4. CONDITIONS TO EFFECTIVENESS OF AGREEMENT AND EXTENSIONS OF CREDIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 4.01 Conditions of Initial Loans.. . . . . . . . . . . . . . . . . . . . . 39 4.02 Conditions to all Extensions of Credit. . . . . . . . . . . . . . . . 40 SECTION 5. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . 42 5.01 Corporate Existence and Power.. . . . . . . . . . . . . . . . . . . . 42 5.02 Corporate Authorization; No Contravention.. . . . . . . . . . . . . . 42 5.03 Binding Effect. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 5.04 Subsidiaries; Subsidiary Guarantors.. . . . . . . . . . . . . . . . . 42 5.05 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . 43 5.06 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 5.07 Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 5.08 Pending Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . 43 5.09 Title to Properties.. . . . . . . . . . . . . . . . . . . . . . . . . 44 -i- 5.10 Patents and Trademarks. . . . . . . . . . . . . . . . . . . . . . . . 44 5.11 Governmental Consent. . . . . . . . . . . . . . . . . . . . . . . . . 44 5.12 Taxes.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 5.13 Use of Proceeds.. . . . . . . . . . . . . . . . . . . . . . . . . . . 44 5.14 ERISA.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 5.15 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . . 45 5.16 Compliance with Environmental Laws. . . . . . . . . . . . . . . . . . 45 5.17 Regulated Entities. . . . . . . . . . . . . . . . . . . . . . . . . . 46 5.18 No Burdensome Restrictions. . . . . . . . . . . . . . . . . . . . . . 46 5.19 Labor Relations.. . . . . . . . . . . . . . . . . . . . . . . . . . . 46 5.20 Insurance.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 5.21 No Restrictions on Subsidiaries.. . . . . . . . . . . . . . . . . . . 46 5.22 Year 2000.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . 47 6.01 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . 47 6.02 Notices.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 6.03 Corporate Existence, Etc. . . . . . . . . . . . . . . . . . . . . . . 49 6.04 Insurance.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 6.05 Taxes, Claims for Labor and Materials, Compliance with Laws.. . . . . 50 6.06 Maintenance, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 50 6.07 Payment of Obligations. . . . . . . . . . . . . . . . . . . . . . . . 51 6.08 Environmental Laws. . . . . . . . . . . . . . . . . . . . . . . . . . 51 6.09 Inspection of Property and Books and Records. . . . . . . . . . . . . 51 6.10 Guaranties by New Domestic Subsidiaries.. . . . . . . . . . . . . . . 51 SECTION 7. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 51 7.01 Limitation on Liens.. . . . . . . . . . . . . . . . . . . . . . . . . 51 7.02 Limitations on Indebtedness.. . . . . . . . . . . . . . . . . . . . . 52 7.03 No Restrictions on Subsidiaries.. . . . . . . . . . . . . . . . . . . 53 7.04 Fundamental Changes.. . . . . . . . . . . . . . . . . . . . . . . . . 53 7.05 Dispositions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 7.06 Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 7.07 Operating Leases. . . . . . . . . . . . . . . . . . . . . . . . . . . 54 7.08 Loans and Investments.. . . . . . . . . . . . . . . . . . . . . . . . 55 7.09 Restricted Payments.. . . . . . . . . . . . . . . . . . . . . . . . . 55 7.10 Termination of Pension Plans. . . . . . . . . . . . . . . . . . . . . 56 7.11 Compliance with ERISA.. . . . . . . . . . . . . . . . . . . . . . . . 56 7.12 Capital Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . 56 7.13 Consolidated Net Worth. . . . . . . . . . . . . . . . . . . . . . . . 56 7.14 Leverage Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 7.15 Interest Coverage Ratio.. . . . . . . . . . . . . . . . . . . . . . . 57 7.16 Transactions with Affiliates. . . . . . . . . . . . . . . . . . . . . 57 7.17 Nature of Business. . . . . . . . . . . . . . . . . . . . . . . . . . 57 7.18 Accounting Changes. . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 8. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 8.01 Events of Default.. . . . . . . . . . . . . . . . . . . . . . . . . . 58 8.02 Remedies Upon Event of Default. . . . . . . . . . . . . . . . . . . . 60 SECTION 9. ADMINISTRATIVE AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . 61 -ii- 9.01 Appointment and Authorization of Administrative Agent.. . . . . . . . 61 9.02 Delegation of Duties. . . . . . . . . . . . . . . . . . . . . . . . . 62 9.03 Liability of Administrative Agent.. . . . . . . . . . . . . . . . . . 62 9.04 Reliance by Administrative Agent. . . . . . . . . . . . . . . . . . . 62 9.05 Notice of Default.. . . . . . . . . . . . . . . . . . . . . . . . . . 63 9.06 Credit Decision; Disclosure of Information by Administrative Agent.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 9.07 Indemnification of Administrative Agent.. . . . . . . . . . . . . . . 64 9.08 Administrative Agent in Individual Capacity.. . . . . . . . . . . . . 64 9.09 Successor Administrative Agent. . . . . . . . . . . . . . . . . . . . 64 SECTION 10. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 10.01 Amendments; Consents. . . . . . . . . . . . . . . . . . . . . . . . . 65 10.02 Transmission and Effectiveness of Notices and Signatures. . . . . . . 66 10.03 Attorney Costs, Expenses and Taxes. . . . . . . . . . . . . . . . . . 67 10.04 Binding Effect; Assignment. . . . . . . . . . . . . . . . . . . . . . 67 10.05 Set-off.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 10.06 Sharing of Payments.. . . . . . . . . . . . . . . . . . . . . . . . . 69 10.07 No Waiver; Cumulative Remedies. . . . . . . . . . . . . . . . . . . . 70 10.08 Usury.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 10.09 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 10.10 Integration.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 10.11 Nature of Lenders' Obligations. . . . . . . . . . . . . . . . . . . . 71 10.12 Survival of Representations and Warranties. . . . . . . . . . . . . . 71 10.13 Indemnity by Borrower.. . . . . . . . . . . . . . . . . . . . . . . . 71 10.14 Nonliability of Lenders.. . . . . . . . . . . . . . . . . . . . . . . 71 10.15 No Third Parties Benefited. . . . . . . . . . . . . . . . . . . . . . 72 10.16 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 10.17 Confidentiality.. . . . . . . . . . . . . . . . . . . . . . . . . . . 73 10.18 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . 73 10.19 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 10.20 Time of the Essence.. . . . . . . . . . . . . . . . . . . . . . . . . 73 10.21 Foreign Lenders and Participants. . . . . . . . . . . . . . . . . . . 73 10.22 Governing Law.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 10.23 Waiver of Right to Trial by Jury. . . . . . . . . . . . . . . . . . . 75 10.24 ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 75 10.25 Termination of Existing Syndicated Agreement. . . . . . . . . . . . . 75
-iii- EXHIBITS FORM OF: A Request for Extension of Credit B Compliance Certificate C Note D Notice of Assignment and Acceptance E Guaranty F Intercreditor Agreement SCHEDULES 2.01 Commitments and Pro Rata Shares 5.04 Subsidiaries as of Closing Date 5.06 Existing Indebtedness 5.08 Certain Litigation 5.12 Tax Assessments 5.14 Certain ERISA Matters 5.16 Environmental Liabilities 7.01 Existing Liens 7.08 Existing Investments 10.02 Offshore and Domestic Lending Offices, Addresses for Notices -iv- CREDIT AGREEMENT THIS CREDIT AGREEMENT (this "AGREEMENT") is dated as of December 21, 1999 and is entered into by and among K2 INC., a Delaware corporation ("BORROWER"), THE FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF (individually referred to herein as a "LENDER" and collectively as "LENDERS"), and BANK OF AMERICA, N.A. as Administrative Agent for Lenders ("ADMINISTRATIVE AGENT"). RECITAL Lenders and Administrative Agent have agreed to make available a revolving credit facility to Borrower upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: SECTION 1. DEFINITIONS. 1.01 CERTAIN DEFINED TERMS. The following terms used in this Agreement shall have the following meanings: "ACQUISITION" means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition of in excess of 50% of the capital stock, partnership interests or equity of any Person or otherwise causing any Person to become a Subsidiary of Borrower, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is a Subsidiary of Borrower) provided that Borrower or Borrower's Subsidiary is the surviving entity; PROVIDED, HOWEVER, that "Acquisition" shall not include any of the foregoing transactions between Borrower and any Subsidiary that is a Subsidiary Guarantor prior to such transaction or between companies that are Subsidiary Guarantors prior to such transaction; PROVIDED, FURTHER, that "Acquisition" shall not include Investments. "ADMINISTRATIVE AGENT" means Bank of America, N.A., in its capacity as administrative agent under any of the Loan Documents, or any successor administrative agent. "ADMINISTRATIVE AGENT'S OFFICE" means Administrative Agent's address and, as appropriate, account as set forth on SCHEDULE 10.02, or such other address or account as Administrative Agent hereafter may designate by written notice to Borrower and Lenders. "ADMINISTRATIVE AGENT-RELATED PERSONS" means Administrative Agent (including any successor agent), together with its Affiliates (including, in the case of Administrative Agent, the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. -1- "AFFILIATE" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, by contract or otherwise. Without limitation, any director, executive officer or beneficial owner of 5% or more of the equity of a Person shall for the purposes of this Agreement, be deemed to control such Person. "AGREEMENT" means this Credit Agreement, as it may hereafter be amended, supplemented, restated or otherwise modified from time to time. "APPLICABLE MARGIN" means, for any period, from and after the Closing Date, the amounts set forth in the following pricing grid:
OFFSHORE RATE LOANS ----------- FINANCIAL PERFORMANCE LETTER OF LETTER OF COMMITMENT LEVEL LEVERAGE RATIO CREDIT FEES CREDIT FEES FEE ----- -------------------------------------- ----------- ----------- ---------- 5 greater-than4.00:1 2.000% 1.000% 0.500% 4 less-than4.00:1 but greater-than3.50:1 1.750% 0.875% 0.375% 3 less-than3.50:1 but greater-than3.00:1 1.500% 0.750% 0.325% 2 less-than3.00:1 but greater-than2.50:1 1.250% 0.625% 0.275% 1 less-than2.50:1 1.000% 0.500% 0.225%
The Applicable Margin shall be based upon the Leverage Ratio set forth in the most recent Compliance Certificate delivered to Administrative Agent, and shall be effective during the Pricing Period (as defined in the chart below) applicable to such Compliance Certificate as indicated in the chart below. If Administrative Agent does not receive a Compliance Certificate by the date required by SECTION 6.01(F), the Applicable Margin shall, effective as of the first day of the Pricing Period that would be applicable, be the highest Level set forth above to but excluding the date Administrative Agent receives such Compliance Certificate. Thereafter, and for the remaining portion of the applicable Pricing Period, the Applicable Margin shall be that indicated by the Leverage Ratio in such late Compliance Certificate. The initial Applicable Margin shall be based on Level 5 from the Closing Date through and including December 31, 1999.
FOR COMPLIANCE CERTIFICATE RECEIVED IN RESPECT OF FISCAL PERIOD ENDING: THE APPLICABLE PRICING PERIOD IS: ----------------------------- --------------------------------- March 31 April 1 through next June 30 June 30 July 1 through next September 30 September 30 October 1 through next December 31 December 31 January 1 through next March 31
-2- "APPLICABLE PAYMENT DATE" means, (a) as to any Offshore Rate Loan, the last day of the relevant Interest Period and any date that such Loan is prepaid or converted in whole or in part and the Maturity Date; PROVIDED, HOWEVER, that if any Interest Period for an Offshore Rate Loan exceeds three months, interest shall also be paid on the date which falls every three months after the beginning of such Interest Period, and (b) as to any other Obligations, the last Business Day of each calendar quarter and the Maturity Date; PROVIDED, FURTHER, that interest accruing at the Default Rate shall be payable from time to time at any time upon demand of Administrative Agent. "ARRANGER" means Banc of America Securities LLC, in its capacity as sole arranger and sole book manager. "ATTORNEY COSTS" means and includes all reasonable fees and disbursements of any law firm or other external counsel and the allocated cost of internal legal services and all disbursements of internal counsel. "BANK OF AMERICA" means Bank of America, N.A. "BASE RATE" means a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its "prime rate." Such rate is a rate set by Bank of America based upon various factors including Bank of America's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change. "BASKET TOTAL DEBT" means Total Debt excluding Indebtedness permitted under SECTION 7.02(A), (B), (C) and (D). "BASE RATE LOAN" means a Loan which bears interest based on the Base Rate. "BORROWER" means K2 Inc. "BORROWER PARTY" means Borrower, each Subsidiary Guarantor or any Person other than Lenders and any Affiliates of Lenders, Administrative Agent, or Issuing Lender from time to time party to a Loan Document. "BORROWING" and "BORROW" each mean a borrowing hereunder consisting of Loans of the same type made on the same day and, in the case of Offshore Rate Loans, having the same Interest Periods. "BORROWING DATE" means the date that a Loan is made, which shall be a Business Day. "BUSINESS DAY" means any day other than a Saturday, Sunday, or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the state where Administrative Agent's Office is located and, if such day relates to any Offshore Rate -3- Loan, means any such day on which dealings in Dollar deposits are conducted by and between banks in the offshore Dollar interbank market. "CAPITAL EXPENDITURES" means any expenditure that is considered a capital expenditure under GAAP, including any amount which is required to be treated as an asset subject to a Capital Lease. "CAPITALIZED LEASES" means all leases which contain Capitalized Lease Obligations. "CAPITALIZED LEASE OBLIGATION" means any rental obligation which, under generally accepted accounting principles, is or will be required to be capitalized on the books of Borrower or any Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expense) in accordance with such principles. "CERCLA" has the meaning specified in the definition of "Environmental Laws." "CHANGE IN CONTROL" means each and every issue, sale or other disposition of shares of stock of the Borrower which results in any person (as such term is used in Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended) or related person constituting a group (as such term is used in Section 13d-5 of the Securities Exchange Act of 1934, as amended) (herein, an "ACQUIRING PERSON") becoming the "beneficial owners" (as such term is used in Section 13d-3 of the Securities Exchange Act of 1934 as in effect on the Closing Date), directly or indirectly, of more than 50% or more of the outstanding Voting Stock of Borrower. "CLOSING DATE" means the date on which this Agreement becomes effective and all the conditions in SECTION 4.01 are satisfied or waived. "CODE" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. "COMMERCIAL LETTER OF CREDIT" means a commercial Letter of Credit issued for the purpose of providing a payment mechanism in connection with the conduct of Borrower's or any of its Subsidiary's ordinary course of business. "COMMITMENT" means, for each Lender, the obligation of such Lender to make Extensions of Credit in an aggregate principal amount not exceeding the amount set forth opposite such Lender's name on SCHEDULE 2.01 at any one time outstanding, as such amount may be reduced or adjusted from time to time in accordance with this Agreement (collectively, the "COMBINED COMMITMENTS"). "COMPLIANCE CERTIFICATE" means a certificate in the form of EXHIBIT B, properly completed and signed by a Responsible Officer of Borrower. "CONSOLIDATED EBITDA" means, for the period of the four fiscal quarters ending on any date of determination (the "measurement period"), for Borrower and its Subsidiaries on a consolidated basis, an amount equal to (i) the sum of (a) Consolidated Net Income for such measurement period, (b) Consolidated Interest Expense for such measurement period, (c) the amount of taxes, based on or measured by income, used or included in the determination of such -4- Consolidated Net Income for such measurement period, (d) the amount of depreciation and amortization expense deducted in determining such Consolidated Net Income for such measurement period and (e) non-cash nonrecurring charges and expenses included in the determination of Consolidated Net Income for such measurement period to the extent relating to items originally purchased in periods prior to the measurement period; PROVIDED, HOWEVER, that charges and expenses related to inventory excluded from the determination of Consolidated EBITDA by this clause (e) shall not exceed $5,000,000 in any measurement period, LESS (ii) non-cash nonrecurring gains included in the determination of Consolidated Net Income for such measurement period to the extent relating to items originally purchased in periods prior to the measurement period; PROVIDED, FURTHER, that, with respect to the Acquisition of a Subsidiary within such measurement period which would have added at least $3,000,000 to Consolidated EBITDA had it been included in the calculation thereof for such measurement period, Borrower may also include items (i) and (ii) above for such Subsidiary for such measurement period in Consolidated EBITDA if Borrower has provided to Administrative Agent (who shall promptly deliver the same to all Lenders) (x) the most recent year-end audited financial statements for that Subsidiary (which audited statements must be as of a date occurring within five fiscal quarters prior to the date of such Acquisition (even if such date is prior to the measurement period and, therefore, such audited statements are not actually used in computing Consolidated EBITDA for such measurement period)) and (y) company-prepared financial statements for that Subsidiary for any portion of such measurement period to be included; PROVIDED, FURTHER, that the items in the foregoing proviso may only be included if the items set forth in the proviso to Consolidated Interest Expense relating to such Subsidiary are also included when determining any covenant hereunder. "CONSOLIDATED INTEREST EXPENSE" means, for the period of the four fiscal quarters ending on any date of determination (the "measurement period"), the sum, without duplication, of (a) total interest expense (including that portion attributable to Capitalized Leases in conformity with GAAP) of Borrower and its Subsidiaries for such measurement period on a consolidated basis and (b) fees, commissions and interest related to Permitted Accounts Receivable Financing Facilities for such measurement period; PROVIDED, HOWEVER, that, with respect to the Acquisition of a Subsidiary within such measurement period which would have added at least $3,000,000 to Consolidated EBITDA had it been included in the calculation thereof for such measurement period, Borrower may also include items (a) and (b) above for such Subsidiary for such measurement period in Consolidated Interest Expense if Borrower has provided to Administrative Agent (who shall promptly deliver the same to all Lenders) (i) the most recent year-end audited financial statements for that Subsidiary (which audited statements must be as of a date occurring within five fiscal quarters prior to the date of such Acquisition (even if such date is prior to the measurement period and, therefore, such audited statements are not actually used in computing Consolidated Interest Expense for such measurement period)) and (ii) company-prepared financial statements for that Subsidiary for any portion of such measurement period to be included. "CONSOLIDATED NET INCOME" means, for any period, the net income of Borrower and its Subsidiaries on a consolidated basis for such period, determined in accordance with GAAP, but excluding in any event: -5- (a) any extraordinary gains or losses as defined in APBO Nos. 11, 16 and 30 and FASB Statement No. 4; (b) net earnings and losses of any Subsidiary accrued prior to the date it became a Subsidiary; (c) net earnings and losses of any corporation (other than a Subsidiary), substantially all the assets of which have been acquired in any manner by Borrower or any Subsidiary, accrued by such corporation prior to the date of such Acquisition; (d) net earnings and losses of any corporation (other than a Subsidiary) with which Borrower or a Subsidiary shall have consolidated or which shall have merged into or with Borrower or a Subsidiary, accrued by such corporation prior to the date of such consolidation or merger; (e) net earnings of any business entity (other than a Subsidiary) in which Borrower or any Subsidiary has an ownership interest unless such net earnings shall have actually been received or are receivable by Borrower or such Subsidiary in the form of cash distributions; (f) any portion of the net earnings of any Subsidiary which for any reason is unavailable for payment of dividends to Borrower or any other Subsidiary except to the extent applied to the repayment of Indebtedness of such Subsidiary to Borrower or any other Subsidiary; (g) earnings or amortization resulting from any reappraisal, revaluation or write-up of assets (other than pursuant to any purchase accounting adjustments made to the book value of assets of an acquired Person in connection with an Acquisition); (h) to the extent not otherwise excluded pursuant to clause (a) above, any aggregate net gain (or any aggregate net loss) during such period arising from the sale, conversion, exchange or other disposition of capital assets (such term to include, without limitation (i) all noncurrent assets and, without duplication, (ii) the following, whether or not current: all fixed assets, whether tangible or intangible, all inventory sold in the conjunction with the disposition of fixed assets, and all securities); (i) any deferred or other credit or amortization thereof representing any excess of the equity in any Subsidiary at the date of Acquisition thereof over the amount invested in such Subsidiary; and (j) any gain arising from the acquisition of any securities of Borrower or any Subsidiary. "CONSOLIDATED NET WORTH" means, as of the date of any determination thereof, the total consolidated assets of Borrower and its Subsidiaries on a consolidated basis less the total liabilities of Borrower and its Subsidiaries on a consolidated basis determined in accordance with GAAP. -6- "CONSOLIDATED TANGIBLE NET WORTH" means at any date Consolidated Net Worth LESS the Intangible Assets of Borrower and its Subsidiaries on a consolidated basis, all determined as of such date. For purposes of this definition, "Intangible Assets" means the amount (to the extent reflected in determining such Consolidated Net Worth) of all unamortized debt discount and expense, unamortized deferred charges (other than deferred employee benefit liabilities), goodwill, patents, trademarks, service marks, trade names, copyrights, organization or development expenses and other intangible items. "CONSOLIDATED TOTAL ASSETS" mean, as of the date of any determination thereof, the total assets of Borrower and its Subsidiaries on a consolidated basis determined in accordance with GAAP. "CONTINUATION" and "CONTINUE" mean, with respect to any Offshore Rate Loan, the continuation of such Offshore Rate Loan as an Offshore Rate Loan on the last day of the Interest Period for such Loan. "CONTRACTUAL OBLIGATION," as applied to any Person, means any provision of any security issued by that Person or of any material indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject. "CONTROLLED GROUP" means Borrower and all Persons (whether or not incorporated) under common control or treated as a single employer with Borrower or any of its Subsidiaries pursuant to Section 414(b) or (c) of the Code. "CONVERSION" and "CONVERT" mean, with respect to any Loan, the conversion of such Loan from or into another type of Loan. "COVERED DISPOSITION" is any Disposition, the proceeds of which are used to make Investments otherwise permitted hereunder within 180 days from the date of such Disposition. "DEBTOR RELIEF LAWS" means the Bankruptcy Code of the United States of America, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States of America or other applicable jurisdictions from time to time in effect affecting the rights of creditors generally. "DEFAULT" means any event which, with the giving of notice, the lapse of time, or both, would constitute an Event of Default. "DEFAULT RATE" means an interest rate equal to the Base Rate PLUS the Applicable Margin, if any, applicable to Base Rate Loans PLUS 2% per annum, to the fullest extent permitted by applicable Laws; PROVIDED, HOWEVER, that with respect to an Offshore Rate Loan, the Default Rate shall be an interest rate equal to the interest rate (including any Applicable Margin) otherwise applicable to such Loan plus 2% per annum. -7- "DESIGNATED DEPOSIT ACCOUNT" means a deposit account to be maintained by Borrower with Bank of America, as from time to time designated by Borrower by written notification to Administrative Agent. "DISPOSITION" or "DISPOSE" means the sale, transfer, license or other disposition (including any sale and leaseback transaction) of any property by any Person, including any sale, assignment, transfer or other disposal with or without recourse of any notes or accounts receivable or any rights and claims associated therewith. "DOLLARS" means lawful money of the United States of America. "DOMESTIC LENDING OFFICE" means, with respect to each Lender, the office of that Lender designated as such on SCHEDULE 10.02 hereto or such other office of Lender as it may from time to time specify in writing to Borrower and Administrative Agent. "DOMESTIC SUBSIDIARIES" means those Subsidiaries of Borrower which are incorporated under the laws of any State of the United States and which are engaged in business primarily in the United States, other than Subsidiaries which are Subsidiaries of a Foreign Subsidiary. "ELIGIBLE ASSIGNEE" means (a) a financial institution organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development, or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the United States; (c) a Person that is primarily engaged in the business of commercial banking and that is (i) a Subsidiary of a Lender, (ii) a Subsidiary of a Person of which a Lender is a Subsidiary, or (iii) a Person of which a Lender is a Subsidiary; (d) another Lender; (e) any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Exchange Act of 1934, as amended) which extends credit or buys loans as one of its businesses, including but not limited to, insurance companies, mutual funds and lease financing companies; or (f) other lenders or institutional investors consented to in writing in advance by Administrative Agent and Borrower. No Borrower Party or any Affiliate of a Borrower Party shall be an Eligible Assignee. "ENVIRONMENTAL CLAIM" means all claims, however asserted, by any Governmental Authority or other Person alleging potential liability or responsibility for violation of any Environmental Law or for release or injury to the environment or otherwise alleging liability or responsibility for damages (punitive or otherwise), cleanup, removal, remedial or response costs, restitution, civil or criminal penalties, injunctive relief, or other type of relief, resulting from or based upon (a) the presence, placement, discharge, emission or release (including intentional and unintentional, negligent and non-negligent, sudden or non-sudden, accidental or non-accidental placement, spills, leaks, discharges, emissions or releases) of any Hazardous Material at, in or from property, whether or not owned by Borrower or any of its Subsidiaries, or (b) any other circumstances forming the basis of any violation, or alleged violation, of any Environmental Laws. -8- "ENVIRONMENTAL LAWS" means all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, matters; including the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Clean Air Act, the Federal Water Pollution Control Act of 1972, the Solid Waste Disposal Act, the Federal Resource Conservation and Recovery Act, the Toxic Substances Control Act, the Emergency Planning and Community Right-to-Know Act. "ERISA" means the Employee Retirement Income Security Act of 1974 and any regulation promulgated thereunder. "ERISA AFFILIATE" means any trade or business (whether or not incorporated) under common control with Borrower within the meaning of Sections 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA EVENT" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by Borrower or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by Borrower or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon Borrower or any ERISA Affiliate. "EVENT OF DEFAULT" means any of the events set forth in SECTION 8.01. "EXCHANGE ACT" means, at any time, the Securities Exchange Act of 1934, as amended from time to time, and any successor statute. "EXISTING SYNDICATED AGREEMENT" means that certain Credit Agreement dated as of May 21, 1996, as amended, among Borrower, the lenders party thereto, and Bank of America as agent for such lenders. "EXTENSION OF CREDIT" means (a) a Borrowing, Conversion or Continuation of Loans, (b) a Letter of Credit Action wherein a new Letter of Credit is issued or which has the effect of increasing the amount of, extending the maturity of, or making a material modification to an outstanding Letter of Credit or the reimbursement of drawings thereunder, (c) each Lender's purchase of a risk participation in a new Letter of Credit, or (d) each Lender's purchase of a risk participation in a Swing Line Loan made by Swing Line Lender (collectively, the "EXTENSIONS OF CREDIT"). -9- "FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded upwards to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank on the Business Day next succeeding such day; PROVIDED that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to Bank of America on such day on such transactions as determined by Administrative Agent. "FINANCIAL LETTER OF CREDIT" means any standby letter of credit covering the potential default of a financial contractual obligation, and includes without limitation all letters of credit required to be classified as such by the Federal Reserve Board or by the Office of the Comptroller of the Currency. "FINANCIAL LETTER OF CREDIT SUBLIMIT" means an amount equal to the lesser of the combined Commitments and $10,000,000. "FOREIGN SUBSIDIARIES" means those Subsidiaries of Borrower which are not Domestic Subsidiaries. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession, that are applicable to the circumstances as of the date of determination, consistently applied. If at any time any change in GAAP would affect the computation of any financial ratio or requirement set forth in any Loan Document, and either Borrower or the Requisite Lenders shall so request, Administrative Agent, Lenders and Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of reflect such change in GAAP (subject to the approval of the Requisite Lenders), provided that, until so amended, (a) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein and (b) Borrower shall provide to Administrative Agent, and Lenders financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP. "GOVERNMENTAL AUTHORITY" means any nation or government, any state or other political subdivision thereof, any central Lender (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "GUARANTY OBLIGATION" means, as to any Person, any (a) guaranty by that Person of Indebtedness of, or other obligation payable or performable by, any other Person or (b) assurance, agreement, letter of responsibility, letter of awareness, undertaking or arrangement given by that Person to an obligee of any other Person with respect to the payment or -10- performance of an obligation by, or the financial condition of, such other Person, whether direct, indirect or contingent, including any purchase or repurchase agreement covering such obligation or any collateral security therefor, any agreement to provide funds (by means of loans, capital contributions or otherwise) to such other Person, any agreement to support the solvency or level of any balance sheet item of such other Person or any "keep-well" or other arrangement of whatever nature given for the purpose of assuring or holding harmless such obligee against loss with respect to any obligation of such other Person; PROVIDED, HOWEVER, that the term Guaranty Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guaranty Obligation shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, covered by such Guaranty Obligation or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the Person in good faith. "HAZARDOUS MATERIALS" means all those substances which are regulated by, or which may form the basis of liability under, any Environmental Laws, including all substances identified under any Environmental Laws as a pollutant, contaminant, hazardous waste, hazardous constituent, special waste, hazardous substance, hazardous material, or toxic substance, or petroleum or petroleum derived substance or waste. "INDEBTEDNESS" means as to any Person at a particular time, all items which would, in conformity with GAAP, be classified as liabilities on a balance sheet of such Person as at such time (excluding trade and other accounts payable in the ordinary course of business in accordance with customary trade terms and which are not overdue for a period of more than 60 days and excluding deferred taxes), but in any event including, without duplication: (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (b) any direct or contingent obligations of such Person arising under letters of credit (including standby and commercial), banker's acceptances, bank guaranties, surety bonds and similar instruments; (c) net obligations under any Swap Contract in an amount equal to (i) if such Swap Contract has been closed out, the termination value thereof, or (ii) if such Swap Contract has not been closed out, the mark-to-market value thereof determined on the basis of readily available quotations provided by any recognized dealer in such Swap Contract; (d) whether or not so included as liabilities in accordance with GAAP, all obligations of such Person to pay the deferred purchase price of property or services, and indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; (e) lease payment obligations under Capitalized Leases or Synthetic Lease Obligations; and -11- (f) all Guaranty Obligations of such Person in respect of any of the foregoing. For all purposes of this Agreement, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person except for customary exceptions acceptable to the Requisite Lenders. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement substantially in the form of EXHIBIT F hereto, as amended, supplemented or otherwise modified from time to time. "INTEREST COVERAGE RATIO" means, as of any date of determination, the ratio of (a) Consolidated EBITDA for the period of the four prior fiscal quarters ending on such date TO (b) Consolidated Interest Expense during such period. "INTEREST PERIOD" means, for each Offshore Rate Loan as requested by Borrower, (a) initially, the period commencing on the date such Offshore Rate Loan is disbursed, Continued as, or Converted into, an Offshore Rate Loan and (b) thereafter, the period commencing on the last day of the preceding Interest Period, and ending, in each case, on the earlier of (x) the scheduled Maturity Date, or (y) one, two, three or six months thereafter; PROVIDED that: (i) any Interest Period 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 another calendar month, in which case such Interest Period shall end on the next preceding Business Day; (ii) any Interest Period which 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 end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) unless Administrative Agent otherwise consents, there may not be more than 10 Interest Periods in effect at any time. "INVESTMENTS" means all investments, in cash or by delivery of property made, directly or indirectly in any Person, whether by acquisition of shares of capital stock, indebtedness or other obligations or securities or by loan, advance, capital contribution or otherwise; PROVIDED, HOWEVER, that "Investments" shall not include Acquisitions. In valuing any Investments for purposes of this Agreement, such Investments shall be taken at the original cost thereof, without allowance for any subsequent write-offs or appreciation or depreciation therein, but less any amount repaid or recovered on account of capital or principal. "IRS" means the Internal Revenue Service. "ISSUING LENDER" means Bank of America, or any successor issuing lender hereunder. "K2 FUNDING" means K2 Funding, Inc., a Delaware corporation, which is a Subsidiary. -12- "LAWS" or "LAW" means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, in each case whether or not having the force of law. "LENDER" means each lender from time to time party hereto and, as the context requires, Swing Line Lender and Issuing Lender. "LENDING OFFICE" means, as to any Lender, the office or offices of such Lender described as such on SCHEDULE 10.02, or such other office or offices as a Lender may from time to time notify Administrative Agent. "LETTER OF CREDIT" means any letter of credit issued or outstanding hereunder. A Letter of Credit may be a Commercial Letter of Credit, a Performance Letter of Credit or a Financial Letter of Credit. "LETTER OF CREDIT ACTION" means the issuance, supplement, amendment, renewal, extension, modification or other action relating to a Letter of Credit. "LETTER OF CREDIT APPLICATION" means an application for a Letter of Credit Action as shall at any time be in use by Issuing Lender. "LETTER OF CREDIT CASH COLLATERAL ACCOUNT" means a blocked deposit account at Bank of America with respect to which Borrower hereby grants a security interest in such account to Administrative Agent for and on behalf of Lenders as security for Letter of Credit Usage and with respect to which Borrower agrees to execute and deliver from time to time such documentation as Administrative Agent may reasonably request to further assure and confirm such security interest. "LETTER OF CREDIT EXPIRATION DATE" means the date which is 30 days prior to the Maturity Date. "LETTER OF CREDIT USAGE" means, as at any date of determination, the aggregate undrawn face amount of outstanding Letters of Credit PLUS the aggregate amount of all drawings under the Letters of Credit honored by Issuing Lender and not reimbursed to Issuing Lender by Borrower or converted into Loans. "LEVERAGE RATIO" means, as of any date of determination, for Borrower and its Subsidiaries on a consolidated basis, the ratio of (a) Total Debt as of such date TO (b) Consolidated EBITDA for the period of the four fiscal quarters ending on that date. "LIEN" means any mortgage, pledge, hypothecation, assignment, deposit arrangement (in the nature of compensating balances, cash collateral accounts or security interests), encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of -13- the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable Laws of any jurisdiction), including the interest of a purchaser of accounts receivable. "LOAN" means any advance made by any Lender to Borrower as provided in SECTION 2 (collectively, the "LOANS"). "LOAN DOCUMENTS" means this Agreement, the Master Subsidiary Guaranty, the Intercreditor Agreement, any Letter of Credit Application, any Request for Extension of Credit and any Note, certificate, any fee letter, and other instrument, document or agreement from time to time delivered in connection with this Agreement. "MASTER SUBSIDIARY GUARANTY" means the continuing guaranty of the Obligations to be executed and delivered by the Subsidiary Guarantors, substantially in the form of EXHIBIT E, and any amendments or supplements thereto. "MATERIAL ADVERSE EFFECT" means (a) a material adverse effect upon the business, operations, properties, assets, business prospects or condition (financial or otherwise) of Borrower and its Subsidiaries, taken as a whole, or (b) a material impairment of the ability of any Borrower Party to perform the Obligations in any material respect or (c) a material adverse effect upon the legality, validity, binding effect or enforceability of any Loan Document. "MATURITY DATE" means September 30, 2004, as it may be earlier terminated or extended in accordance with the terms hereof. "MINIMUM AMOUNT" means, with respect to each of the following actions, the minimum amount and any multiples in excess thereof set forth opposite such action:
MULTIPLES IN EXCESS TYPE OF ACTION MINIMUM AMOUNT THEREOF --------------------- -------------- -------------------- Borrowing or prepayment of or Conversion into, Base Rate Loans $500,000 none Borrowing, prepayment, Continuation of, or Conversion into, Offshore Rate Loans $1,500,000 $500,000 Borrowing or prepayment of Swing Line Loans $500,000 $500,000 Letter of Credit Action $100,000 None Reduction in Commitments $10,000,000 $5,000,000 Assignments $5,000,000
-14- "MULTIEMPLOYER PLAN" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA which is maintained for employees of Borrower or any ERISA Affiliate of Borrower. "NEGATIVE PLEDGE" means a Contractual Obligation that restricts Liens on property. "NET ISSUANCE PROCEEDS" means, in respect of any issuance of equity, the cash proceeds and non-cash proceeds received or receivable in connection therewith, net of reasonable costs and expenses and underwriting discounts and commissions paid or incurred in connection therewith in favor of any Person not an Affiliate of Borrower. "NOTE" means a promissory note made by Borrower in favor of a Lender evidencing Loans made by such Lender, substantially in the form of EXHIBIT C (collectively, the "NOTES"). "NOTICE OF ASSIGNMENT AND ACCEPTANCE" means a Notice of Assignment and Acceptance substantially in the form of EXHIBIT D. "NOTICE OF LIEN" means any "notice of lien" or similar document intended to be filed or recorded with any court, registry, recorder's office, central filing office or Governmental Authority for the purpose of evidencing, creating, perfecting or preserving the priority of a Lien securing obligations owing to a Governmental Authority. "OBLIGATIONS" means all advances to, and debts, liabilities, obligations, covenants and duties of, any Borrower Party arising under any Loan Document, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and including interest that accrues after the commencement of any proceeding under any Debtor Relief Laws by or against any Borrower Party or any Subsidiary or Affiliate of any Borrower Party. "OFFSHORE BASE RATE" has the meaning set forth in the definition of Offshore Rate. "OFFSHORE RATE" means for any Interest Period with respect to any Offshore Rate Loan, a rate per annum determined by Administrative Agent pursuant to the following formula: OFFSHORE BASE RATE Offshore Rate = ------------------------------------ 1.00 - Eurodollar Reserve Percentage Where, "OFFSHORE BASE RATE" means, for such Interest Period: (a) the rate per annum (carried out to the fifth decimal place) equal to the rate determined by Administrative Agent to be the offered rate that appears on the page of the Telerate Screen that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or -15- (b) in the event the rate referenced in the preceding subsection (a) does not appear on such page or service or such page or service shall cease to be available, the rate per annum (carried out to the fifth decimal place) equal to the rate determined by Administrative Agent to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (c) in the event the rates referenced in the preceding subsections (a) and (b) are not available, the rate per annum determined by Administrative Agent as the rate of interest at which deposits in Dollars (for delivery on the first day of such Interest Period) in same day funds in the approximate amount of the applicable Offshore Rate Loan and with a term equivalent to such Interest Period would be offered by its London Branch to major banks in the offshore market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period. "EURODOLLAR RESERVE PERCENTAGE" means, for any day during any Interest Period, the reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day, whether or not applicable to any Lender, under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"). The Offshore Rate for each outstanding Offshore Rate Loan shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. "OFFSHORE RATE LOAN" means a Loan bearing interest based on the Offshore Rate. "OPERATING LEASE" means, as applied to any Person, any lease of property (whether real, personal or mixed) which is not a lease that would, in conformity with GAAP, be required to be accounted for as a capital lease on the balance sheet of that Person and excluding, in the case of Borrower or any of its Subsidiaries, any such lease under which Borrower or that Subsidiary is the lessor. "ORDINARY COURSE DISPOSITIONS" means: (a) Dispositions of obsolete or worn out property, whether now owned or hereafter acquired, in the ordinary course of business; (b) Dispositions of cash, cash equivalents, inventory and other property in the ordinary course of business; (c) Dispositions of property to the extent that such property is exchanged for credit against the purchase price of similar replacement property, or the proceeds of such sale are reasonably promptly applied to the purchase price of such replacement property or where Borrower or its Subsidiary determine in good faith that the failure to replace such equipment will not be detrimental to the business of Borrower or such Subsidiary; and -16- (d) Dispositions of assets or property by any Subsidiary of Borrower to Borrower or another wholly-owned Subsidiary of Borrower; PROVIDED, HOWEVER, that no such Disposition shall be for less than the fair market value of the property being disposed of. "ORDINARY COURSE INDEBTEDNESS" means: (a) intercompany Guaranty Obligations of Borrower or any of its Subsidiaries guarantying Indebtedness otherwise permitted hereunder of Borrower or any wholly-owned Subsidiary of Borrower; (b) Indebtedness arising from the honoring of a check, draft or similar instrument against insufficient funds; (c) Indebtedness of a Subsidiary to Borrower or to a wholly-owned Subsidiary; (d) Indebtedness of Borrower to a Subsidiary Guarantor; and (e) in connection with Letters of credit issued in the ordinary course of business. "ORDINARY COURSE INVESTMENTS" means Investments of Borrower and its Subsidiaries, consisting of: (a) Investments in and to Subsidiaries and Borrower and in any Person that is a Subsidiary after giving effect to such Investment; (b) Investments in commercial paper maturing in 270 days or less from the date of issuance which, at the time of acquisition by Borrower or its Subsidiaries, is accorded the highest rating by Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Service, Inc. ("MOODY'S") or other nationally recognized credit rating agency of similar standing; (c) Investments in direct obligations of the United States of America or any agency or instrumentality of the United States of America, the payment or guarantee of which constitutes a full faith and credit obligation of the United States of America, in either case, maturing in 12 months or less from the date of acquisition thereof; (d) Investments in certificates of deposit maturing within one year from the date of issuance thereof, issued by a bank or trust company organized under the laws of the United States or any state thereof, having capital, surplus and undivided profits aggregating at least $100,000,000 and whose long-term certificates of deposit are, at the time of acquisition thereof by Borrower or its Subsidiaries, rated A or better by S&P or A or better by Moody's; (e) receivables, including negotiable instruments and letters of credit in respect of which Borrower or its Subsidiaries is the beneficiary, arising from the sale of goods and services in the ordinary course of business of Borrower and its Subsidiaries; -17- (f) Investments in repurchase agreements or bankers acceptances, having terms of less than 30 days, with a United States bank or trust company meeting the requirements of paragraph (d) hereof, which Investments mature within one year and which are fully secured by obligations of the type described in paragraphs (c) and (d) hereof; and (g) Investments in offshore certificates of deposit maturing within one year from the date of issuance thereof, issued by a bank or trust company having capital, surplus and undivided profits aggregating at least $1,000,000,000 and whose long term offshore certificates of deposit are at the time of acquisition thereof by Borrower or its Subsidiaries, accorded a rating of A or better by S&P or Moody's. "ORDINARY COURSE LIENS" means: (a) Liens for property taxes and assessments or governmental charges or levies and Liens securing claims or demands of carriers, warehousemen, landlords, mechanics and materialmen, provided payment thereof is not at the time required by SECTION 6.05; (b) Liens of or resulting from any judgment or award the time for the appeal or petition for rehearing of which shall not have expired, or in respect of which Borrower or its Subsidiaries shall at any time in good faith be prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review shall have been secured; (c) Liens and Negative Pledges incidental to the conduct of business or the ownership of assets (including Liens and Negative Pledges in connection with worker's compensation, unemployment insurance and other like laws, warehouseman's and attorneys' liens and statutory landlords' liens) and Liens and Negative Pledges to secure the performance of bids, tenders or trade contracts or to secure statutory obligations, surety or appeal bonds or other Liens and Negative Pledges of like general nature incurred in the ordinary course of business and not in connection with the borrowing of money; provided in each case, the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate actions or proceedings; (d) survey exceptions or encumbrances, easements or reservations, or rights of others for rights-of-way, utilities and other similar purposes, or zoning or other restrictions as to the use of real properties, which are necessary for the conduct of the activities of Borrower and its Subsidiaries or which customarily exist on properties of corporations engaged in similar activities and similarly situated and which do not in any event materially impair their use in the operation of the business of Borrower and its Subsidiaries; and (e) Liens securing Indebtedness of a Subsidiary to Borrower or to another Subsidiary. "ORGANIZATION DOCUMENTS" means, (a) with respect to any corporation, the certificate or articles of incorporation and the bylaws; (b) with respect to any limited liability company, the articles of formation and operating agreement; and (c) with respect to any partnership, joint venture or other form of business entity, the partnership agreement and any agreement, filing or notice with respect thereto filed with the secretary of state of the state of its formation, in each case as amended from time to time. -18- "OUTSTANDING OBLIGATIONS" means, as of any date, and giving effect to making any Extensions of Credit requested on such date and all payments, repayments and prepayments made on such date, (a) when reference is made to all Lenders, the sum of (i) the aggregate outstanding principal amount of all Loans, and (ii) all Letter of Credit Usage, and (b) when reference is made to one Lender the sum of (i) the aggregate outstanding principal amount of all Loans (excluding, in the case of Swing Line Lender, Swing Line Loans) made by such Lender, (ii) such Lender's ratable participation in all Letter of Credit Usage, and (iii) such Lender's ratable participation in all outstanding Swing Line Loans. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PENSION PLAN" means any "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by Borrower or any ERISA Affiliates or to which Borrower or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five plan years. "PERFORMANCE LETTER OF CREDIT" means a standby Letter of Credit used directly or indirectly to cover bid, performance, advance and retention obligations, including, without limitation, Letters of Credit issued in favor of sureties who in connection therewith cover bid, performance and retention obligations. "PERMITTED ACCOUNTS RECEIVABLE FINANCING FACILITIES" means (a) a single facility not exceeding $75,000,000 in the aggregate involving the sale or discount of undivided ownership interests not exceeding $75,000,000 in domestic accounts receivable, and (b) a single facility not exceeding $20,000,000 in the aggregate involving the sale or discount of undivided ownership interests not exceeding $20,000,000 in foreign accounts receivable of Borrower and its Subsidiaries; PROVIDED, HOWEVER, that, in each case (x) such facility does not involve the creation of a Lien or Negative Pledge on any accounts receivable except to the extent of the undivided ownership interests in such accounts receivable so purportedly sold or discounted. "PERSON" means any individual, partnership, corporation (including a business trust), limited liability company, limited liability partnership, joint stock company, joint venture, trust, Lender, trust company, unincorporated association or other entity or a government or any agency or political subdivision thereof. "PLAN" means any employee benefit plan maintained or contributed to by a Borrower Party or by any trade or business (whether or not incorporated) under common control with a Borrower Party as defined in Section 4001(b) of ERISA and insured by the Pension Benefit Guaranty Corporation under Title IV of ERISA. "PRO RATA SHARE" means, with respect to each Lender, the percentage of the combined Commitments set forth opposite the name of that Lender on SCHEDULE 2.01, as such share may be adjusted pursuant to SECTION 2.12. -19- "REPORTABLE EVENT" means any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder, a withdrawal from a Plan described in Section 4063 of ERISA, or a cessation of operations described in Section 4062(e) of ERISA. "REQUEST FOR EXTENSION OF CREDIT" means, unless otherwise specified herein, (a) with respect to a Borrowing, Conversion or Continuance of Loans, a written request substantially in the form of EXHIBIT A, (b) with respect to a Letter of Credit Action, a Letter of Credit Application, and (c) with respect to a Swing Line Loan, any written or verbal notice acceptable to Swing Line Lender, in each case delivered by Requisite Notice. "REQUISITE LENDERS" means (a) as of any date of determination if the Commitments are then in effect, Lenders(excluding any Lenders not funding when required to so hereunder) having in the aggregate more than 50% of the combined Commitments then in effect and (b) as of any date of determination if the Commitments have then been terminated and there are Loans and/or Letter of Credit Usage outstanding, Lenders holding Loans and Letter of Credit Usage aggregating more than 50% of the aggregate outstanding principal amount of the Loans and Letter of Credit Usage. "REQUISITE NOTICE" means, unless otherwise provided herein, (a) irrevocable written notice to the intended recipient or (b) except with respect to Letter of Credit Actions (which must be in writing), irrevocable telephonic notice to the intended recipient, promptly followed by a written notice to such recipient. Such notices shall be (i) delivered to such recipient at the address or telephone number specified on SCHEDULE 10.02 or as otherwise designated by such recipient by Requisite Notice to each other party hereto, and (ii) if made by any Borrower Party, duly given or made by a Responsible Officer of such Borrower Party. Any written notice delivered in connection with any Loan Document shall be in the form, if any, prescribed in the applicable section hereof or thereof and may be delivered as provided in SECTION 10.02. Any notice sent by other than hardcopy shall be promptly confirmed by a telephone call to the recipient and, if requested by Administrative Agent, by a manually-signed hardcopy thereof. "REQUISITE TIME" means, with respect to any of the actions listed below, the time and date set forth below opposite such action (all times are local time (standard or daylight) as observed in the state where Administrative Agent's Office is located): -20-
TYPE OF ACTION TIME DATE OF ACTION --------------------------------- ------- --------------------- Delivery of Request for Extension of Credit for, or notice for - - Borrowing or prepayment of 8:30 a.m. Same date as such Borrowing, or Conversion into, Base prepayment or Conversion Rate Loans - - Borrowing, prepayment or 10:00 a.m. 3 Business Days prior to Continuation of, or such Borrowing, prepayment Conversion into, Offshore or Conversion Rate Loans - - Borrowing or prepayment of 1:00 p.m. Same date as such Borrowing Swing Line Loans or prepayment - - Letter of Credit Action 10:00 a.m. 2 Business Days prior to such action (OR SUCH LESSER TIME WHICH IS ACCEPTABLE TO ISSUING LENDER) - - Voluntary reduction in or 10:00 a.m. 3 Business Days prior to termination of Commitments such reduction or termination Payments by Lenders or Borrower to 11:00 a.m. On date payment is due Administrative Agent
"RESPONSIBLE OFFICER" means the President, any Senior Vice President, the Chief Financial Officer or the Treasurer of Borrower who in the normal performance of his or her duties would have knowledge of this Agreement and the provisions thereof. "RESTRICTED PAYMENTS" means: (a) the declaration or payment of any dividend by Borrower, either in cash or property, on any shares of the capital stock of any class of Borrower (except dividends or other distributions payable solely in shares of capital stock of Borrower); (b) the purchase, redemption or retirement by Borrower of any shares of the capital stock of any class of Borrower or any warrants, rights or options to purchase or acquire any shares of its capital stock, whether directly or indirectly, or through any Subsidiary; and (c) any other payment or distribution by Borrower in respect of its capital stock, either directly or indirectly or through any Subsidiary. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time, and any successor statute. "SENIOR NOTE AGREEMENTS" means (a) that certain Note Agreement dated as of October 15, 1992 among Borrower and the purchasers named in schedule 1 thereto, and (b) that certain Note Purchase Agreement dated as of December 1, 1999 among Borrower and the purchasers named in schedule A thereto, in each case as amended, supplemented or otherwise modified from time to time. -21- "SIMPLEX PRODUCTS DISPOSITION" means any sale or transfer of assets of the Simplex Products Division of Borrower or refinancing or recapitalization of the assets or operations of the Simplex Products Division, whether in the form of a sale of stock, borrowing, issuance of debt or equity securities or otherwise, as result of which (a) Borrower ceases to own directly substantially all of the assets of the Simplex Products Division, (b) Borrower ceases to be liable directly or indirectly for any Indebtedness or trade payables of the Simplex Products Division (other than pursuant to any indemnification provision for the benefit of the transferee of the assets of the Simplex Products Division or any affiliate of such transferee contained in the agreements memorializing such transaction), and (c) Borrower receives in such transaction, by way of sale proceeds, refinancing proceeds, dividend proceeds, proceeds of the issuance of securities or otherwise, at least $20,000,000 in cash. "SUBSIDIARY" means any corporation, association or other business entity of which more than 50% of the total voting power of shares of stock entitled to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more of the other Subsidiaries of that Person or a combination thereof. "SUBSIDIARY GUARANTORS" means each Person from time to time executing and delivering the Master Subsidiary Guaranty. "SWAP CONTRACT" means (a) any and all rate swap transactions, basis swaps, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, or (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., or any other master agreement (any such master agreement, together with any related schedules, as amended, restated, extended, supplemented or otherwise modified in writing from time to time, a "MASTER AGREEMENT"), including any such obligations or liabilities under any Master Agreement. "SWAP TERMINATION VALUE" means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a) the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include any Lender). "SWING LINE" means the revolving line of credit established by Swing Line Lender in favor of Borrower pursuant to SECTION 2.04. -22- "SWING LINE LENDER" means Bank of America, or any successor Swing Line Lender hereunder. "SWING LINE LOAN" means a loan which bears interest at a rate per annum equal to interest payable on a Base Rate Loan (plus the Applicable Margin, if any) and made by Swing Line Lender to Borrower under the Swing Line. "SWING LINE SUBLIMIT" means an amount equal to the lesser of (a) $7,500,000 and (b) the combined Commitments. "SYNTHETIC LEASE OBLIGATIONS" means all monetary obligations of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property creating obligations which do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the Indebtedness of such Person (without regard to accounting treatment). "TOTAL DEBT" of any Person means all (a) Indebtedness of such Person for borrowed money, (b) drawn, but unreimbursed letters of credit; (c) all Capitalized Lease Obligations of such Person, (d) Indebtedness in respect of Permitted Accounts Receivable Financing Facilities, and, without duplication, (e) all Guaranty Obligations of such Person with respect to the foregoing. "TYPE" of Loan means (a) a Base Rate Loan, (b) an Offshore Rate Loan and (c) a Swing Line Loan. "UNFUNDED PENSION LIABILITY" means the excess of a Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. "VOTING STOCK" means securities of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). 1.02 USE OF CERTAIN TERMS. (a) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto or thereto, unless otherwise defined therein. (b) As used herein, unless the context requires otherwise, the masculine, feminine and neuter genders and the singular and plural include one another. (c) The words "HEREIN" and "HEREUNDER" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The term "INCLUDING" is by way of example and not limitation. References herein to a Section, subsection or clause shall refer to the appropriate Section, subsection or clause in this Agreement. -23- (d) The term "or" is disjunctive; the term "and" is conjunctive. The term "shall" is mandatory; the term "may" is permissive. Masculine terms also apply to females; feminine terms also apply to males. 1.03 ACCOUNTING TERMS. All accounting terms not specifically or completely defined in this Agreement shall be construed in conformity with, and all financial data required to be submitted by this Agreement shall be prepared in conformity with, GAAP applied on a consistent basis, as in effect from time to time, applied in a manner consistent with that used in preparing the Audited Financial Statements, EXCEPT as otherwise specifically prescribed herein. 1.04 ROUNDING. Any financial ratios required to be maintained by Borrower pursuant to this Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed in this Agreement and rounding the result up or down to the nearest number (with a round-up if there is no nearest number) to the number of places by which such ratio is expressed in this Agreement. 1.05 EXHIBITS AND SCHEDULES. All exhibits and schedules to this Agreement, either as originally existing or as the same may from time to time be supplemented, modified or amended, are incorporated herein by this reference. A matter disclosed on any Schedule shall be deemed disclosed on all Schedules. 1.06 REFERENCES TO AGREEMENTS AND LAWS. Unless otherwise expressly provided herein, (a) references to agreements (including the Loan Documents) and other contractual instruments shall include all amendments and other modifications thereto (unless prohibited by any Loan Document), and (b) references to any statute or regulation shall include all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. SECTION 2. THE COMMITMENTS. 2.01 AMOUNTS AND TERMS OF COMMITMENTS. (a) Subject to the terms and conditions set forth in this Agreement, each Lender severally agrees to make, Convert and Continue Loans in Dollars until the Maturity Date as Borrower may from time to time request; PROVIDED, HOWEVER, that the Outstanding Obligations of each Lender shall not exceed such Lender's Commitment, and the aggregate principal amount of all outstanding Loans shall not at any time exceed the combined Commitments. Within the foregoing limits, and subject to the other terms and conditions hereof, Borrower may borrow, Convert, Continue, prepay and reborrow Loans as set forth herein without premium or penalty. (b) Loans made by each Lender shall be evidenced by one or more loan accounts or records maintained by such Lender in the ordinary course of business. Upon the request of any Lender made through Administrative Agent, such Lender's Loans may be evidenced by one or more Notes, instead of or in addition to loan accounts. Each such Lender may attach schedules -24- to its Note(s) and endorse thereon the date, amount and maturity of its Loans and payments with respect thereto. Such loan accounts, records or Notes shall be conclusive absent manifest error of the amount of such Loans and payments thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of Borrower to pay any amount owing with respect to the Loans. 2.02 BORROWINGS, CONVERSIONS AND CONTINUATIONS OF LOANS. (a) Borrower may irrevocably request a Borrowing, Conversion or Continuation of Loans in a Minimum Amount therefor by delivering a Request for Extension of Credit therefor by Requisite Notice to Administrative Agent not later than the Requisite Time therefor. All Borrowings, Conversions and Continuations shall constitute Base Rate Loans unless properly and timely otherwise designated as set forth in the prior sentence. (b) Following receipt of a Request for Extension of Credit, Administrative Agent shall promptly notify each Lender of its Pro Rata Share thereof by Requisite Notice. In the case of a Borrowing of Loans, each Lender shall make available the funds for its Loan to Administrative Agent at Administrative Agent's Office not later than the Requisite Time therefor on the Business Day specified in such Request for Extension of Credit. Upon satisfaction of the applicable conditions set forth in SECTION 4.02, all funds so received shall be made available to Borrower in like funds received. (c) Administrative Agent shall promptly notify Borrower and Lenders of the interest rate applicable to any Loan other than a Base Rate Loan upon determination of same. (d) Except as otherwise provided herein, an Offshore Rate Loan may be Continued or Converted only on the last day of the Interest Period for such Offshore Rate Loan. No Loans may be requested as, Converted into or Continued as Offshore Rate Loans during the existence of a Default or Event of Default. During the existence of a Default or Event of Default, the Requisite Lender may demand that any or all of the then outstanding Offshore Rate Loans be Converted immediately into Base Rate Loans. Such Conversion shall be effective upon notice to Borrower and shall continue so long as such Default or Event of Default continues to exist. (e) If a Loan is to be made on the same date that another Loan is due and payable, Borrower or Lenders, as the case may be, shall, unless Administrative Agent otherwise requests, make available to Administrative Agent the net amount of funds giving effect to both such Loans and the effect for purposes of this Agreement shall be the same as if separate transfers of funds had been made with respect to each such Loan. (f) The failure of any Lender to make any Loan on any date shall not relieve any other Lender of any obligation to make a Loan on such date, but no Lender shall be responsible for the failure of any other Lender to so make its Loan. 2.03 LETTERS OF CREDIT. (a) THE LETTER OF CREDIT SUBLIMIT. Subject to the terms and conditions hereof, at any time and from time to time from the Closing Date through the Letter of Credit Expiration -25- Date, Issuing Lender shall take such Letter of Credit Actions under the Commitments as Borrower may request; PROVIDED, HOWEVER, that (i) the Outstanding Obligations of each Lender shall not exceed such Lender's Commitment and the Outstanding Obligations of all Lenders shall not exceed the combined Commitments at any time, and (ii) the aggregate outstanding Letter of Credit Usage with respect to Financial Letters of Credit shall not exceed the Financial Letter of Credit Sublimit at any time. Subject to subsection (f) below, no Letter of Credit may expire more than 12 months after the date of its issuance or last renewal; PROVIDED, HOWEVER, that no Letter of Credit shall expire after the Letter of Credit Expiration Date. If any Letter of Credit Usage remains outstanding after the Letter of Credit Expiration Date, Borrower shall, not later than the Letter of Credit Expiration Date, deposit cash in an amount equal to such Letter of Credit Usage in a Letter of Credit Cash Collateral Account. (b) REQUESTING LETTER OF CREDIT ACTIONS. Borrower may irrevocably request a Letter of Credit Action in a Minimum Amount therefor by delivering a Letter of Credit Application therefor to Issuing Lender, with a copy to Administrative Agent (who shall notify Lenders), by Requisite Notice not later than the Requisite Time therefor. Each Letter of Credit Action shall be in a form acceptable to Issuing Lender in its sole discretion. Unless Administrative Agent notifies Issuing Lender that such Letter of Credit Action is not permitted hereunder, or Issuing Lender notifies Administrative Agent that it has determined that such Letter of Credit Action is contrary to any Laws or policies of Issuing Lender, Issuing Lender shall, upon satisfaction of the applicable conditions set forth in SECTION 4.02 with respect to any Letter of Credit Action constituting an Extension of Credit, effect such Letter of Credit Action. This Agreement shall control in the event of any conflict with any Letter of Credit Application. Upon the issuance of a Letter of Credit, each Lender shall be deemed to have purchased from Issuing Lender a risk participation therein in an amount equal to that Lender's Pro Rata Share TIMES the amount of such Letter of Credit Usage. (c) REIMBURSEMENT OF PAYMENTS UNDER LETTERS OF CREDIT. Borrower shall reimburse Issuing Lender through Administrative Agent for any payment that Issuing Lender makes under a Letter of Credit on or before the date of such payment; PROVIDED, HOWEVER, that if the conditions precedent set forth in SECTION 4 can be satisfied, Borrower may request a Borrowing of Loans to reimburse Issuing Lender for such payment on or before the date thereof by complying with SECTION 2.02, or Borrower may allow a deemed Borrowing of Loans which are Base Rate Loans to take place on such payment date pursuant to subsection (e) below. (d) FUNDING BY LENDERS WHEN ISSUING LENDER NOT REIMBURSED. Upon any drawing under a Letter of Credit, Issuing Lender shall notify Administrative Agent and Borrower. If Borrower fails to timely make the payment required pursuant to subsection (c) above, Issuing Lender shall notify Administrative Agent of such fact and the amount of such unreimbursed payment. Administrative Agent shall promptly notify each Lender of its Pro Rata Share of such amount by Requisite Notice. Each Lender shall make funds in an amount equal its Pro Rata Share of such unreimbursed payment available to Administrative Agent at Administrative Agent's Office not later than the Requisite Time on the Business Day specified by Administrative Agent, and Administrative Agent shall remit the funds so received to reimburse Issuing Lender. The obligation of each Lender to so reimburse Issuing Lender shall be absolute and unconditional and shall not be affected by the occurrence of an Event of Default or -26- any other occurrence or event. Any such reimbursement shall not relieve or otherwise impair the obligation of Borrower to reimburse Issuing Lender for the amount of any payment made by Issuing Lender under any Letter of Credit, together with interest as provided herein. (e) NATURE OF LENDERS' FUNDING. If the conditions precedent set forth in SECTION 4.02 can be satisfied (except for the giving of a Request for Extension of Credit) on any date Borrower is obligated to, but fails to, reimburse Issuing Lender for a drawing under a Letter of Credit, the funding by Lenders pursuant to the previous subsection shall be deemed to be a Borrowing of Base Rate Loans (without regard to the Minimum Amount therefor) deemed requested by Borrower. If the conditions precedent set forth in SECTION 4.02 cannot be satisfied on the date Borrower is obligated to, but fails to, reimburse Issuing Lender for a drawing under a Letter of Credit, the funding by Lenders pursuant to the previous subsection shall be deemed to be a funding by each Lender of its risk participation in such Letter of Credit, and each Lender making such funding shall thereupon acquire a pro rata participation, to the extent of its reimbursement, in the claim of Issuing Lender against Borrower in respect of such payment and shall share, in accordance with that pro rata participation, in any payment made by Borrower with respect to such claim. Any amounts made available by a Lender under its risk participation shall be payable by Borrower upon demand of Administrative Agent, and shall bear interest at a rate per annum equal to the Default Rate. (f) SPECIAL PROVISIONS RELATING TO EVERGREEN LETTERS OF CREDIT. Borrower may request Letters of Credit that have automatic extension or renewal provisions ("evergreen" Letters of Credit) so long as Issuing Lender consents in its sole and absolute discretion thereto and has the right to not permit any such extension or renewal at least annually within a notice period to be agreed upon at the time each such Letter of Credit is issued. Once an evergreen Letter of Credit is issued, unless Administrative Agent has notified Issuing Lender that Requisite Lenders have elected not to permit such extension or renewal, the Borrower Parties, Administrative Agent and Lenders shall be deemed to have authorized (but may not require) Issuing Lender to, in its sole and absolute discretion, permit the renewal of such evergreen Letter of Credit at any time to a date not later than the Letter of Credit Expiration Date, and, unless directed by Issuing Lender, Borrower shall not be required to request such extension or renewal. Issuing Lender may, in its sole and absolute discretion elect not to permit an evergreen Letter of Credit to be extended or renewed at any time. (G) OBLIGATIONS ABSOLUTE. The obligation of Borrower to pay to Issuing Lender the amount of any payment made by Issuing Lender under any Letter of Credit shall be absolute, unconditional, and irrevocable. Without limiting the foregoing or limiting Borrower's rights to pursue such rights and remedies as it may have against Issuing Lender, Administrative Agent or any Lender or beneficiaries of a Letter of Credit, Borrower's obligation shall not be affected by any of the following circumstances: (i) any lack of validity or enforceability of the Letter of Credit, this Agreement, or any other agreement or instrument relating thereto; (ii) any amendment or waiver of or any consent to departure from the Letter of Credit, this Agreement, or any other agreement or instrument relating thereto; -27- (iii) the existence of any claim, setoff, defense, or other rights which Borrower may have at any time against Issuing Lender, Administrative Agent or any Lender, any beneficiary of the Letter of Credit (or any persons or entities for whom any such beneficiary may be acting) or any other Person, whether in connection with the Letter of Credit, this Agreement, or any other agreement or instrument relating thereto, or any unrelated transactions; (iv) any demand, statement, or any other document presented under the 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 whatsoever so long as any such document appeared to comply with the terms of the Letter of Credit; (v) payment by Issuing Lender in good faith under the Letter of Credit against presentation of a draft or any accompanying document which does not strictly comply with the terms of the Letter of Credit; or any payment made by Issuing Lender under any Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of any Letter of Credit, including any arising in connection with any proceeding under any Debtor Relief Laws; (vi) the existence, character, quality, quantity, condition, packing, value or delivery of any property purported to be represented by documents presented in connection with any Letter of Credit or for any difference between any such property and the character, quality, quantity, condition, or value of such property as described in such documents; (vii) the time, place, manner, order or contents of shipments or deliveries of property as described in documents presented in connection with any Letter of Credit or the existence, nature and extent of any insurance relative thereto; (viii) the solvency or financial responsibility of any party issuing any documents in connection with a Letter of Credit; (ix) any failure or delay in notice of shipments or arrival of any property; (x) any error in the transmission of any message relating to a Letter of Credit not caused by Issuing Lender, or any delay or interruption in any such message; (xi) any error, neglect or default of any correspondent of Issuing Lender in connection with a Letter of Credit; (xii) any consequence arising from acts of God, wars, insurrections, civil unrest, disturbances, labor disputes, emergency conditions or other causes beyond the control of Issuing Lender; (xiii) so long as Issuing Lender in good faith determines that the document appears to comply with the terms of the Letter of Credit, the form, accuracy, genuineness -28- or legal effect of any contract or document referred to in any document submitted to Issuing Lender in connection with a Letter of Credit; and (xiv) where Issuing Lender has acted in good faith under any other circumstances whatsoever. In addition, Borrower will promptly examine a copy of each Letter of Credit and amendments thereto delivered to it and, in the event of any claim of noncompliance with Borrower's instructions or other irregularity, Borrower will immediately notify Issuing Lender in writing. Borrower shall be conclusively deemed to have waived any such claim against Issuing Lender and its correspondents unless such notice is given as aforesaid. (h) ROLE OF ISSUING LENDER. Each Lender and Borrower Parties agree that, in paying any drawing under a Letter of Credit, Issuing Lender shall not have any responsibility to obtain any document (other than any sight draft, certificates and documents expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document. No Administrative Agent-Related Person nor any of the respective correspondents, participants or assignees of Issuing Lender shall be liable to any Lender for any action taken or omitted in connection herewith at the request or with the approval of Lenders or the Requisite Lenders, as applicable; any action taken or omitted in the absence of gross negligence or willful misconduct; or the due execution, effectiveness, validity or enforceability of any document or instrument related to any Letter of Credit. Borrower hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; PROVIDED, HOWEVER, that this assumption is not intended to, and shall not, preclude Borrower's pursuing such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement. No Administrative Agent-Related Person, nor any of the respective correspondents, participants or assignees of Issuing Lender, shall be liable or responsible for any of the matters described in subsection (g) above. In furtherance and not in limitation of the foregoing, Issuing Lender may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary, and Issuing Lender shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason. (i) APPLICABILITY OF ISP98 AND UCP. Unless otherwise expressly agreed by the Issuing Lender and Borrower when a Letter of Credit is issued, performance under Letters of Credit by the Issuing Lender, its correspondents, and beneficiaries will be governed by (i) with respect to standby Letters of Credit, the rules of the "International Standby Practices 1998" (ISP98) or such later revision as may be published by the International Chamber of Commerce (the "ICC"), and (ii) with respect to commercial Letters of Credit, the rules of the Uniform Customs and Practice for Documentary Credits, as published in its most recent version by the ICC on the date any commercial Letter of Credit is issued. (j) LETTER OF CREDIT FEES. On each Applicable Payment Date, Borrower shall pay to Administrative Agent in arrears, for the account of each Lender in accordance with its Pro Rata Share, a Letter of Credit fee equal to the indicated Applicable Margin for the type of Letters of -29- Credit in each case such fee to be MULTIPLIED BY the actual daily maximum amount available to be drawn under each such Letter of Credit since the later of the Closing Date and the previous Applicable Payment Date. If there is any change in the Applicable Margin during any quarter, the actual daily amount shall be computed and multiplied by the Applicable Margin separately for each period during such quarter that such Applicable Margin was in effect. In addition, Borrower shall pay directly to Issuing Lender for its account a fronting fee in an amount (i) with respect to Performance Letters of Credit and Financial Letters of Credit, equal to 1/8 of 1% per annum on the daily average face amount thereof, payable quarterly in arrears on each Applicable Payment Date, and (ii) with respect to Commercial Letters of Credit, equal to the greater of (A) $400 and (B) 1/8 of 1% of the face amount thereof, payable upon the issuance thereof. (k) DOCUMENTARY AND PROCESSING CHARGES PAYABLE TO ISSUING LENDER. Borrower shall pay directly to Issuing Lender for its sole account its customary documentary and processing charges in accordance with its standard schedule, as from time to time in effect, for any Letter of Credit Action or other occurrence relating to a Letter of Credit for which such charges are customarily made. Such fees and charges are nonrefundable. 2.04 THE SWING LINE. (a) Subject to the terms and conditions set forth in this Agreement, Swing Line Lender agrees to make Swing Line Loans to Borrower until the Maturity Date in such amounts as Borrower may from time to time request; PROVIDED, HOWEVER, that (i) the aggregate principal amount of all Swing Line Loans shall not exceed the Swing Line Sublimit, and (ii) the Outstanding Obligations of each Lender shall not exceed such Lender's Commitment and the Outstanding Obligations of all Lenders shall not exceed the combined Commitments at any time. This is a revolving credit and, subject to the foregoing and the other terms and conditions hereof, Borrower may borrow, prepay and reborrow Swing Line Loans as set forth herein without premium or penalty; PROVIDED, HOWEVER, that Swing Line Lender may terminate or suspend the Swing Line at any time in its sole discretion upon at least 24 hours Requisite Notice to Borrower. Each Swing Line Loan shall be a Base Rate Loan. (b) Unless notified to the contrary by Swing Line Lender, Borrower may irrevocably request a Swing Line Loan in the Minimum Amount therefor upon Requisite Notice to Swing Line Lender not later than the Requisite Time therefor. Each such request for a Swing Line Loan shall constitute a representation and warranty by Borrower that the conditions set forth in SECTIONS 4.02(A) and (B) are satisfied. Promptly after receipt of such request, Swing Line Lender shall obtain telephonic verification from Administrative Agent that such Swing Line Loan is permitted hereunder. Upon receiving such verification, Swing Line Lender shall make such Swing Line Loan available to Borrower. Without the consent of Requisite Lenders and Swing Line Lender, no Swing Line Loan shall be made during the continuation of a Default or Event of Default. Upon the making of each Swing Line Loan, each Lender shall be deemed to have purchased from Swing Line Lender a risk participation therein in an amount equal to that Lender's Pro Rata Share TIMES the amount of the Swing Line Loan. (c) Each Swing Line Loan shall bear interest at a fluctuating rate per annum equal to the rate of interest payable on Base Rate Loans (plus the Applicable Margin, if any) upon demand of Swing Line Lender and on the Maturity Date. Swing Line Lender shall be -30- responsible for invoicing Borrower (or notifying Administrative Agent to so invoice Borrower) for such interest. The interest payable on Swing Line Loans is solely for the account of Swing Line Lender. (d) Borrower shall repay each Swing Line Loan not later than the Requisite Time for payments hereunder on the earliest of (i) the fifth Business Day after it is made, (ii) upon demand made by Swing Line Lender and (iii) the Maturity Date. If the conditions precedent set forth in SECTION 4.02 can be satisfied, Borrower may request a Borrowing of Loans to repay Swing Line Lender pursuant to SECTION 2.02 or, failing to make such request, Borrower shall be deemed to have requested a Borrowing of Base Rate Loans (without regard to the Minimum Amount therefor) on such payment date in a principal amount equal to such payment. Swing Line Lender shall promptly notify Administrative Agent of each Swing Line Loan and each payment thereof. (e) If Swing Line Lender does not timely receive (by payment, a Borrowing or a deemed Borrowing) any payment of principal of or interest on any Swing Line Loan, Swing Line Lender shall notify Administrative Agent of such fact and the unpaid amount. Administrative Agent shall promptly notify each Lender of its Pro Rata Share of such amount by Requisite Notice. Each Lender shall make funds in an amount equal its Pro Rata Share of such amount available to Administrative Agent at Administrative Agent's Office not later than the Requisite Time for payments hereunder on the following Business Day. The obligation of each Lender to make such payment shall be absolute and unconditional and shall not be affected by the occurrence of an Event of Default or any other occurrence or event. Each Lender's payment shall be deemed to be a funding of such Lender's participation in such Swing Line Loan, and each Lender making such funding shall thereupon acquire a pro rata participation, to the extent of its payment, in the claim of Swing Line Lender against Borrower in respect of such payment and shall share, in accordance with that pro rata participation, in any payment made by Borrower with respect to such claim. Any amounts made available by a Lender under its risk participation shall not relieve or otherwise impair the obligation of Borrower to repay Swing Line Lender for any amount of Swing Line Loans, together with interest as provided herein, and such amounts made available shall be payable by Borrower upon demand of Administrative Agent, and shall bear interest at a rate per annum equal to the Default Rate. 2.05 PREPAYMENTS. (a) Upon Requisite Notice to Administrative Agent not later than the Requisite Time therefor, Borrower may at any time and from time to time voluntarily prepay Loans in part in the Minimum Amount therefor or in full without premium or penalty. Administrative Agent will promptly notify each Lender thereof and of such Lender's Pro Rata Share of such prepayment. Any prepayment of an Offshore Rate Loan shall be accompanied by all accrued interest thereon, together with the costs set forth in SECTION 3.05. (b) If for any reason the Outstanding Obligations exceed the combined Commitments as in effect or as reduced or because of any limitation set forth in this Agreement or otherwise, Borrower shall immediately prepay Loans and/or deposit cash in a Letter of Credit Cash Collateral Account in an aggregate amount equal to such excess. 2.06 REDUCTION OR TERMINATION OF COMMITMENTS. -31- (a) Upon Requisite Notice to Administrative Agent not later than the Requisite Time therefor, Borrower may at any time and from time to time, without premium or penalty, permanently and irrevocably reduce the Commitments in a Minimum Amount therefor to an amount not less than the Outstanding Obligations at such time or terminate the Commitments. Any such reduction or termination shall be accompanied by payment of all accrued and unpaid commitment fees with respect to the portion of the Commitments being reduced or terminated. Administrative Agent shall promptly notify Lenders of any such request for reduction or termination of the Commitments. Each Lender's Commitment shall be reduced by an amount equal to such Lender's Pro Rata Share TIMES the amount of such reduction. 2.07 PRINCIPAL AND INTEREST. (a) If not sooner paid, Borrower agrees to pay the outstanding principal amount of each Loan on the Maturity Date. (b) Subject to subsection (c) below, Borrower shall pay interest on the unpaid principal amount of each Loan (before and after default, before and after maturity, before and after judgment, and before and after the commencement of any proceeding under any Debtor Relief Laws) from the date borrowed until paid in full (whether by acceleration or otherwise) on each Applicable Payment Date at a rate per annum equal to the interest rate determined in accordance with the definition of such type of Loan, PLUS, to the extent applicable in each case, the Applicable Margin. (c) If any amount payable by any Borrower Party under any Loan Document is not paid when due (without regard to any applicable grace periods), it shall thereafter bear interest (after as well as before entry of judgment thereon to the extent permitted by law) at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Law. Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be payable upon demand. 2.08 FEES. (a) COMMITMENT FEE. Borrower shall pay to Administrative Agent, for the ratable accounts of Lenders pro rata according to their Pro Rata Share, a commitment fee equal to the Applicable Margin TIMES the actual daily amount by which the combined Commitments exceed the sum of all Outstanding Obligations (excluding Swing Line Loans). The commitment fee shall accrue at all times from the Closing Date until the Maturity Date and shall be payable quarterly in arrears on each Applicable Payment Date and on the Maturity Date. The commitment fee shall be calculated quarterly in arrears; if there is any change in the Applicable Margin during any quarter, the actual daily amount shall be computed and multiplied by the Applicable Margin separately for each period that such Applicable Margin was in effect during such quarter. The commitment fee shall accrue at all times, including at any time during which one or more conditions in SECTION 4 are not met. (b) AGENCY FEES. Borrower shall pay to Administrative Agent an agency fee in such amounts and at such times as set forth in separate letter agreement between Borrower and Administrative Agent. The agency fee is for the services to be performed by Administrative -32- Agent in acting as Administrative Agent and is fully earned on the date paid. The agency fee paid to Administrative Agent is solely for its own account and is nonrefundable. (c) ARRANGEMENT FEE. On the Closing Date, Borrower shall pay to the Arranger an arrangement fee in the amount set forth in separate a separate letter agreement between Borrower and the Arranger. Such arrangement fee is for the services of the Arranger in arranging the credit facilities under this Agreement and is fully earned on the date paid. The arrangement fee paid to the Arranger is solely for its own account and is nonrefundable. (d) PARTICIPATION FEE. On the Closing Date, Borrower shall pay to each Lender an upfront participation fee in the amount set forth in separate letter agreement between Borrower and Administrative Agent. Such upfront fee is fully earned on the date paid. The participation fee paid to each Lender is solely for its own account and is nonrefundable. 2.09 COMPUTATION OF FEES AND INTEREST. All computations of interest payable in respect of Base Rate Loans shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All computations of interest payable in respect of Offshore Rate Loans and all fees shall be made on the basis of a 360 day year and actual days elapsed, which results in more interest being paid than if computed on the basis of a 365-day year. Interest and fees shall accrue during each period during which interest or such fees are computed from, and including, the first day thereof to, but excluding, the last day thereof. 2.10 MAKING PAYMENTS. (a) Except as otherwise provided herein, all payments by Borrower or any Lender hereunder shall be made to Administrative Agent at Administrative Agent's Office not later than the Requisite Time for such type of payment. All payments received after such Requisite Time shall be deemed received on the next succeeding Business Day. Except as otherwise provided herein, all payments shall be made in immediately available funds in lawful money of the United States of America. All payments by Borrower shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff. (b) Upon satisfaction of any applicable terms and conditions set forth herein, Administrative Agent shall promptly make any amounts received in accordance with the prior subsection available in like funds received as follows: (i) if payable to Borrower, by crediting the Designated Deposit Account, and (ii) if payable to any Lender, by wire transfer to such Lender at its Lending Office. If such conditions are not so satisfied, Administrative Agent shall return any funds it is holding to the Lenders making such funds available, without interest. (c) Subject to the definition of "Interest Period," if any payment to be made by any Borrower Party shall come due on a day other than a Business Day, payment shall instead be considered due on the next succeeding Business Day, and such extension of time shall be reflected in computing interest and fees. (d) Unless Borrower or any Lender has notified Administrative Agent prior to the date any payment to be made by it is due, that it does not intend to remit such payment, Administrative Agent may, in its sole and absolute discretion, assume that Borrower or Lender, -33- as the case may be, has timely remitted such payment and may, in its sole and absolute discretion and in reliance thereon, make available such payment to the Person entitled thereto. If such payment was not in fact remitted to Administrative Agent in immediately available funds, then: (i) if Borrower failed to make such payment, each Lender shall forthwith on demand repay to Administrative Agent the amount of such assumed payment made available to such Lender, together with interest thereon in respect of each day from and including the date such amount was made available by Administrative Agent to such Lender to the date such amount is repaid to Administrative Agent at the Federal Funds Rate; and (ii) if any Lender failed to make such payment, Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender. If such Lender does not pay such corresponding amount forthwith upon Administrative Agent's demand therefor, Administrative Agent promptly shall notify Borrower, and Borrower shall pay such corresponding amount to Administrative Agent. Administrative Agent also shall be entitled to recover from such Lender interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by Administrative Agent to Borrower to the date such corresponding amount is recovered by Administrative Agent, (A) from such Lender at a rate per annum equal to the daily Federal Funds Rate. and (B) from Borrower, at a rate per annum equal to the interest rate applicable to such Borrowing. Nothing herein shall be deemed to relieve any Lender from its obligation to fulfill its Commitment or to prejudice any rights which Administrative Agent or Borrower may have against any Lender as a result of any default by such Lender hereunder. (e) If Administrative Agent or any Lender is required at any time to return to Borrower, or to a trustee, receiver, liquidator, custodian, or any official under any proceeding under Debtor Relief Laws, any portion of a payments made by Borrower, each Lender shall, on demand of Administrative Agent, return its share of the amount to be returned, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to the daily Federal Funds Rate. 2.11 FUNDING SOURCES. Nothing in this Agreement shall be deemed to obligate any Lender to obtain the funds for any Loan in any particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for any Loan in any particular place or manner. 2.12 INCREASE IN COMMITMENTS. (a) Borrower may from time to time (but no more often than once in every 12 months) request an increase in the combined Commitments up to an aggregate of $100,000,000 upon Requisite Notice to Administrative Agent. Such request shall include a certificate signed by a Responsible Officer stating that (i) the representations and warranties contained in SECTION 5 are true and correct on and as of the date of such certificate, and (ii) no Default or Event of Default exists. Administrative Agent shall promptly notify each Lender of such request. Each Lender shall, within 15 Business days of such notice, notify Administrative -34- Agent by Requisite Notice whether (x) it agrees to increase its Commitment by an amount less than or equal to its Pro Rata Share of such requested increase, or (y) it does not agree to any increase in its Commitment. Any Lender not responding within the above time period shall be deemed to have elected not to increase its Commitment. Administrative Agent shall, after receiving the notifications from all of Lenders or the expiration of such period, whichever is earlier, notify Borrower and Lenders of the results thereof. (b) If any Lender declines, or is deemed to have declined, to participate in any such increase to the full extent of its Pro Rata Share thereof (a "DECLINING LENDER"), Borrower may request, through Administrative Agent, that one or more other Lenders, in their sole discretion, provide Commitment(s) equal to such shortfall, If any shortfall remains after all existing Lenders have declined or been deemed to have declined, Borrower may then request, through Administrative Agent, that one or more Eligible Assignees, in their sole discretion, provide Commitment(s) equal to the remaining shortfall; PROVIDED, HOWEVER, that the Commitment of any Eligible Assignee shall not be less than any existing Lender's Commitment before giving effect to any increase in the Commitments contemplated hereby. No existing Lender's Commitment may be reduced without its consent to facilitate the prior proviso. Administrative Agent and Borrower shall thereafter determine the final, revised Commitment allocations and determine an effective date therefor (the "INCREASE EFFECTIVE DATE"). Administrative Agent shall promptly notify Lenders of such revised Commitment allocations and the Increase Effective Date. This section shall supercede any provisions in SECTION 10.02 to the contrary. (c) On or prior to the Increase Effective Date, Borrower shall deliver to Administrative Agent, in form and substance satisfactory to Administrative Agent (with sufficient copies for each Lender): (i) corporate resolutions and incumbency certificates of Borrower and any Guarantor dated as of the Increase Effective Date approving such increase; (ii) new or amended Notes, if requested by any new or affected Lender, evidencing such new or revised Commitments; (iii) with respect to any Eligible Assignees becoming Lenders, one or more Assignments and Acceptances. Administrative Agent shall distribute an amended SCHEDULE 2.01 (which shall thereafter be incorporated into this Agreement), to reflect any new or increased Commitments and each Lender's Pro Rata Share thereof. In order to make all Lender's interests in any outstanding Loans ratable in accordance with any revised Pro Rata Shares after giving effect to any increase in the Commitments, Borrower shall pay or prepay, if necessary, on the Increase Effective Date, all outstanding Loans and pay, to the extent applicable, any amounts due under SECTION 3.05. Borrower may then borrow Loans from Lenders in accordance with their revised Pro Rata Shares. 2.13 MASTER SUBSIDIARY GUARANTY. The Obligations shall be guarantied under the Master Subsidiary Guaranty. -35- SECTION 3. TAXES, YIELD PROTECTION AND ILLEGALITY 3.01 TAXES. (a) Any and all payments by Borrower to or for the account of Administrative Agent or any Lender under any Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, assessments, fees, withholding or similar charges, and all liabilities with respect thereto, EXCLUDING, in the case of Administrative Agent and any Lender, taxes imposed on or measured by its net income, and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the Laws of which Administrative Agent or such Lender, as the case may be, is organized or maintains a lending office (all such non-excluded taxes, duties, levies, imposts, deductions, charges, and liabilities being hereinafter referred to as "TAXES"). If Borrower shall be required by any Laws to deduct any Taxes from or in respect of any sum payable under any Loan Document to Administrative Agent or any Lender, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section), Administrative Agent and such Lender receives an amount equal to the sum it would have received had no such deductions been made, (ii) Borrower shall make such deductions, (iii) Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable Laws, and (iv) within 30 days after the date of such payment, Borrower shall furnish to Administrative Agent (who shall forward the same to such Lender) the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, Borrower agrees to pay any and all present or future stamp, court or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under any Loan Document or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, any Loan Document (hereinafter referred to as "OTHER TAXES"). (c) If Borrower shall be required by the Laws of any jurisdiction outside the United States to deduct any Taxes from or in respect of any sum payable under any Loan Document to Administrative Agent or any Lender, Borrower shall also pay to such Lender or Administrative Agent (for the account of such Lender), at the time interest is paid, such additional amount that that respective Lender specifies as necessary to preserve the after-tax yield (after factoring in United States (federal and state) taxes imposed on or measured by net income) the Lender would have received if such deductions (including deductions applicable to additional sums payable under this Section) had not been made. (d) Borrower agrees to indemnify Administrative Agent and each Lender for the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section) paid by Administrative Agent and such Lender and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. -36- 3.02 ILLEGALITY. If any Lender determines that any Laws adopted on or after the date hereof have made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make, maintain or fund Offshore Rate Loans, or materially restricts the authority of such Lender to purchase or sell, or to take deposits of, Dollars in the applicable offshore interbank market, or to determine or charge interest rates based upon the Offshore Rate, then, on notice thereof by Lender to Borrower through Administrative Agent, any obligation of that Lender to make Offshore Rate Loans shall be suspended until Lender notifies Administrative Agent and Borrower that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, Borrower shall, upon demand from such Lender (with a copy to Administrative Agent), prepay or Convert all Offshore Rate Loans of that Lender, either on the last day of the Interest Period thereof, if Lender may lawfully continue to maintain such Offshore Rate Loans to such day, or immediately, if Lender may not lawfully continue to maintain such Offshore Rate Loans. Each Lender agrees to designate a different Lending Office if such designation will avoid the need for such notice and will not, in the good faith judgment of such Lender, otherwise be materially disadvantageous to such Lender. 3.03 INABILITY TO DETERMINE RATES. If, in connection with any Extension of Credit involving any Offshore Rate Loan, Administrative Agent determines that (a) deposits in Dollars are not being offered to banks in the applicable offshore dollar market for the Applicable Margin and Interest Period of the requested Offshore Rate Loan, (b) adequate and reasonable means do not exist for determining the underlying interest rate for such Offshore Rate Loan, or (c) such underlying interest rate does not adequately and fairly reflect the cost to Lender of funding such Offshore Rate Loan, Administrative Agent will promptly notify Borrower and all Lenders. Thereafter, the obligation of all Lenders to make or maintain such Offshore Rate Loan shall be suspended until Administrative Agent revokes such notice. Upon receipt of such notice, Borrower may revoke any pending request for a Borrowing of Offshore Rate Loans or, failing that, be deemed to have converted such request into a request for a Borrowing of Base Rate Loans in the amount specified therein. 3.04 INCREASED COST AND REDUCED RETURN; CAPITAL ADEQUACY. (a) If any Lender determines that any Laws adopted on or after the date hereof: (i) subject such Lender to any Tax, duty, or other charge with respect to any Offshore Rate Loans or its obligation to make Offshore Rate Loans, or change the basis on which taxes are imposed on any amounts payable to such Lender under this Agreement in respect of any Offshore Rate Loans; (ii) shall impose or modify any reserve, special deposit, or similar requirement (other than the reserve requirement utilized in the determination of the Offshore Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Lender (including its Commitment); or (iii) shall impose on such Lender or on the offshore Dollar interbank market any other condition affecting this Agreement or any of such extensions of credit or liabilities or commitments; -37- and the result of any of the foregoing is to increase the cost to such Lender of making, Converting into, Continuing, or maintaining any Offshore Rate Loans or to reduce any sum received or receivable by such Lender under this Agreement with respect to any Offshore Rate Loans, then from time to time upon demand of Lender (with a copy of such demand to Administrative Agent), Borrower shall pay to such Lender such additional amounts as will compensate such Lender for such increased cost or reduction. Each Lender requesting compensation shall deliver a certificate setting forth the amount and calculation thereof in reasonable detail, which amount shall be presumptive evidence of the amount owing. (b) If any Lender determines that any change in or the interpretation of any Laws adopted on or after the date hereof have the effect of reducing the rate of return on the capital of such Lender or compliance by such Lender (or its Lending Office) or any corporation controlling such Lender as a consequence of such Lender's obligations hereunder (taking into consideration its policies with respect to capital adequacy and such Lender's desired return on capital), then from time to time upon demand of such Lender (with a copy to Administrative Agent), Borrower shall pay to such Lender such additional amounts as will compensate such Lender for such reduction. Each Lender requesting compensation shall deliver a certificate setting forth the amount and calculation thereof in reasonable detail, which amount shall be presumptive evidence of the amount owing. 3.05 BREAKFUNDING COSTS. Upon demand of any Lender (with a copy to Administrative Agent) from time to time, Borrower shall promptly compensate such Lender for and hold such Lender harmless from any loss, cost or expense incurred by it as a result of: (a) any Continuation, Conversion, payment or prepayment of any Offshore Rate Loan on a day other than the last day of the Interest Period for such Loan (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise); or (b) any failure by Borrower (for a reason other than the failure of such Lender to make a Loan) to prepay, borrow, Continue or Convert any Offshore Rate Loan on the date or in the amount notified by Borrower; including any loss of anticipated profits and any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain such Loan or from fees payable to terminate the deposits from which such funds were obtained. Borrower shall also pay any customary administrative fees charged by such Lender in connection with the foregoing. 3.06 MATTERS APPLICABLE TO ALL REQUESTS FOR COMPENSATION. A certificate of Administrative Agent claiming compensation under this SECTION 3 and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of clearly demonstrable error. In determining such amount, Administrative Agent may use any reasonable averaging and attribution methods. For purposes of this SECTION 3, a Lender shall be deemed to have funded each Offshore Rate Loan at the Offshore Base Rate used in determining the Offshore Rate for such Loan by a matching deposit or other borrowing in the offshore Dollar interbank market, whether or not such Offshore Rate Loan was in fact so funded. -38- 3.07 SURVIVAL. All of Borrower's obligations under this SECTION 3 shall survive termination of the Commitments and payment in full of all Obligations. SECTION 4. CONDITIONS TO EFFECTIVENESS OF AGREEMENT AND EXTENSIONS OF CREDIT. 4.01 CONDITIONS OF INITIAL LOANS. The obligation of each Lender to make its initial Extension of Credit hereunder is subject to the condition that Administrative Agent shall have received on or before the Closing Date all of the following, in form and substance satisfactory to Administrative Agent and its counsel and in sufficient copies for each Lender and the Issuing Lender: (a) CREDIT AGREEMENT. This Agreement executed by Borrower, Administrative Agent and each of Lenders. (b) MASTER SUBSIDIARY GUARANTY. The Master Subsidiary Guaranty executed by each Person required to be a Subsidiary Guarantor; (c) RESOLUTIONS; INCUMBENCY. (i) Copies of the resolutions of the board of directors or the executive committee of the board of directors of each Borrower Party approving and authorizing the execution, delivery and performance by such Borrower Party of the Loan Documents to which it is a party, certified as of the Closing Date by the Secretary or an Assistant Secretary of such Borrower Party; and (ii) A certificate of the Secretary or Assistant Secretary of each Borrower Party, certifying the names and true signatures of the officers of each Borrower Party authorized to execute and deliver the Loan Documents to which it is a party. (d) ARTICLES OF INCORPORATION; BY-LAWS AND GOOD STANDING. Each of the following documents: (i) the articles or certificate of incorporation of each Borrower Party as in effect on the Closing Date, certified by the Secretary of State of the State of incorporation of each Borrower Party as of a recent date and by the Secretary or Assistant Secretary of each Borrower Party as of the Closing Date and the bylaws of each Borrower Party as in effect on the Closing Date, certified by the Secretary or Assistant Secretary of each Borrower Party as of the Closing Date; and (ii) a good standing certificate for Borrower from the Secretary of State of its state of incorporation and the State of California as of a recent date, together with bring-down certificate by telex or telecopy, dated as of a recent date. -39- (e) SENIOR NOTES. Evidence that Borrower has issued, or concurrently herewith is issuing, not less than $50,000,000 in aggregate principal amount of senior unsecured notes pursuant to that certain Note Purchase Agreement dated as of December 1, 1999. (f) INTERCREDITOR AGREEMENT. The Intercreditor Agreement executed by each of the parties thereto. (g) LEGAL OPINIONS. An opinion of Gibson, Dunn & Crutcher, counsel to the Borrower Parties, and addressed to Administrative Agent and Lenders in form and substance satisfactory to Administrative Agent and Lenders. (h) PAYMENT OF FEES. Borrower shall have paid all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with reasonable attorney fees, costs and expenses (including the allocated cost of Administrative Agent's inhouse counsel and staff) to the extent invoiced prior to or on the Closing Date, together with such additional amounts of such fees, costs and expenses as shall constitute Administrative Agent's reasonable estimate of such reasonable fees, costs and expenses incurred or to be incurred through the closing proceedings, provided that such estimate shall not thereafter preclude final settling of accounts between Borrower and Administrative Agent; including any such costs, fees and expenses arising under or referenced in SECTION 2.08; (i) CERTIFICATE. A certificate signed by a Responsible Officer, dated as of the Closing Date, stating that: (i) the representations and warranties contained in SECTION 5 are true and correct on and as of such date, as though made on and as of such date; (ii) no Default or Event of Default exists on the Closing Date; and (iii) since December 31, 1998, there has been no change that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect. (j) TERMINATION OF EXISTING SYNDICATED AGREEMENT. The Existing Syndicated Agreement shall have been, or concurrently herewith is being, terminated, and all amounts due and owing thereunder shall have been, or concurrently herewith are being, paid in full. (k) YEAR 2000 COMPLIANCE. Receipt and review, with results satisfactory to Administrative Agent and Lenders, of information confirming that (a) Borrower and its Subsidiaries are taking all necessary and appropriate steps to ascertain the extent of, and to quantify and successfully address, business and financial risks facing Borrower and its subsidiaries as a result of what is commonly referred to as the "Year 2000 problem" (as defined in SECTION 5.22), including risks resulting from the failure of key vendors and customers of Borrower and its Subsidiaries to successfully address the Year 2000 problem, and (b) Borrower's and its Subsidiaries' material computer applications and those of its key vendors and customers will, on a timely basis, adequately address the Year 2000 problem in all material respects. (l) OTHER DOCUMENTS. Such other approvals, opinions or documents as Administrative Agent or any Lender may reasonably request. 4.02 CONDITIONS TO ALL EXTENSIONS OF CREDIT. In addition to any applicable conditions precedent set forth elsewhere in this Section, the obligation of each Lender to honor any Request for Extension of Credit is subject to the following conditions precedent: -40- (a) the representations and warranties of Borrower contained in SECTION 5, or which are contained in any certificate, document or financial or other statement furnished at any time under or in connection herewith or therewith, shall be correct on and as of the date of such Extension of Credit, except to the extent that such representations and warranties specifically refer to any earlier date. (b) No Default or Event of Default exists, or would result from such proposed Extension of Credit. (c) Administrative Agent shall have timely received a Request for Extension of Credit by Requisite Notice by the Requisite Time therefor. (d) Administrative Agent shall have received, in form and substance satisfactory to it, such other assurances, certificates, documents or consents related to the foregoing as Administrative Agent or Requisite Lenders reasonably may require. Each request for an Extension of Credit by Borrower shall be deemed to be a representation and warranty that the conditions specified in SECTIONS 4.02(A) and 4.02(B) have been satisfied and on and as of the date of such Extension of Credit. 4.03 CONDITIONS FOR A SUBSIDIARY BECOMING A SUBSIDIARY GUARANTOR. As a condition precedent to a Domestic Subsidiary becoming a Subsidiary Guarantor under the Master Subsidiary Guaranty, Administrative Agent shall have received the following with respect to such Subsidiary, in form and substance satisfactory to Administrative Agent: (a) The items referred to in SECTION 4.01(C) and, to the extent not previously delivered, the items referred in SECTION 4.01(D). (b) The opinion of the general counsel or assistant general counsel of Borrower (or such other counsel designated by Borrower and acceptable to Administrative Agent) as to (i) such Subsidiary's obligations under the Subsidiary Guaranty being the legal, valid, binding and enforceable obligation of such Subsidiary and (ii) the execution, delivery and performance of Subsidiary Guaranty by such Subsidiary (A) being authorized by all necessary corporate, company or partnership action, as applicable, (B) not violating any law, decree, judgment or contractual obligation to which such Subsidiary is a party or by which it or its assets are bound, and (C) not requiring any government approvals, consents, registrations or filings. (c) Exhibit A to the Master Subsidiary Guaranty duly executed by such Domestic Subsidiary, whereby such Domestic Subsidiary agrees to be bound by the terms and conditions of the Master Subsidiary Guaranty and an Addendum to the Intercreditor Agreement in accordance with the terms thereof. (d) Such other approvals, opinions or documents as Administrative Agent or any Lender may reasonably request. -41- SECTION 5. REPRESENTATIONS AND WARRANTIES In order to induce Lenders, the Issuing Lender and Administrative Agent to enter into this Agreement and to make any extension of credit hereunder, Borrower represents and warrants to each Lender, the Issuing Lender and Administrative Agent that the following statements are true, correct and complete: 5.01 CORPORATE EXISTENCE AND POWER. Each Borrower Party and their Subsidiaries: (a) are corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of their incorporation; (b) have the corporate power and authority to own their assets, carry on their business and to execute, deliver and perform their obligations under the Loan Documents; and (c) are duly qualified as foreign corporations or licensed and in good standing under the Laws of each jurisdiction where their ownership, lease or operation of property or the conduct of their business requires such qualification, except where the failure to be so qualified, licensed or in good standing could not reasonably be expected to cause a Material Adverse Effect. 5.02 CORPORATE AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by each Borrower Party of the Loan Documents to which such Person is party, have been duly authorized by all necessary corporate action and do not and will not: (a) contravene the terms of that Person's certificate of incorporation, bylaws or other organization document; (b) conflict with or result in any breach or contravention of, or the creation of any material Lien under, any Contractual Obligation, injunction, order or decree to which such Person is a party; or (c) violate any material Law. The Loan Document has been duly executed and delivered by each Borrower Party which is a party hereto or thereto. 5.03 BINDING EFFECT. The Loan Document to which each Borrower Party is a party constitute the legal, valid and binding obligations of each respective Person, enforceable against such Person in accordance with their respective terms, except as enforceability may be limited by applicable Debtor Relief Laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 5.04 SUBSIDIARIES; SUBSIDIARY GUARANTORS. (a) SCHEDULE 5.04 correctly sets forth, as of the Closing Date, for each direct or indirect Subsidiary of Borrower, its name, jurisdiction of formation, type of legal entity, the amount, type and ownership of all issued and outstanding equity interests and whether it is a Domestic Subsidiary, Subsidiary Guarantor or Foreign Subsidiary. All active Domestic Subsidiaries of Borrower (EXCLUDING special purpose bankruptcy remote financing entities) are Subsidiary Guarantors. (b) Except as described in SCHEDULE 5.04, Borrower does not as of the Closing Date own directly or indirectly any capital stock, partnership or other equity interest or debt security which is convertible, or exchangeable, for capital stock or partnership or other equity interests in any Person which, if fully or partially exercised by any party, would be a Subsidiary. Unless otherwise indicated on in SCHEDULE 5.04, all outstanding equity interests in each Subsidiary are -42- owned of record and beneficially by the Person specified thereon, there are no outstanding options, warrants or other rights to purchase capital stock of any such Subsidiary, and all such equity interests so owned are duly authorized, validly issued, fully paid and non-assessable, and were issued in compliance with all applicable state and federal securities and other Laws, and are free and clear of all Liens. 5.05 FINANCIAL STATEMENTS. (a) The consolidated balance sheet of Borrower and its Subsidiaries as of December 31, 1998, and the consolidated statement of income and shareholders' equity and cash flows for the fiscal year ended on said date, accompanied by a report thereon containing an opinion unqualified as to scope limitations imposed by Borrower and otherwise without qualification, by Ernst & Young, have been prepared in accordance with GAAP, consistently applied, and present fairly the financial position of Borrower and its Subsidiaries as of such date and the results of their operations and cash flows for such period in accordance with GAAP. The unaudited consolidated and consolidating balance sheets of Borrower and its Restricted Subsidiaries as of December 31, 1998 and June 30, 1999, and the unaudited consolidated and consolidating statements of income and shareholders' equity and cash flows for the year and quarter, respectively, ended on said dates prepared by Borrower have been prepared in accordance with GAAP, consistently applied. (b) Since December 31, 1998, there has been no change in the condition, financial or otherwise, of Borrower and its Subsidiaries as shown on the consolidated balance sheet as of such date except changes which individually or in the aggregate have not had a Material Adverse Effect. 5.06 INDEBTEDNESS. SCHEDULE 5.06 correctly describes all Indebtedness, including Total Debt and letters of credit of Borrower and its Subsidiaries outstanding on the date indicated thereon. 5.07 DISCLOSURE. Neither the financial statements referred to in SECTION 5.05 nor any other written statement furnished by Borrower to any Lender or Administrative Agent in connection herewith contains any untrue statement of a material fact or omits a material fact necessary to make the statements contained therein or herein not misleading as of their respective dates; PROVIDED, HOWEVER, that with respect to any financial projections contained therein, Borrower represents only that such projections were prepared in good faith based on assumptions determined by Borrower as reasonable and appropriate. There is no fact peculiar to Borrower or its Subsidiaries which Borrower has not disclosed to any Lender or Administrative Agent in writing which could reasonably be expected to have a Material Adverse Effect. 5.08 PENDING LITIGATION. Except as set forth in SCHEDULE 5.08, there are no proceedings pending or, to the knowledge of Borrower, threatened against or affecting any Borrower Party or any of their Subsidiaries in any court or before any governmental authority or arbitration board or tribunal which, if adversely determined, could reasonably be expected to have a Material Adverse Effect. -43- 5.09 TITLE TO PROPERTIES. Each Borrower Party and their Subsidiaries have good and marketable title in fee simple (or its equivalent under applicable law) to all material parcels of real property and has good title to all the other material items of property they purports to own, including that reflected as owned in the most recent balance sheet referred to in SECTION 5.05, except for Dispositions not in violation of SECTION 7.05 and except for Liens permitted under SECTION 7.01. 5.10 PATENTS AND TRADEMARKS. Each Borrower Party and their Subsidiaries own or have the right to use all the material patents, trademarks, trade names, service marks, copyrights, licenses and rights with respect to the foregoing necessary for the present and planned future conduct of their business, without any known conflict with the rights of others. 5.11 GOVERNMENTAL CONSENT. No approval, consent or withholding of objection on the part of any regulatory body, state, Federal or local, which has not been obtained is necessary in connection with the execution and delivery by each Borrower Party of the Loan Documents or compliance by each Borrower Party with any of the provisions of the Loan Documents. 5.12 TAXES. All tax returns required to be filed by any Borrower Party and their Subsidiaries in any jurisdiction have, in fact, been filed, except tax returns as to which the failure to file would not reasonably be expected to have a Material Adverse Effect, and all taxes, assessments, fees and other governmental charges upon any Borrower Party and their Subsidiaries or upon any of their respective properties, income or franchises, which are shown to be due and payable in such returns have been paid. For all taxable years ending on or before December 31, 1996 either the period of limitations on assessment of additional Federal income tax has expired or any Borrower Party and their Subsidiaries has entered into an agreement with the Internal Revenue Service closing conclusively the total tax liability for the taxable year. Except as disclosed on SCHEDULE 5.12, as updated from time to time by written notice from Borrower to Administrative Agent, Borrower does not know of any proposed additional tax assessment against it for which adequate provision has not been made on its accounts, and no material controversy in respect of additional Federal or state income taxes due since said date is pending or to the knowledge of Borrower threatened. The provisions for taxes on the books of Borrower and each of its Subsidiaries are adequate in accordance with GAAP for all open years, and for its current fiscal period. 5.13 USE OF PROCEEDS. Borrower shall use the proceeds of the Loans solely for working capital, Acquisitions and Restricted Payments otherwise permitted hereunder and other general corporate purposes not in contravention in any material respect of any material Laws. None of the transactions contemplated in the Loan Documents (including, without limitation thereof, the use of proceeds of the Loans) will violate or result in a violation of Regulations U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. Neither any Borrower Party nor any of their Subsidiaries owns or intends to carry or purchase any "margin stock" within the meaning of said Regulation U other than the capital stock of Borrower. 5.14 ERISA. Except as set forth in SCHEDULE 5.14, to Borrower's knowledge, the consummation of the transactions provided for herein and compliance by Borrower with the provisions hereof will not involve any prohibited transaction within the meaning of ERISA or Section 4975 of the Code other than a transaction for which a statutory exemption is available or -44- an administrative exemption has been obtained. Each Qualified Plan complies in all material respects with all applicable statutes and governmental regulations, and (a) no Reportable Event has occurred and is continuing with respect to any Qualified Plan, (b) neither Borrower nor any ERISA Affiliate has withdrawn from any Multiemployer Plan, and (c) no steps have been instituted to terminate any Qualified Plan in a distress termination under Section 4041(c) of ERISA or a termination issued by the PBGC under Section 4042 of ERISA. No condition exists or event or transaction has occurred in connection with any Qualified Plan which would result in the incurrence by Borrower or any ERISA Affiliate or any liability, fine or penalty which would reasonably be expected to have a Material Adverse Effect. No Qualified Plan maintained by Borrower or any ERISA Affiliate, nor any trust created thereunder, has incurred any "accumulated funding deficiency" as defined in Section 302 of ERISA nor does the present value of all benefits vested under all Qualified Plans exceed, as of the last annual valuation date, the value of the assets of the Qualified Plans allocable to such vested benefits based on the assumptions contained in the most recent actuarial valuation report for the Qualified Plan by an amount greater than $5,000,000 in the aggregate. Neither Borrower nor any ERISA Affiliate has any contingent liability in excess of $1,500,000 with respect to any post-retirement "welfare benefit plan" (as such term is defined in ERISA) that is required to be reflected on Borrower's financial statements under FASB 106, except as so reflected in such financial statements or as has been disclosed to Administrative Agent in writing. Except as set forth on SCHEDULE 5.14, neither any Borrower Party nor any of their Subsidiaries are part of any Multiemployer Plan. 5.15 COMPLIANCE WITH LAWS. Neither any Borrower Party nor any of their Subsidiaries (a) is in violation of any Laws to which it is subject; or (b) has failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of its property or to the conduct of its business, which violation or failure to obtain would have a Material Adverse Effect. Neither any Borrower Party nor any of their Subsidiaries is in default with respect to any order of any court or governmental authority or arbitration board or tribunal where such default could reasonably be expected to have a Material Adverse Effect. 5.16 COMPLIANCE WITH ENVIRONMENTAL LAWS. Neither any Borrower Party nor any of their Subsidiaries is in violation of any Environmental Laws relating to public health, safety or the environment, including, without limitation, relating to releases, discharges, emissions or disposals to air, water, land or ground water, to the withdrawal or use of ground water, to the use, handling or disposal of polychlorinated biphenyls (PCBs), asbestos or urea formaldehyde, to the treatment, storage, disposal or management of hazardous substances (including, without limitation, petroleum, crude oil or any fraction thereof, or other hydrocarbons), pollutants or contaminants, to exposure to toxic, hazardous or other controlled, prohibited or regulated substances which violation could reasonably be expected to have a Material Adverse Effect. Except as set forth on SCHEDULE 5.16, as updated from time to time by written notice from Borrower to Administrative Agent with the consent of the Requisite Lenders, Borrower does not know of any liability or class of liability of any Borrower Party or any of their Subsidiaries under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601 et seq.), or the Resource Conservation and Recovery Act of 1976, as amended (42 U.S.C. Section 6901 et seq.) which liability could reasonably be expected to have a Material Adverse Effect. -45- 5.17 REGULATED ENTITIES. None of any Borrower Party, any Person controlling any Borrower Party, or any Subsidiary of Borrower, is (a) an "Investment Company" within the meaning of the Investment Company Act of 1940; or (b) subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code or any other Federal or state statute or regulation limiting its ability to incur Indebtedness. 5.18 NO BURDENSOME RESTRICTIONS. Neither any Borrower Party nor any of their Subsidiaries is a party to or bound by any Contractual Obligation or subject to any charter or corporate restriction or any Laws which could reasonably be expected to have a Material Adverse Effect. 5.19 LABOR RELATIONS. There are no strikes, lockouts or other labor disputes against any Borrower Party or any of their Subsidiaries, or , to the best of Borrower's knowledge, threatened against or affecting any Borrower Party or any of their Subsidiaries, and no unfair labor practice complaint is pending against any Borrower Party or any of their Subsidiaries or, to the best knowledge of Borrower, threatened against any of them before any Governmental Authority, which, in each case, could reasonably be expected to cause a Material Adverse Effect. 5.20 INSURANCE. The properties of each Borrower Party and their Subsidiaries are insured with financially sound and reputable insurance companies, in such amounts, with such deductibles and covering such risks as is customarily carried on by companies engaged in similar businesses and owning similar properties in localities where such Borrower Party or such Subsidiary operates. 5.21 NO RESTRICTIONS ON SUBSIDIARIES. Neither any Borrower Party nor any of their Subsidiaries has entered into, or committed to enter into, any agreement or understanding that could limit or restrict any Subsidiary making or declaring any dividends, either in cash or property, to Borrower, repaying or prepaying any Indebtedness (other than for amounts loaned by Borrower to Subsidiaries on a subordinated basis in connection with Permitted Accounts Receivable Financing Facilities) owing to Borrower, or making any Investment in Borrower. 5.22 YEAR 2000. Borrower has (a) initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by customers and vendors) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications and devices containing imbedded computer chips used by any Borrower Party or any of its Subsidiaries (or their respective customers and vendors) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (b) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (c) to date, implemented that plan in accordance with that timetable. Based on the foregoing, Borrower believes that all computer applications and devices containing imbedded computer chips (including those of its and its Subsidiaries' customers and vendors) that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect. -46- SECTION 6. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, so long as any Lender or the Issuing Lender shall have any Commitment hereunder, or any Obligation shall remain unpaid, unless the Requisite Lenders waive compliance in writing: 6.01 FINANCIAL STATEMENTS. Borrower shall deliver to Administrative Agent in form and detail satisfactory to the Requisite Lenders, with copies for each Lender: (a) QUARTERLY STATEMENTS. As soon as available and in any event within 50 days after the end of each quarterly fiscal period (except the last) of each fiscal year, copies of: (1) consolidated and consolidating balance sheets of Borrower and its Subsidiaries as of the close of such quarterly fiscal period, setting forth in comparative form the consolidated figures for the fiscal year then most recently ended, (2) consolidated and consolidating statements of income of Borrower and its Subsidiaries for such quarterly fiscal period and for the portion of the fiscal year ending with such quarterly fiscal period, in each case setting forth in comparative form the consolidated figures for the corresponding periods of the preceding fiscal year, and (3) consolidated and consolidating statements of cash flows of Borrower and its Subsidiaries for each quarterly fiscal period and for the portion of the fiscal year ending with such quarterly fiscal period, setting forth in comparative form the consolidated figures for the corresponding period of the preceding fiscal year, all certified by an appropriate Responsible Officer as being to the best of such officer's knowledge complete and correct and fairly presenting, in accordance with GAAP (except for the use of abbreviated footnotes of the type required by the Securities and Exchange Commission to be included in quarterly reports on Form 10-Q), the financial position and the results of operations of Borrower and its Subsidiaries. (b) ANNUAL STATEMENTS. As soon as available and in any event within 105 days after the close of each fiscal year of Borrower, copies of: (1) consolidated and consolidating balance sheets of Borrower and its Subsidiaries as of the close of such fiscal year, and (2) consolidated and consolidating statements of income and retained earnings and cash flows of Borrower and its Subsidiaries for such fiscal year, in each case setting forth in comparative form the consolidated figures for the preceding fiscal year, all in reasonable detail and accompanied, with respect to Borrower and its Subsidiaries, by a report thereon of a firm of independent public accountants of recognized national standing selected by Borrower to the effect that the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Borrower and its Subsidiaries as of the end of the fiscal year being reported on and the consolidated results of operations and cash flows -47- for said year in conformity with GAAP and that the audit of such accountants in connection with such financial statements has been conducted in accordance with generally accepted auditing standards. Such report and opinion shall not be subject to any qualifications or exceptions as to the scope of the audit nor to any qualifications and exceptions (including possible errors generated by financial reporting and related systems due to the Year 2000 Problem) not reasonably acceptable to the Requisite Lenders; (c) AUDIT REPORTS. Promptly upon receipt thereof, one copy of each interim or special audit made by independent accountants of the books of Borrower or any Subsidiary and any management letter received from such accountants; (d) SEC AND OTHER REPORTS. Promptly upon their becoming sent or filed, one copy of each financial statement, report, notice or proxy statement sent by Borrower to stockholders generally and of each regular or periodic report, and any registration statement or prospectus filed by Borrower or any of its Subsidiaries with any securities exchange or the Securities and Exchange Commission or any successor agency, and copies of any orders in any material proceedings to which Borrower or any of its Subsidiaries is a party, issued by any governmental agency, Federal or state, having jurisdiction over Borrower or any of its Subsidiaries; (e) ERISA REPORTS. Notice of the occurrence of any of the following events affecting Borrower or any ERISA Affiliate (but in no event more than 10 days after such event), and deliver to Administrative Agent and each Lender a copy of any notice with respect to such event that is filed with a Governmental Authority and any notice delivered by a Governmental Authority to Borrower or any ERISA Affiliate with respect to such event: (i) an ERISA Event; (ii) a material increase in the Unfunded Pension Liability of any Pension Plan; (iii) the adoption of, or the commencement of contributions to, any Plan subject to Section 412 of the Code by Borrower or any ERISA Affiliate; or (iv) the adoption of any amendment to a Plan subject to Section 412 of the Code, if such amendment results in a material increase in contributions or Unfunded Pension Liability; (f) COMPLIANCE CERTIFICATES. Within the periods provided in paragraphs (a) and (b) above, a Compliance Certificate signed by a Responsible Officer; (g) ACCOUNTANT'S CERTIFICATES. Within the period provided in paragraph (b) above, a certificate of the accountants who render an opinion with respect to such financial statements, stating that they have reviewed this Agreement and stating further whether, in making their audit, (i) Borrower is in compliance with SECTIONS 7.02(E), 7.13, 7.14 AND 7.15 as of the end of such year and (ii) anything came to their attention that caused them to believe that Borrower failed to comply with the terms, covenants, provisions or conditions of SECTION 7.02 (excluding SECTION 7.02(E)) insofar as they relate to accounting matters, and if any such condition or event then exists, specifying the nature and period of existence thereof; (h) YEAR 2000 COMPLIANCE. Promptly upon the discovery or determination that any computer application (including those of its suppliers and vendors) that is material to any Borrower Parties' or any of their Subsidiaries' business and operations will not be Year 2000 Compliant on a timely basis, except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect; and -47- (i) REQUESTED INFORMATION. With reasonable promptness, such other data and information as Administrative Agent or any Lender may reasonably request and which may be furnished without unreasonable expense to Borrower. 6.02 NOTICES. Borrower shall promptly notify Administrative Agent and each Lender: (a) upon becoming aware of the occurrence of any Default or Event of Default and of the occurrence or existence of any event or circumstance that foreseeably will become a Default or Event of Default and the action which Borrower is taking or proposes to take with respect thereto; (b) upon becoming aware of any (i) breach or non-performance of, or any default under any Contractual Obligation of Borrower or any of its Subsidiaries which could reasonably be expected to result in a Material Adverse Effect; (c) upon becoming aware of the commencement of, or any material development in, any litigation, dispute, litigation, investigation, proceeding or suspension affecting Borrower or any of its Subsidiaries (i) in which the amount of damages claimed is $15,000,000 (or its equivalent in another currency or currencies) or more, (ii) in which injunctive or similar relief is sought and which, if adversely determined, could reasonably be expected to have a Material Adverse Effect, or (iii) in which the relief sought is an injunction or other stay of the performance of this Agreement or any Loan Document or any material portion of the operations of Borrower or any of its Subsidiaries; (d) upon, but in no event later than ten business days after, receipt of notice of (i) any and all enforcement, cleanup, removal or other governmental or regulatory actions instituted, completed or threatened against Borrower or any of its Subsidiaries or any of their properties pursuant to any applicable Environmental Laws and (ii) all other Environmental Claims which, in the case of each of clauses (i) and (ii) could reasonably be expected to have a Material Adverse Effect; (e) upon becoming aware of any other litigation or proceeding affecting Borrower or any of its Subsidiaries which Borrower would be required to report to the Securities and Exchange Commission pursuant to the Exchange Act, within four days after reporting the same to the Securities and Exchange Commission; and (f) upon becoming aware of any Material Adverse Effect. Each notice pursuant to this Section shall be accompanied by a written statement by a Responsible Officer of Borrower setting forth details of the occurrence referred to therein and stating what action, if any, Borrower proposes to take with respect thereto. 6.03 CORPORATE EXISTENCE, ETC. Borrower will preserve and keep in full force and effect, and will cause each of its Subsidiaries to preserve and keep in full force and effect, its corporate existence and all licenses and permits necessary to the proper conduct of its business; PROVIDED, HOWEVER, that the foregoing shall not prevent any transactions permitted by -49- SECTION 7.04 or 7.05 or prevent the dissolution, liquidation, merger or other Disposition of Subsidiaries not holding any assets. 6.04 INSURANCE. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, with financially sound and reputable independent insurers, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons; including workers' compensation insurance, public liability and property and casualty insurance. Upon request of Administrative Agent or any Lender, Borrower shall furnish Administrative Agent, with sufficient copies for each Lender, at reasonable intervals (but not more than once per calendar year) a copy of all insurance policies maintained by Borrower and its Subsidiaries and a certificate of a Responsible Officer of Borrower (and, if requested by Administrative Agent or any Lender, any insurance broker of Borrower) setting forth the nature and extent of all insurance maintained by Borrower and its Subsidiaries in accordance with this SECTION 6.04 (and which, in the case of a certificate of a broker, were placed through such broker). 6.05 TAXES, CLAIMS FOR LABOR AND MATERIALS, COMPLIANCE WITH LAWS. Borrower will promptly pay and discharge, and will cause each of its Subsidiaries promptly to pay and discharge, all lawful taxes, assessments and governmental charges or levies imposed upon Borrower or such Subsidiary, respectively, or upon or in respect of all or any part of the property or business of Borrower or such Subsidiary, all trade accounts payable in accordance with usual and customary business terms, and all claims for work, labor or materials, which if unpaid might become a Lien upon any property of Borrower or such Subsidiary; PROVIDED, HOWEVER, that Borrower or such Subsidiary shall not be required to pay any such tax, assessment, charge, levy, account payable or claim if (i) the validity, applicability or amount thereof is being contested in good faith by appropriate actions or proceedings which will prevent the forfeiture or sale of any property of Borrower or such Subsidiary or any material interference with the use thereof by Borrower or such Subsidiary, and Borrower or such Subsidiary shall set aside on its books, reserves deemed by it to be adequate with respect thereto in accordance with GAAP or (ii) the failure to pay any such tax, assessment, charge, levy, account payable or claim could not reasonably be expected to have a Material Adverse Effect. Neither Borrower nor any of its Subsidiaries shall violate any law, ordinance or governmental rule and regulation to which it is subject including, without limitation, the Occupational Safety and Health Act of 1970, as amended, ERISA and all laws, ordinances, governmental rules and regulations relating to environmental protection in all applicable jurisdictions, if such violation could reasonably be expected to have a Material Adverse Effect or would result in any Lien not permitted under SECTION 7.01. 6.06 MAINTENANCE, ETC. Borrower will maintain, preserve and keep, and will cause each of its Subsidiaries to maintain, preserve and keep, its material properties which are used or useful in the conduct of its business (whether owned in fee or a leasehold interest) in good repair and working order (ordinary wear and tear excepted) and from time to time will make all necessary repairs, replacements, renewals and additions so that at all times the efficiency thereof shall be maintained. -50- 6.07 PAYMENT OF OBLIGATIONS. Subject to SECTION 6.05, Borrower shall, and shall cause each of its Subsidiaries to, pay and discharge as the same shall become due and payable, all their respective material obligations and liabilities, including all material Indebtedness as and when due and payable but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness. 6.08 ENVIRONMENTAL LAWS. Upon the written request of Administrative Agent or any Lender, Borrower shall submit and cause each of its Subsidiaries to submit, to Administrative Agent with sufficient copies for each Lender, at Borrower's sole cost and expense, at reasonable intervals, but in any event no more frequently than quarterly, a report providing an update of the status of any environmental compliance, hazard or liability issue identified in any notice or report required pursuant to SECTION 6.02(D), that could, individually or in the aggregate, reasonably be expected to result in liability in excess of $5,000,000. 6.09 INSPECTION OF PROPERTY AND BOOKS AND RECORDS. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, proper books of record and account, in which full, true and correct entries which will allow for preparation of financial statements in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of Borrower and such Subsidiaries. Borrower will permit, and will cause each of its Subsidiaries to permit, representatives of Administrative Agent or any Lender to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants, all at the expense of Borrower and at such reasonable times during normal business hours and as often as may be reasonably requested, upon reasonable advance notice to Borrower. 6.10 GUARANTIES BY NEW DOMESTIC SUBSIDIARIES. Borrower shall cause each Person that becomes an active Domestic Subsidiary (EXCLUDING special purpose bankruptcy remote financing entities), within 30 days after becoming such a Domestic Subsidiary, to become a Subsidiary Guarantor under the Master Subsidiary Guaranty and, in connection therewith, deliver to Administrative Agent the applicable documents pursuant to SECTION 4.03, and such other documents as Administrative Agent and any Lender may reasonably request. SECTION 7. NEGATIVE COVENANTS Borrower covenants and agrees that, so long as any Lender or the Issuing Lender shall have any Commitment hereunder, or any Obligations shall remain unpaid, unless the Requisite Lenders waive compliance in writing: 7.01 LIMITATION ON LIENS. Borrower will not, nor will it permit any of its Subsidiaries to, incur, assume or suffer to exist, any Lien or Negative Pledge upon any of its property, assets or revenues, whether now owned or hereafter acquired, EXCEPT: (a) Ordinary Course Liens; -51- (b) Liens and Negative Pledges existing on the Closing Date and listed on SCHEDULE 7.01; (c) Liens securing Indebtedness permitted to be secured under SECTIONS 7.02; PROVIDED HOWEVER that Liens permitted under SECTION 7.02(D) shall attach solely to the assets financed by such purchase money Indebtedness; (d) Liens in connection with Permitted Accounts Receivable Financing Facilities; (e) Liens resulting from or consisting of Operating Leases and Capitalized Leases permitted hereunder; (f) Negative Pledges on assets otherwise permitted to be subject to a Lien hereunder; and (g) extensions and renewals of Liens described above, PROVIDED that (i) such Liens shall not be extended to other property of Borrower or any of its Subsidiaries, and (ii) the principal amount of Indebtedness secured thereby shall not be increased over the principal amount thereof outstanding immediately prior to such extension or renewal. 7.02 LIMITATIONS ON INDEBTEDNESS. Borrower will not, nor will it permit of its Subsidiaries to, create, assume, suffer to exist or incur or in any manner become liable in respect of any Indebtedness for borrowed money or other Indebtedness described in clauses (a) through (f) of the definition thereof, EXCEPT: (a) Ordinary Course Indebtedness; (b) unsecured Indebtedness outstanding under the Senior Note Agreements not exceeding $100,000,000 in the aggregate; (c) Indebtedness under Permitted Accounts Receivable Financing Facilities; PROVIDED, HOWEVER, that the Net Issuance Proceeds from increases in outstandings under Permitted Accounts Receivable Financing Facilities after the Closing Date shall be applied to repay or prepay Indebtedness owing by the Borrower and its Subsidiaries. (d) secured purchase money Indebtedness, including Capitalized Lease Obligations, originally incurred to acquire fixed assets PROVIDED that at the time of such acquisition, the aggregate amount remaining unpaid on all such Indebtedness secured by Liens on such fixed assets, whether or not assumed by Borrower or its Subsidiaries Subsidiary, does not exceed an amount equal to the lesser of (i) 100%, in the case of fixed assets which are personal property (including Capitalized Leases of fixed assets which are personal property) or (ii) 80%, in the case of fixed assets which are real property, of the lesser of the total purchase price or fair market value at the time of such acquisition as determined in good faith by the Board of Directors of Borrower; (e) other Indebtedness for borrowed money (including Indebtedness hereunder); PROVIDED, HOWEVER, that, after giving effect thereto, ALL of the following conditions are satisfied: -52- (i) no Default or Event of Default shall exist; (ii) the aggregate outstanding principal of the Basket Total Debt of Borrower's Subsidiaries shall not exceed 20% of Consolidated Net Worth; and (iii) the aggregate outstanding principal of the secured Basket Total Debt of Borrower and its Subsidiaries shall not exceed 10% of Consolidated Net Worth; (f) Indebtedness refinancing or extending Indebtedness permitted above on terms and conditions no less favorable than the Indebtedness being refinanced; PROVIDED, HOWEVER, that the principal amount of such new Indebtedness shall not exceed the outstanding principal amount of Indebtedness being refinanced immediately prior to such refinancing. 7.03 NO RESTRICTIONS ON SUBSIDIARIES. Borrower will not, nor will it permit any of its Subsidiaries to, enter into, or commit to enter into, any agreement or understanding that could limit or restrict any of its Subsidiaries making or declaring any dividends, either in cash or property, to Borrower, repaying or prepaying any Indebtedness (other than for amounts loaned by Borrower to its Subsidiaries on a subordinated basis in connection with Permitted Accounts Receivable Financing Facilities) owing to Borrower, or making any Investment in Borrower. 7.04 FUNDAMENTAL CHANGES. Borrower will not, nor will it permit any of its Subsidiaries to, merge or consolidate with or into any Person or liquidate, wind-up or dissolve itself, or permit or suffer any liquidation or dissolution or sell all or substantially all of its assets, EXCEPT, that so long as no Default or Event of Default exists or would result therefrom: (a) any of its Subsidiaries may merge or consolidate (i) with or into Borrower or any wholly-owned Subsidiary so long as in any merger or consolidation involving Borrower, Borrower shall be the surviving or continuing corporation or (ii) with any other Person PROVIDED that such merger or consolidation (EXCLUDING any Covered Dispositions) does not constitute a Disposition of more than 15% of Consolidated Total Assets, determined as of the end of the end of the immediately preceding fiscal year; (b) Borrower may consolidate or merge with any other corporation if (i) Borrower shall be the surviving or continuing corporation and (ii) at the time of such consolidation or merger and after giving effect thereto no Default or Event of Default shall have occurred and be continuing; and (c) any of its Subsidiaries may sell, lease or otherwise dispose of all or any substantial part of its assets to Borrower or any wholly-owned Subsidiary. 7.05 DISPOSITIONS. Borrower will not, nor will it permit any of its Subsidiaries to, make any Dispositions, EXCEPT: (a) Ordinary Course Dispositions; (b) Dispositions permitted by SECTION 7.04; (c) in connection with Permitted Accounts Receivable Financing Facilities; -53- (d) the Simplex Products Disposition; (e) Dispositions (EXCLUDING Covered Dispositions) of other assets having a book value not exceeding during the 12-month period ending with the date of such Disposition, 15% of Consolidated Total Assets, determined as of the end of the end of the immediately preceding fiscal year; and (f) any Covered Dispositions. 7.06 ACQUISITIONS. Borrower will not, nor will it suffer or permit any of its Subsidiaries to, make any Acquisition unless, after giving effect to such Acquisition (the "SUBJECT ACQUISITION"), ALL of the following requirements are satisfied: (a) during the 12-month period ending on the last day of the month prior to the closing of the subject Acquisition, the aggregate consideration paid (including, without limitation, Indebtedness for borrowed money incurred or assumed) for all Acquisitions during such period (including, on a pro forma basis, the subject Acquisition) does not exceed 50% of Consolidated Tangible Net Worth as of the last day of such period (including all Acquisitions during such period including, on a pro forma basis, the subject Acquisition); (b) the total consideration paid (including, without limitation, Indebtedness for borrowed money incurred or assumed, but excluding secured purchase money Indebtedness, including Capitalized Lease Obligations permitted under SECTION 7.02(D)) for any one Acquisition or series of related Acquisitions does not exceed $75,000,000; PROVIDED, HOWEVER, that the cash consideration and all Indebtedness incurred or assumed in any one Acquisition (excluding secured purchase money Indebtedness, including Capitalized Lease Obligations permitted under SECTION 7.02(D)) shall not exceed an amount equal to the SUM OF (i) $25,000,000, (ii) the net cash proceeds received from Dispositions (OTHER THAN Permitted Accounts Receivable Financing Facilities) within the prior 12 months (EXCLUDING any such proceeds counted towards prior Acquisitions), and (iii) the net cash proceeds received from any equity offering; (c) at the time of any Acquisition and after giving effect thereto no Default or Event of Default shall have occurred and be continuing; and (d) such Acquisitions are not opposed by the board of directors or management of any Person or business to be acquired. 7.07 OPERATING LEASES. Borrower will not, nor will it permit any of its Subsidiaries to, create or suffer to exist any obligations for the payment of rent for any property under any Operating Leases, EXCEPT (a) Operating Leases of Borrower and its Subsidiaries in existence on the Closing Date and any renewal, extension or refinancing thereof that does not increase the rental payments therefor; and (b) other Operating Leases PROVIDED that aggregate annual rental payments for all such Operating Leases shall not exceed in any fiscal year $15,000,000. -54- 7.08 LOANS AND INVESTMENTS. Borrower will not, nor will it suffer or permit any of its Subsidiaries to, make any Investment in any Person including any Affiliate of Borrower, EXCEPT: (a) Ordinary Course Investments; (b) Investments existing as of the date hereof and set forth on SCHEDULE 7.08, including reinvestments of the same amounts in the same instruments; (c) Investments in, or Guaranty Obligations with respect to Indebtedness of, joint ventures which respect to which Borrower or its Subsidiaries is a partner not exceeding $2,000,000 in the aggregate at any time; (d) loans or advances in the usual and ordinary course of business to officers, directors and employees for expenses (including moving and relocation expenses related to a transfer) incidental to carrying on the business of Borrower or any of its Subsidiaries not exceeding $2,000,000 in the aggregate at any time outstanding; (e) loan and advances to officers, directors and employees to exercise stock options of such employees to purchase stock of Borrower, if, after giving effect thereto and to the application of the proceeds thereof, such loan does not increase Consolidated Net Worth or Consolidated Net Income (other than an increase due to interest on such loan or advance); (f) advances on commissions in the ordinary course of business to employees or subcontractors of Borrower or its Subsidiaries in an aggregate amount not exceeding $5,000,000 at any time outstanding; (g) loans, guarantees, or other extensions of credit not exceeding $10,000,000 in the aggregate to Borrower's employee stock ownership plan ("ESOP") at any time outstanding; (h) loans to the ESOP to purchase newly issued convertible shares of stock of Borrower, if, after giving effect thereto and to the application of the proceeds thereof, such loan does not increase Consolidated Tangible Net Worth; (i) notes taken in connection with any Disposition permitted hereunder; (j) additional Investments in any fiscal year in an amount equal to Restricted Payments that can be made under SECTION 7.09(A) in respect of such fiscal year, but which are not made, PROVIDED that after giving effect to such Investments, no Event of Default shall have occurred and be continuing; and (k) additional Investments not exceeding $3,000,000 in the aggregate in any fiscal year, PROVIDED that after giving effect to such Investments, no Event of Default shall have occurred and be continuing. 7.09 RESTRICTED PAYMENTS. Borrower will not, nor will it permit any of its Subsidiaries to, make any Restricted Payments EXCEPT: -55- (a) Restricted Payments not exceeding $9,000,000 in the aggregate in respect of any fiscal year; and (b) Restricted Payments in any fiscal year in an amount equal to Investments that can be made under SECTION 7.08(K) in such fiscal year, but which are not made; PROVIDED that, in each instance, after giving effect to any Restricted Payments, no Event of Default shall have occurred and be continuing. For the purposes of this SECTION 7.09, (a) the amount of any Restricted Payment declared, paid or distributed in property shall be deemed to be the greater of the book value or fair market value (as determined in good faith by the Board of Directors of Borrower) of such property at the time of the making of the Restricted Payment in question and (b) on the date which is twelve months after the date on which a corporation becomes a Subsidiary, all Investments of such corporation at such time shall be deemed to have been made by such corporation, as a Subsidiary, at such time and such Investments will not be taken into account for purposes of this SECTION 7.09 prior to such time. 7.10 TERMINATION OF PENSION PLANS. Borrower will not, nor will it permit any ERISA Affiliate to, withdraw from any Multiemployer Plan if such withdrawal would result in withdrawal liability (as described in Part I of Subtitle E of Title IV of ERISA) which is currently owing which could reasonably be expected to have a Material Adverse Effect. Borrower and any ERISA Affiliate will not permit any employee benefit plan maintained by it to be terminated if such termination could result in the imposition of a Lien on any property of Borrower or any ERISA Affiliate pursuant to Section 4068 of ERISA. 7.11 COMPLIANCE WITH ERISA. Borrower will not directly or indirectly, nor will it permit any ERISA Affiliate directly or indirectly, (i) to terminate in a distress termination under Section 4041 of ERISA, any Plan subject to Title IV of ERISA so as to result in any material liability to Borrower or any ERISA Affiliate, (ii) to permit to exist any ERISA Event or any other event or condition, which presents the risk of a material liability of Borrower or any ERISA Affiliate, or (iii) to make a complete or partial withdrawal (within the meaning of ERISA Section 4201) from any Multiemployer Plan so as to result in any material liability to Borrower or any ERISA Affiliate. For purposes of this SECTION 7.11, "material liability" means any liability which could reasonably be expected to have a Material Adverse Effect. 7.12 CAPITAL EXPENDITURES. Borrower will not, nor will it suffer or permit any Of its Subsidiaries to, make, or become legally obligated to make, any Capital Expenditures, EXCEPT Capital Expenditures in any fiscal year of Borrower not exceeding $30,000,000 in the aggregate. 7.13 CONSOLIDATED NET WORTH. Borrower will not permit its Consolidated Net Worth at any time during any fiscal quarter to be less than $170,000,000 PLUS 50% of each fiscal quarter's Consolidated Net Income (with no deduction for losses) commencing January 1, 1999 PLUS 75% of any Net Issuance Proceeds after January 1, 1999. -56- 7.14 LEVERAGE RATIO. Borrower shall not permit the Leverage Ratio at any time during any fiscal quarter set forth below to be greater than the ratio set forth below opposite such fiscal quarter or the period during which such fiscal quarter ends:
MAXIMUM LEVERAGE FISCAL QUARTERS ENDING RATIO ------------------------------ ----------------- Closing through March 31, 2000 4.50 to 1 June 30, 2000 through September 30, 2000 3.75 to 1 December 31, 2000 3.50 to 1 March 31, 2001 through June 30, 2001 3.25 to 1 September 30, 2001 and thereafter 3.00 to 1
7.15 INTEREST COVERAGE RATIO. Borrower will not permit its Interest Coverage Ratio to be less than 3.50 to 1.00 at any time. 7.16 TRANSACTIONS WITH AFFILIATES. Borrower will not, nor will it permit any Of its Subsidiaries to, enter into or be a party to any transaction or arrangement with any Affiliate (including, without limitation, the purchase from, sale to or exchange of property with, or the rendering of any service by or for, any Affiliate, but excluding intercompany transactions with any wholly-owned Subsidiary), EXCEPT (a) employment, consulting and other compensation arrangements with the officers and directors of Borrower, (b) in the ordinary course of and pursuant to the reasonable requirements of Borrower's or such Subsidiary's business and upon terms no less favorable to Borrower or such Subsidiary than would obtain in a comparable arm's-length transaction with a Person other than an Affiliate; and (c) in connection with Permitted Accounts Receivable Financing Facilities. 7.17 NATURE OF BUSINESS. Borrower will not, nor will it permit any Of its Subsidiaries to, engage in any business if, as a result, the general nature of the business, taken on a consolidated basis, which would then be engaged in by Borrower and its Subsidiaries would be substantially changed from the general nature of the business engaged in by Borrower and its Subsidiaries on the date of this Agreement. No transaction or series of transactions permitted under SECTION 7.04 or constituting Investments permitted under SECTION 7.08 shall be deemed to violate this SECTION 7.17. 7.18 ACCOUNTING CHANGES. Borrower will not, nor will it permit any Of its Subsidiaries to make any material changes in accounting, except as may be allowed or required by GAAP and only if the impact of such changes are disclosed and quantified in a note to Borrower's financial statements. -57- SECTION 8. EVENTS OF DEFAULT 8.01 EVENTS OF DEFAULT. Any of the following events shall constitute an "Event of Default": (a) Any Borrower Party fails to pay any principal or interest on any Outstanding Obligation (other than fees) as and on the date when due; or fails to pay any fees due hereunder within three days after the date when due; or (b) Any representation or warranty by Borrower or any of its Subsidiaries herein, in any Loan Document or which is contained in any certificate, document or financial or other statement furnished at any time under this Agreement, or in or under any Loan Document, shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) A default shall occur in the observance or performance of any other provision of this Agreement which is not remedied within 10 business days after the earlier of (i) the day on which a Responsible Officer of any Borrower Party first obtains actual knowledge of such default, or (ii) the day on which notice thereof is given to Borrower by Administrative Agent; or (d) (i) Any Borrower Party (x) defaults in any payment when due of principal of or interest on any Indebtedness (other than Indebtedness hereunder) or (y) defaults in the observance or performance of any other agreement or condition relating to any Indebtedness (other than Indebtedness hereunder) or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur, the effect of which default or other event is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, Indebtedness having an aggregate principal amount in excess of $5,000,000 to be demanded or become due (automatically or otherwise) prior to its stated maturity, or any Guaranty Obligation in such amount to become payable or cash collateral in respect thereof to be demanded, or any Borrower Party is unable or admits in writing its inability to pay its debts as they mature; or (ii) the occurrence under any Swap Contract of an Early Termination Date (as defined in such Swap Contract) resulting from (x) any event of default under such Swap Contract as to which Borrower or any Subsidiary is the Defaulting Party (as defined in such Swap Contract) or (y) any Termination Event occurs under any Swap Contract (as defined therein) as to which Borrower or any Subsidiary is an Affected Party (as so defined), which, in either event, the Swap Termination Value owed by Borrower or such Subsidiary as a result thereof is greater than $5,000,000; or (e) Final judgment or judgments for the payment of money aggregating in excess of $1,000,000 is or are outstanding against Borrower and/or any Of its Subsidiaries or against any property or assets of either and such judgments have remained unpaid, unvacated, unbonded or unstayed by appeal or otherwise for a period of 10 business days from the date of entry; or (f) Borrower or any of its Subsidiaries (i) becomes insolvent or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace -58- periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course substantially as it is conducted on the Closing Date except as permitted by SECTION 7.04; (iii) commences any proceeding under Debtor Relief Laws or files any petition or answer consenting to any proceeding under Debtor Relief Laws; (iv) acquiesces in the appointment of a receiver, trustee, custodian or liquidator for itself or a substantial portion of its property, assets or business or effects a plan or other arrangement with its creditors; or (v) takes any action to effectuate any of the foregoing; or (g) Any involuntary proceeding under Debtor Relief Laws is commenced or filed against Borrower or any Of its Subsidiaries holding a substantial part of the assets of Borrower and its Subsidiaries on a consolidated basis, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of the assets of Borrower and its Subsidiaries on a consolidated basis and any such proceedings or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; or (h) An ERISA Event shall occur with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of Borrower under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of 5% of Consolidated Tangible Net Worth; the aggregate amount of Unfunded Pension Liability among all Pension Plans at any time exceeds 5% of Consolidated Tangible Net Worth; or (iii) Borrower or any ERISA Affiliate shall fail to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of 5% of Consolidated Tangible Net Worth; or (i) Any Event of Default shall occur under (and as defined in) any Senior Note Agreement; or (j) Any Person or group of Persons (within the meaning of Section 13 or 14 of the Exchange Act), other than an employee benefit or stock ownership plan of Borrower, shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 50% or more of the outstanding shares of common stock of Borrower; or (k) There occurs any termination (other than a scheduled termination), liquidation, unwind or similar event or circumstance under any Permitted Accounts Receivable Financing Facilities, which permits any purchaser of receivables thereunder to cease purchasing such receivables and/or to apply all collections on previously purchased receivables thereunder to the repayment of such purchaser's interest in such previously purchased receivables; or (l) Any Loan Document, at any time after its execution and delivery and for any reason other than the agreement or action (or omission to act) of Lenders or satisfaction in full of all the Obligations ceases to be in full force and effect or is declared by a court of competent jurisdiction to be null and void, invalid or unenforceable in any respect; or any Borrower Party -59- thereto denies in writing that it has any or further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind same; or (m) The occurrence of a Change in Control. 8.02 REMEDIES UPON EVENT OF DEFAULT. Without limiting any other rights or remedies of Administrative Agent or Lenders provided for elsewhere in this Agreement, or the other Loan Documents, or by applicable Law, or in equity, or otherwise: (a) Upon the occurrence, and during the continuance, of any Event of Default OTHER THAN an Event of Default described in SECTION 8.01(f) or (g): (i) the Requisite Lenders may request Administrative Agent to, and Administrative Agent thereupon shall, terminate the Commitments and/or declare all or any part of the unpaid principal of all Loans, all interest accrued and unpaid thereon and all other amounts payable under the Loan Documents to be immediately due and payable, whereupon the same shall become and be immediately due and payable, without protest, presentment, notice of dishonor, demand or further notice of any kind, all of which are expressly waived by Borrower; and (ii) Issuing Lender may, with the approval of Administrative Agent on behalf of the Requisite Lenders, demand immediate payment by Borrower of an amount equal to the aggregate amount of all outstanding Letters of Credit Usage to be held in a Letter of Credit Cash Collateral Account. (b) Upon the occurrence of any Event of Default described in SECTION 8.01(f) or (g): (i) the Commitments and all other obligations of Administrative Agent or Lenders shall automatically terminate without notice to or demand upon Borrower, which are expressly waived by Borrower; (ii) the unpaid principal of all Loans, all interest accrued and unpaid thereon and all other amounts payable under the Loan Documents shall be immediately due and payable, without protest, presentment, notice of dishonor, demand or further notice of any kind, all of which are expressly waived by Borrower; and (iii) an amount equal to the aggregate amount of all outstanding Letters of Credit Usage shall be immediately due and payable to Issuing Lender without notice to or demand upon Borrower, which are expressly waived by Borrower, to be held in a Letter of Credit Cash Collateral Account. (c) Upon the occurrence of any Event of Default, Lenders and Administrative Agent, or any of them, without notice to (except as expressly provided for in any Loan Document) or demand upon Borrower, which are expressly waived by Borrower (except as to notices expressly provided for in any Loan Document), may proceed to (but only with the consent of the Requisite Lenders) protect, exercise and enforce their rights and remedies under the Loan Documents against any Borrower Party and such other rights and remedies as are provided by Law or equity. -60- (d) Except as permitted by SECTION 10.05, no Lender may exercise any rights or remedies with respect to the Obligations without the consent of the Requisite Lenders in their sole and absolute discretion. The order and manner in which Administrative Agent's and Lenders' rights and remedies are to be exercised shall be determined by the Requisite Lenders in their sole and absolute discretion. Regardless of how a Lender may treat payments for the purpose of its own accounting, for the purpose of computing the Obligations hereunder, payments shall be applied FIRST, to costs and expenses (including Attorney Costs) incurred by Administrative Agent and each Lender, SECOND, to the payment of accrued and unpaid interest on the Loans to and including the date of such application, THIRD, to the payment of the unpaid principal of the Loans, and FOURTH, to the payment of all other amounts (including fees) then owing to Administrative Agent and Lenders under the Loan Documents, in each case paid pro rata to each Lender in the same proportions that the aggregate Obligations owed to each Lender under the Loan Documents bear to the aggregate Obligations owed under the Loan Documents to all Lenders, without priority or preference among Lenders. No application of payments will cure any Event of Default, or prevent acceleration, or continued acceleration, of amounts payable under the Loan Documents, or prevent the exercise, or continued exercise, of rights or remedies of Administrative Agent and Lenders hereunder or thereunder or at Law or in equity. SECTION 9. ADMINISTRATIVE AGENT 9.01 APPOINTMENT AND AUTHORIZATION OF ADMINISTRATIVE AGENT. (a) Each Lender hereby irrevocably (subject to SECTION 9.09) appoints, designates and authorizes Administrative Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Administrative Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Administrative Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" in this Agreement with reference to Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. (b) Issuing Lender shall act on behalf of Lenders with respect to any Letters of Credit issued by it and the documents associated therewith until such time and except for so long as Administrative Agent may agree at the request of the Requisite Lenders to act for such Issuing Lender with respect thereto; PROVIDED, HOWEVER, that Issuing Lender shall have all of the benefits and immunities (i) provided to Administrative Agent in this SECTION 9 with respect to any acts taken or omissions suffered by Issuing Lender in connection with Letters of Credit issued by it or -61- proposed to be issued by it and the application and agreements for letters of credit pertaining to the Letters of Credit as fully as if the term "Administrative Agent" as used in this SECTION 9 included Issuing Lender with respect to such acts or omissions, and (ii) as additionally provided in this Agreement with respect to Issuing Lender. 9.02 DELEGATION OF DUTIES. Administrative Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Administrative Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 9.03 LIABILITY OF ADMINISTRATIVE AGENT. None of Administrative Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of Lenders for any recital, statement, representation or warranty made by any Borrower Party or any Subsidiary or Affiliate of any Borrower Party, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Administrative Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of any Borrower Party or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Administrative Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of any Borrower Party or any of any Borrower Party's Subsidiaries or Affiliates. 9.04 RELIANCE BY ADMINISTRATIVE AGENT. (a) Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrower), independent accountants and other experts selected by Administrative Agent. Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Requisite Lenders as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Requisite Lenders or all Lenders, if required hereunder, and such request and any action taken or failure to act pursuant thereto shall be binding upon all of Lenders. Where this Agreement expressly permits or prohibits an action unless the Requisite Lenders otherwise determine, and in all other instances, Administrative -62- Agent may, but shall not be required to, initiate any solicitation for the consent or a vote of Lenders. (b) For purposes of determining compliance with the conditions specified in SECTION 4.01, each Lender that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by Administrative Agent to such Lender for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to such Lender. 9.05 NOTICE OF DEFAULT. Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to Administrative Agent for the account of Lenders, unless Administrative Agent shall have received written notice from a Lender or Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". Administrative Agent will notify Lenders of its receipt of any such notice. Administrative Agent shall take such action with respect to such Default or Event of Default as may be requested by the Requisite Lenders in accordance with SECTION 8; PROVIDED, HOWEVER, that unless and until Administrative Agent has received any such request, Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of Lenders. 9.06 CREDIT DECISION; DISCLOSURE OF INFORMATION BY ADMINISTRATIVE AGENT. Each Lender acknowledges that none of Administrative Agent-Related Persons has made any representation or warranty to it, and that no act by Administrative Agent hereinafter taken, including any consent to and acceptance of any assignment or review of the affairs of any Borrower Party and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Administrative Agent-Related Person to any Lender as to any matter, including whether Administrative Agent-Related Persons have disclosed material information in their possession. Each Lender, including any Lender by assignment, represents to Administrative Agent that it has, independently and without reliance upon any Administrative Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of any Borrower Party and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to any Borrower Party hereunder. Each Lender also represents that it will, independently and without reliance upon any Administrative Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of any Borrower Party. Except for notices, reports and other documents expressly required to be furnished to Lenders by Administrative Agent herein, Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and -63- other condition or creditworthiness of any Borrower Party or any of its Subsidiaries which may come into the possession of any of Administrative Agent-Related Persons. 9.07 INDEMNIFICATION OF ADMINISTRATIVE AGENT. Whether or not the transactions contemplated hereby are consummated, Lenders shall indemnify upon demand each Administrative Agent-Related Person (to the extent not reimbursed by or on behalf of Borrower Parties and without limiting the obligation of Borrower Parties to do so), pro rata, and hold harmless each Administrative Agent-Related Person from and against any and all Indemnified Liabilities incurred by it; PROVIDED, HOWEVER, that no Lender shall be liable for the payment to any Administrative Agent-Related Person of any portion of such Indemnified Liabilities resulting from such Person's gross negligence or willful misconduct; PROVIDED, HOWEVER, that no action taken in accordance with the directions of the Requisite Lenders shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section. Without limitation of the foregoing, each Lender shall reimburse Administrative Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by Administrative Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that Administrative Agent is not reimbursed for such expenses by or on behalf of Borrower Parties. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of Administrative Agent. 9.08 ADMINISTRATIVE AGENT IN INDIVIDUAL CAPACITY. Bank of America and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrower and its Subsidiaries and Affiliates as though Bank of America were not Administrative Agent or Issuing Lender hereunder and without notice to or consent of Lenders. Lenders acknowledge that, pursuant to such activities, Bank of America or its Affiliates may receive information regarding Borrower or its Affiliates (including information that may be subject to confidentiality obligations in favor of Borrower or such Affiliate) and acknowledge that Administrative Agent shall be under no obligation to provide such information to them. With respect to its Loans, Bank of America shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not Administrative Agent or Issuing Lender. 9.09 SUCCESSOR ADMINISTRATIVE AGENT. Administrative Agent may, and at the request of the Requisite Lenders shall, resign as Administrative Agent upon 30 days' notice to Lenders. If Administrative Agent resigns under this Agreement, the Requisite Lenders shall appoint from among Lenders a successor administrative agent for Lenders which successor administrative agent shall be approved by Borrower. If no successor administrative agent is appointed prior to the effective date of the resignation of Administrative Agent, Administrative Agent may appoint, after consulting with Lenders and Borrower, a successor administrative agent from among Lenders. Upon the acceptance of its appointment as successor administrative agent hereunder, such successor administrative agent shall succeed to all the rights, powers and duties of the retiring Administrative Agent and the term "Administrative Agent" shall mean such successor -64- administrative agent and the retiring Administrative Agent's appointment, powers and duties as Administrative Agent shall be terminated. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this SECTION 9 and SECTIONS 10.03 and 10.13 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. If no successor administrative agent has accepted appointment as Administrative Agent by the date which is 30 days following a retiring Administrative Agent's notice of resignation, the retiring Administrative Agent's resignation shall nevertheless thereupon become effective and Lenders shall perform all of the duties of Administrative Agent hereunder until such time, if any, as the Requisite Lenders appoint a successor agent as provided for above. Notwithstanding the foregoing, however, Bank of America may not be removed as Administrative Agent at the request of the Requisite Lenders unless Bank of America shall also simultaneously be replaced as "Issuing Lender" and "Swing Line Lender" hereunder pursuant to documentation in form and substance reasonably satisfactory to Bank of America. SECTION 10. MISCELLANEOUS. 10.01 AMENDMENTS; CONSENTS. No amendment, modification, supplement, extension, termination or waiver of any provision of this Agreement or any other Loan Document, no approval or consent thereunder, and no consent to any departure by any Borrower Party therefrom shall be effective unless in writing signed by the Requisite Lenders and acknowledged by Administrative Agent, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Except as otherwise expressly provided herein, without the approval in writing of Administrative Agent and all Lenders, no amendment, modification, supplement, termination, waiver or consent may be effective: (a) To reduce the amount of principal, principal prepayments or the rate of interest payable on, any Loan, or the amount of any fee or other amount payable to any Lender under the Loan Documents (unless such modification is consented to by each Lender entitled to receive such fee ) or to waive an Event of Default consisting of the failure of any Borrower Party to pay when due principal, interest or any commitment fee; (b) To postpone any date fixed for any payment of principal of, prepayment of principal of, or any installment of interest on, any Loan or any installment of any commitment fee, to extend the term of, or, except as provided in SECTION 2.12, increase the amount of, any Lender's Commitment (it being understood that a waiver of an Event of Default shall not constitute an extension or increase in the Commitment of any Lender) or, except as provided in SECTION 2.12, modify the Pro Rata Share of any Lender; (c) To amend the provisions of the definition of "REQUISITE LENDERS," this SECTION 10.01 or SECTION 10.06; (d) Release all or substantially all of the Subsidiary Guarantors; or -65- (e) To amend any provision of this Agreement that expressly requires the consent or approval of all Lenders. PROVIDED, HOWEVER, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Issuing Lender in addition to the Requisite Lenders or all Lenders, as the case may be, affect the rights or duties of the Issuing Lender under any Loan Document relating to Letters of Credit, (ii) no amendment, waiver or consent shall, unless in writing and signed by Administrative Agent in addition to the Requisite Lenders or all Lenders, as the case may be, affect the rights or duties of Administrative Agent under any Loan Document, (iii) no amendment, waiver or consent shall, unless in writing and signed by Swing Line Lender in addition to the Requisite Lenders or all Lenders, as the case may be, affect the rights or duties of Swing Line Lender under any Loan Document, and (iv) any fee letter may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. Any amendment, modification, supplement, termination, waiver or consent pursuant to this Section shall apply equally to, and shall be binding upon, all Lenders and Administrative Agent. 10.02 TRANSMISSION AND EFFECTIVENESS OF NOTICES AND SIGNATURES. (a) MODES OF DELIVERY. Except as otherwise provided in any Loan Document, notices, requests, demands, directions, agreements and documents delivered in connection with the Loan Documents (collectively, "COMMUNICATIONS") shall be transmitted by Requisite Notice to the number and address set forth on SCHEDULE 10.02, may be delivered by the following modes of delivery, and shall be effective as follows: MODE OF DELIVERY EFFECTIVE ON EARLIER OF ACTUAL RECEIPT AND: - ------------------------------------------------------------------------ Courier Scheduled delivery date Facsimile When transmission in legible form complete Mail Fourth Business Day after deposit in U.S. mail first class postage pre-paid Personal delivery When received Telephone When conversation completed PROVIDED, HOWEVER, that communications delivered to Administrative Agent pursuant to SECTION 2 shall not be effective until actually received by Administrative Agent. (b) RELIANCE BY ADMINISTRATIVE AGENT AND LENDERS. Administrative Agent and Lenders shall be entitled to rely and act on any communications purportedly given by or on behalf of any Borrower Party even if such communications (i) were not made in a manner specified herein, (ii) were incomplete, (iii) were not preceded or followed by any other notice specified herein, or (d) the terms thereof, as understood by the recipient, varied from any subsequent related communications provided for herein. Each Borrower Party shall indemnify Administrative Agent and Lenders from any loss, cost, expense or liability as a result of relying on any communications permitted herein. -66- (c) EFFECTIVENESS OF FACSIMILE SIGNATURES. Signatures on communications may be transmitted by facsimile only with the consent of Administrative Agent in its sole and absolute discretion in each instance. The effectiveness of any such signatures accepted by Administrative Agent shall, subject to applicable Law, have the same force and effect as manual signatures and shall be binding on all Borrower Parties and Administrative Agent and Lenders. Administrative Agent may also require that any such signature be confirmed by a manually-signed hardcopy thereof; PROVIDED, HOWEVER, that the failure to request any such manually-signed hardcopy confirmation shall not effect the effectiveness of any facsimile signatures. 10.03 ATTORNEY COSTS, EXPENSES AND TAXES. Borrower agrees (a) to pay or reimburse Administrative Agent for all costs and expenses incurred in connection with the development, preparation, negotiation and execution of the Loan Documents, and the development, preparation, negotiation and execution of any amendment, waiver, consent, supplement or modification to, any Loan Documents, and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including all Attorney Costs, and (b) to pay or reimburse Administrative Agent and each Lender for all costs and expenses incurred in connection with any refinancing, restructuring, reorganization (including a bankruptcy reorganization) and enforcement or attempted enforcement, or preservation of any rights under any Loan Documents, and any other documents prepared in connection herewith or therewith, or in connection with any refinancing, or restructuring of any such documents in the nature of a "workout" or of any insolvency or bankruptcy proceeding, including Attorney Costs. The foregoing costs and expenses shall include all search, filing, recording, title insurance and appraisal charges and fees and taxes related thereto, and other out-of-pocket expenses incurred by Administrative Agent and the cost of independent public accountants and other outside experts retained by Administrative Agent or any Lender. Such costs and expenses shall also include administrative costs of Administrative Agent reasonably attributable to the administration of the Loan Documents. Any amount payable by Borrower under this Section shall bear interest from the second Business Day following the date of demand for payment at the Default Rate, unless waived by Administrative Agent. The agreements in this Section shall survive repayment of all Obligations. 10.04 BINDING EFFECT; ASSIGNMENT. (a) This Agreement and the other Loan Documents to which each Borrower Party is a party will be binding upon and inure to the benefit of each Borrower Party, Administrative Agent, Lenders and their respective successors and assigns, except that, no Borrower Party may assign its rights hereunder or thereunder or any interest herein or therein without the prior written consent of all Lenders and any such attempted assignment shall be void. Any Lender may at any time pledge its Note or any other instrument evidencing its rights as a Lender under this Agreement to a Federal Reserve Lender, but no such pledge shall release that Lender from its obligations hereunder or grant to such Federal Reserve Lender the rights of a Lender hereunder absent foreclosure of such pledge. (b) From time to time following the Closing Date, each Lender may assign to one or more Eligible Assignees all or any portion of its Pro Rata Share of its Commitment and/or Extensions of Credit; PROVIDED that (i) such assignment, if not to a Lender or an Affiliate of the assigning Lender, shall be consented to by Borrower at all times other than during the existence -67- of a Default or Event of Default and Administrative Agent and Issuing Lender (which consents shall not be unreasonably withheld or delayed), (ii) a copy of a duly signed and completed Notice of Assignment and Acceptance shall be delivered to Administrative Agent, (iii) except in the case of an assignment to an Affiliate of the assigning Lender, to another Lender or of the entire remaining Commitment of the assigning Lender, the assignment shall not assign a Pro Rata Share equivalent to less than the Minimum Amount therefor, and (iv) the effective date of any such assignment shall be as specified in the Notice of Assignment and Acceptance, but not earlier than the date which is five Business Days after the date Administrative Agent has received the Notice of Assignment and Acceptance. Upon acceptance by Administrative Agent of such Notice Assignment and Acceptance and consent thereto by Administrative Agent and Issuing Lender and payment of the requisite fee described below, the Eligible Assignee named therein shall be a Lender for all purposes of this Agreement, with the Pro Rata Share therein set forth and, to the extent of such Pro Rata Share, the assigning Lender shall be released from its further obligations under this Agreement. Borrower agrees that it shall execute and deliver upon request (against delivery by the assigning Lender to Borrower of any Note) to such assignee Lender, one or more Notes evidencing that assignee Lender's Pro Rata Share, and to the assigning Lender if requested, one or more Notes evidencing the remaining balance Pro Rata Share retained by the assigning Lender. Administrative Agent's consent to and acceptance of any assignment shall not be deemed to constitute any representation or warranty by any Administrative Agent-Related Person as to any matter. Each assignee shall concurrently execute and deliver an Addendum to the Intercreditor Agreement in accordance with the terms thereof. (c) After receipt of a completed Notice of Assignment and Acceptance, and receipt of an assignment fee of $3,500 from such Eligible Assignee (including Affiliates of assigning Lenders), Administrative Agent shall, promptly following the effective date thereof, provide to Borrower and Lenders a revised SCHEDULE 10.02 giving effect thereto. (d) Each Lender may from time to time grant participations to one or more other Person (including another Lender) all or any portion of its Pro Rata Share of its Commitment and/or Extensions of Credit; PROVIDED, HOWEVER, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other financial institutions shall not be a Lender hereunder for any purpose except, if the participation agreement so provides, for the purposes of SECTION 3 (but only to the extent that the cost of such benefits to a Borrower Party does not exceed the cost which a Borrower Party would have incurred in respect of such Lender absent the participation) and subject to SECTIONS 10.05 AND 10.06, (iv) Borrower, Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, (v) the participation shall not restrict an increase in the Commitment or in granting Lender's Pro Rata Share, so long as the amount of the participation interest is not affected thereby, and (vi) the consent of the holder of such participation interest shall not be required for amendments or waivers of provisions of the Loan Documents; PROVIDED, HOWEVER, that the assigning Lender may, in any agreement with a participant, give such participant the right to consent to any matter which (A) extends the Maturity Date as to such participant or any other date upon which any payment of money is due to such participant, (B) reduces the rate of interest -68- owing to such participant, any fee or any other monetary amount owing to such participant, or (C) reduces the amount of any installment of principal owing to such participant. 10.05 SET-OFF. In addition to any rights and remedies of Administrative Agent and Lenders or any assignee or participant of Lenders or any Affiliates thereof (each, a "PROCEEDING PARTY") provided by law, upon the occurrence and during the continuance of any Event of Default, each Proceeding Party is authorized at any time and from time to time, without prior notice to Borrower, any such notice being waived by Borrower to the fullest extent permitted by law, to proceed directly, by right of set-off, banker's lien, or otherwise, against any assets of Borrower Parties which may be in the hands of such Proceeding Party (including all general or special, time or demand, provisional or other deposits and other indebtedness owing by such Proceeding Party to or for the credit or the account of Borrower) and apply such assets against the Obligations, irrespective of whether such Proceeding Party shall have made any demand therefor and although such Obligations may be unmatured. Each Lender agrees promptly to notify Borrower and Administrative Agent after any such set-off and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 10.06 SHARING OF PAYMENTS. Each Lender severally agrees that if it, through the exercise of any right of setoff, banker's lien or counterclaim against any Borrower Party, or otherwise, receives payment of the Obligations held by it that is ratably more than any other Lender, through any means, receives in payment of the Obligations held by that Lender, then, subject to applicable Laws: (a) Lender exercising the right of setoff, banker's lien or counterclaim or otherwise receiving such payment shall purchase, and shall be deemed to have simultaneously purchased, from the other Lender a participation in the Obligations held by the other Lender and shall pay to the other Lender a purchase price in an amount so that the share of the Obligations held by each Lender after the exercise of the right of setoff, banker's lien or counterclaim or receipt of payment shall be in the same proportion that existed prior to the exercise of the right of setoff, banker's lien or counterclaim or receipt of payment; and (b) such other adjustments and purchases of participations shall be made from time to time as shall be equitable to ensure that all of Lenders share any payment obtained in respect of the Obligations ratably in accordance with each Lender's share of the Obligations immediately prior to, and without taking into account, the payment; PROVIDED that, if all or any portion of a disproportionate payment obtained as a result of the exercise of the right of setoff, banker's lien, counterclaim or otherwise is thereafter recovered from the purchasing Lender by a Borrower Party or any Person claiming through or succeeding to the rights of a Borrower Party, the purchase of a participation shall be rescinded and the purchase price thereof shall be restored to the extent of the recovery, but without interest. Each Lender that purchases a participation in the Obligations pursuant to this Section shall from and after the purchase have the right to give all notices, requests, demands, directions and other communications under this Agreement with respect to the portion of the Obligations purchased to the same extent as though the purchasing Lender were the original owner of the Obligations purchased. Each Borrower Party expressly consents to the foregoing arrangements and agrees that any Lender holding a participation in an Obligation so purchased may exercise any and all rights of setoff, banker's lien or counterclaim with respect to the participation as fully as if Lender were the original owner of the Obligation purchased. -69- 10.07 NO WAIVER; CUMULATIVE REMEDIES. (a) No failure by any Lender or Administrative Agent to exercise, and no delay by any Lender or Administrative Agent in exercising, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege under any Loan Document preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. (b) The rights, remedies, powers and privileges herein or therein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by Law. Any decision by Administrative Agent or any Lender not to require payment of any interest (including Default Interest), fee, cost or other amount payable under any Loan Document or to calculate any amount payable by a particular method on any occasion shall in no way limit or be deemed a waiver of Administrative Agent's or such Lender's right to require full payment thereof, or to calculate an amount payable by another method that is not inconsistent with this Agreement, on any other or subsequent occasion. (c) The terms and conditions of SECTION 9 are inserted for the sole benefit of Administrative Agent and Lenders; the same may be waived in whole or in part, with or without terms or conditions, in respect of any Extension of Credit without prejudicing Administrative Agent's or Lenders' rights to assert them in whole or in part in respect of any other Loan. 10.08 USURY. Notwithstanding anything to the contrary contained in any Loan Document, the interest and fees paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by applicable Law (the "MAXIMUM RATE"). If Administrative Agent or any Lender shall receive interest or a fee in an amount that exceeds the Maximum Rate, the excessive interest or fee shall be applied to the principal of the Outstanding Obligations or, if it exceeds the unpaid principal, refunded to Borrower. In determining whether the interest or a fee contracted for, charged, or received by Administrative Agent or a Lender exceeds the Maximum Rate, such Person may, to the extent permitted by applicable Law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations. 10.09 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10.10 INTEGRATION. This Agreement, together with the other Loan Documents and any letter agreements referred to herein, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. In the event of any conflict between the provisions of this Agreement and those of any other Loan Document, the provisions of this Agreement shall control and govern; PROVIDED that the inclusion of supplemental rights or remedies in favor of Administrative Agent or Lenders in any other Loan Document shall not be deemed a conflict with this Agreement. Each Loan Document was drafted with the joint participation of the respective parties thereto and -70- shall be construed neither against nor in favor of any party, but rather in accordance with the fair meaning thereof. 10.11 NATURE OF LENDERS' OBLIGATIONS. The obligations of Lenders hereunder are several and not joint or joint and several. Nothing contained in this Agreement or any other Loan Document and no action taken by Administrative Agent or Lenders or any of them pursuant hereto or thereto may, or may be deemed to, make Lenders a partnership, an association, a joint venture or other entity, either among themselves or with Borrower or any Affiliates of Borrower. Each Lender's obligation to make any Loan pursuant hereto is several and not joint or joint and several, and in the case of the initial Loan only is conditioned upon the performance by all other Lenders of their obligations to make initial Loans A default by any Lender will not increase the Pro Rata Share attributable to any other Lender. 10.12 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made hereunder and in any Loan Document, certificate or statement delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery thereof but shall terminate the later of (a) when the Commitments are terminated and (b) when no Obligations remain outstanding under any Loan Document. Such representations and warranties have been or will be relied upon by Administrative Agent and each Lender, notwithstanding any investigation made by Administrative Agent or any Lender or on their behalf. 10.13 INDEMNITY BY BORROWER. Borrower agrees to indemnify, save and hold harmless each Administrative Agent-Related Person and each Lender and their respective Affiliates, directors, officers, agents, attorneys and employees (collectively the "INDEMNITEES") from and against: (a) any and all claims, demands, actions or causes of action that are asserted against any Indemnitee by any Person (other than Administrative Agent or any Lender) relating directly or indirectly to a claim, demand, action or cause of action that such Person asserts or may assert against any Borrower Party, any of their Affiliates or any of their officers or directors; (b) any and all claims, demands, actions or causes of action arising out of or relating to, the Loan Documents, any predecessor loan documents, the Commitments, the use or contemplated use of the proceeds of any Loan, or the relationship of any Borrower Party, Administrative Agent and Lenders under this Agreement; (c) any administrative or investigative proceeding by any Governmental Authority arising out of or related to a claim, demand, action or cause of action described in subsection (a) or (b) above; and (d) any and all liabilities, losses, costs or expenses (including Attorney Costs) that any Indemnitee suffers or incurs as a result of the assertion of any foregoing claim, demand, action, cause of action or proceeding, or as a result of the preparation of any defense in connection with any foregoing claim, demand, action, cause of action or proceeding, in all cases, whether or not an Indemnitee is a party to such claim, demand, action, cause of action or proceeding, including those liabilities caused by an Indemnitee's own negligence (all the foregoing, collectively, the "INDEMNIFIED LIABILITIES"); PROVIDED that no Indemnitee shall be entitled to indemnification for any loss caused by its own gross negligence or willful misconduct or for any loss asserted against it by another Indemnitee. 10.14 NONLIABILITY OF LENDERS. Borrower acknowledges and agrees that: -71- (a) Any inspections of any property of Borrower made by or through Administrative Agent or Lenders are for purposes of administration of the Loan Documents only, and Borrower is entitled to rely upon the same (whether or not such inspections are at the expense of Borrower); (b) By accepting or approving anything required to be observed, performed, fulfilled or given to Administrative Agent or Lenders pursuant to the Loan Documents, neither Administrative Agent nor Lenders shall be deemed to have warranted or represented the sufficiency, legality, effectiveness or legal effect of the same, or of any term, provision or condition thereof, and such acceptance or approval thereof shall not constitute a warranty or representation to anyone with respect thereto by Administrative Agent or Lenders; (c) The relationship between Borrower and Administrative Agent and Lenders is, and shall at all times remain, solely that of borrower and lenders; neither Administrative Agent nor Lenders shall under any circumstance be construed to be partners or joint venturers of Borrower or its Affiliates; neither Administrative Agent nor Lenders shall under any circumstance be deemed to be in a relationship of confidence or trust or a fiduciary relationship with Borrower or its Affiliates, or to owe any fiduciary duty to Borrower or its Affiliates; neither Administrative Agent nor Lenders undertake or assume any responsibility or duty to Borrower or its Affiliates to select, review, inspect, supervise, pass judgment upon or inform Borrower or its Affiliates of any matter in connection with their property or the operations of Borrower or its Affiliates; Borrower and it Affiliates shall rely entirely upon their own judgment with respect to such matters; and any review, inspection, supervision, exercise of judgment or supply of information undertaken or assumed by Administrative Agent or Lenders in connection with such matters is solely for the protection of Administrative Agent and Lenders and neither Borrower nor any other Person is entitled to rely thereon; and (d) Administrative Agent and Lenders shall not be responsible or liable to any Person for any loss, damage, liability or claim of any kind relating to injury or death to Persons or damage to property caused by the actions, inaction or negligence of any Borrower and/or its Affiliates and Borrower hereby indemnifies and holds Administrative Agent and Lenders harmless from any such loss, damage, liability or claim. 10.15 NO THIRD PARTIES BENEFITED. This Agreement is made for the purpose of defining and setting forth certain obligations, rights and duties of Borrower, Administrative Agent and Lenders in connection with the Loans, and is made for the sole benefit of Borrower, Administrative Agent and Lenders, and Administrative Agent's and Lenders' successors and assigns. Except as provided in SECTIONS 10.04 and 10.13, no other Person shall have any rights of any nature hereunder or by reason hereof. 10.16 SEVERABILITY. Any provision of the Loan Documents that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. -72- 10.17 CONFIDENTIALITY. Administrative Agent and each Lender shall use any confidential non-public information concerning the Borrower Parties and their Subsidiaries that is furnished to Administrative Agent or such Lender by or on behalf of the Borrower Parties and their Subsidiaries in connection with the Loan Documents (collectively, "CONFIDENTIAL INFORMATION") solely for the purpose of evaluating and providing products and services to them and administering and enforcing the Loan Documents, and it will hold the Confidential Information in confidence. Notwithstanding the foregoing, Administrative Agent and each Lender may disclose Confidential Information (a) to their affiliates or any of their or their affiliates' directors, officers, employees, advisors, or representatives (collectively, the "REPRESENTATIVES") whom it determines need to know such information for the purposes set forth in this Section; (b) to any bank or financial institution or other entity to which such Lender has assigned or desires to assign an interest or participation in the Loan Documents or the Obligations, PROVIDED that any such foregoing recipient of such Confidential Information agrees to keep such Confidential Information confidential as specified herein; (c) to any governmental agency or regulatory body having or claiming to have authority to regulate or oversee any aspect of Administrative Agent's or such Lender's business or that of their Representatives in connection with the exercise of such authority or claimed authority; (d) to the extent necessary or appropriate to effect or preserve Administrative Agent's or such Lender's or any of their Affiliates' security (if any) for any Obligation or to enforce any right or remedy or in connection with any claims asserted by or against Administrative Agent or such Lender or any of their Representatives; and (e) pursuant to any subpoena or any similar legal process. For purposes hereof, the term "Confidential Information" shall not include information that (x) is in Administrative Agent's or a Lender's possession prior to its being provided by or on behalf of the Borrower Parties, PROVIDED that such information is not known by Administrative Agent or such Lender to be subject to another confidentiality agreement with, or other legal or contractual obligation of confidentiality to, a Borrower Party, (y) is or becomes publicly available (other than through a breach hereof by Administrative Agent or such Lender), or (z) becomes available to Administrative Agent or such Lender on a nonconfidential basis, PROVIDED that the source of such information was not known by Administrative Agent or such Lender to be bound by a confidentiality agreement or other legal or contractual obligation of confidentiality with respect to such information. 10.18 FURTHER ASSURANCES. Borrower and its Subsidiaries shall, at their expense and without expense to Lenders or Administrative Agent, do, execute and deliver such further acts and documents as any Lender or Administrative Agent from time to time reasonably requires for the assuring and confirming unto Lenders or Administrative Agent of the rights hereby created or intended now or hereafter so to be, or for carrying out the intention or facilitating the performance of the terms of any Loan Document. 10.19 HEADINGS. Section headings in this Agreement and the other Loan Documents are included for convenience of reference only and are not part of this Agreement or the other Loan Documents for any other purpose. 10.20 TIME OF THE ESSENCE. Time is of the essence of the Loan Documents. 10.21 FOREIGN LENDERS AND PARTICIPANTS. Each Lender, and each holder of a participation interest herein, that is a "foreign corporation, partnership or trust" within the -73- meaning of the Code shall deliver to Administrative Agent, prior to receipt of any payment subject to withholding (or after accepting an assignment or receiving a participation interest herein), two duly signed completed copies of either Form W-8BEN or any successor thereto (relating to such Person and entitling it to a complete exemption from withholding on all payments to be made to such Person by Borrower pursuant to this Agreement) or Form W-8ECI or any successor thereto (relating to all payments to be made to such Person by Borrower pursuant to this Agreement) of the United States Internal Revenue Service or such other evidence satisfactory to Borrower and Administrative Agent that no withholding under the federal income tax laws is required with respect to such Person. Thereafter and from time to time, each such Person shall (a) promptly submit to Administrative Agent such additional duly completed and signed copies of one of such forms (or such successor forms as shall be adopted from time to time by the relevant United States taxing authorities) as may then be available under then current United States laws and regulations to avoid, or such evidence as is satisfactory to Borrower and Administrative Agent of any available exemption from, United States withholding taxes in respect of all payments to be made to such Person by Borrower pursuant to this Agreement and (b) take such steps as shall not be materially disadvantageous to it, in the reasonable judgment of such Lender, and as may be reasonably necessary (including the re-designation of its Lending Office, if any) to avoid any requirement of applicable Laws that Borrower make any deduction or withholding for taxes from amounts payable to such Person. If such Persons fails to deliver the above forms or other documentation, then Administrative Agent may withhold from any interest payment to such Person an amount equivalent to the applicable withholding tax imposed by Sections 1441 and 1442 of the Code, without reduction. If any Governmental Authority asserts that Administrative Agent did not properly withhold any tax or other amount from payments made in respect of such Person, such Person shall indemnify Administrative Agent therefor, including all penalties and interest and costs and expenses (including Attorney Costs) of Administrative Agent. The obligation of Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of Administrative Agent. 10.22 GOVERNING LAW. (a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE; PROVIDED THAT ADMINISTRATIVE AGENT AND EACH LENDER SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE CENTRAL DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH BORROWER PARTY, ADMINISTRATIVE AGENT AND EACH LENDER CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH BORROWER PARTY, ADMINISTRATIVE AGENT AND EACH LENDER IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR -74- HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF ANY LOAN DOCUMENT OR OTHER DOCUMENT RELATED HERETO. EACH BORROWER PARTY, ADMINISTRATIVE AGENT AND EACH LENDER WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY THE LAW OF CALIFORNIA. 10.23 WAIVER OF RIGHT TO TRIAL BY JURY. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER ANY LOAN DOCUMENT OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO ANY LOAN DOCUMENT, OR THE TRANSACTIONS RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER FOUNDED IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 10.24 ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 10.25 TERMINATION OF EXISTING SYNDICATED AGREEMENT. The parties to the Existing Syndicated Agreement which are parties hereto hereby agree that the Existing Syndicated Agreement shall terminate on as of the Closing Date, except with respect to provisions thereof which by their terms survive the termination of the Existing Syndicated Agreement PROVIDED that all amounts due and owing thereunder are paid in full. -75- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. K2 INC. By ------------------------------------- John J. Rangel Senior Vice President, Finance BANK OF AMERICA, N.A., AS ADMINISTRATIVE AGENT By ------------------------------------- Gina Meador Vice President BANK OF AMERICA, N.A., AS ISSUING LENDER, A LENDER AND SWING LINE LENDER By ------------------------------------- Therese Fontaine Principal -S-1- BANK ONE, N.A. By ---------------------------- Name -------------------------- Title ------------------------- -S-2- UNION BANK OF CALIFORNIA, N.A. By ------------------------------ Name ---------------------------- Title --------------------------- -S-3- COMERICA WEST INCORPORATED By --------------------------- Name ------------------------- Title ------------------------ -S-4- EX-21 7 EXHIBIT 21 EXHIBIT (21) SUBSIDIARIES OF K2 INC.
PERCENTAGE OF VOTING SECURITIES OWNED OR SUBJECT TO VOTING CONTROL BY ------------------------------- COMPANY OTHER ------- ----- Shakespeare Company, a Delaware corporation 100% Subsidiaries of Shakespeare Company: Shakespeare (Hong Kong) Ltd., a Hong Kong corporation 100% Subsidiary of Shakespeare (Hong Kong) Ltd.: Pacific Rim Metallic Products Ltd., a Hong Kong corporation 100% Shakespeare International Ltd., a British corporation 100% Subsidiaries of Shakespeare International Ltd.: Shakespeare Company (UK) Ltd., a British corporation 100% Shakespeare Monofilament U.K. Ltd., a British corporation 100% Shakespeare Hengelsport, B.V., a Dutch corporation 100% Shakespeare (Australia) Pty. Ltd., an Australian corporation 100% K2 Ski Sport und Mode GmbH, a German corporation 100% Sitca Corporation, a Washington corporation 100% Subsidiaries of Sitca Corporation: K-2 Corporation, an Indiana corporation 100% Subsidiaries of K-2 Corporation: Planet Earth Skateboards, Inc., a California corporation 100% K-2 International, Inc., an Indiana corporation 100% K2 Japan Corporation, a Japanese corporation 100% Madshus A.S., a Norwegian corporation 100% SMCA, Inc., a Minnesota corporation 100% Subsidiary of SMCA, Inc.: Stearns Inc., a Minnesota corporation 100% Ride, Inc., a Washington corporation 100% Subsidiaries of Ride, Inc.: Ride Snowboard Company, a Washington corporation 100% Ride Manufacturing, Inc, a California corporation 100% SMP Clothing, Inc., a Washington corporation 100% Smiley Hats, Inc., a Nevada corporation 100% K2 Corporation of Canada, a Canadian corporation 100% K2 Funding, Inc., a Delaware corporation 100% Anthony Sales (Barbados), Ltd., a Barbados corporation 100%
EX-23 8 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 dated October 14, 1988 and Form S-8 dated December 28, 1994) pertaining to the 1988 Incentive Stock Option Plan and the 1994 Incentive Stock Option Plan of K2 Inc. of our report dated February 21, 2000, with respect to the consolidated financial statements of K2 Inc. included in the Annual Report on Form 10-K for the year ended December 31, 1999. We also consent to the incorporation by reference in the Registration Statement (Form S-4 dated August 9, 1999) of K2 Inc. and in the related Proxy Statement of our report dated February 21, 2000 with respect to the consolidated financial statements of K2 Inc. included in this Annual Report on Form 10-K for the year ended December 31, 1999. Our audits also include the financial statement schedule of K2 Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Los Angeles, California March 24, 2000 EX-27 9 EXHIBIT 27
5 1,000 YEAR DEC-31-1999 DEC-31-1999 9,421 0 155,723 (6,572) 172,154 345,809 162,453 (89,858) 487,878 158,623 0 0 0 18,673 199,847 487,878 635,105 635,518 462,033 462,033 145,634 2,594 12,741 12,516 4,005 8,511 1,332 0 0 9,843 .58 .58
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